Teledyne Technologies Incorporated — Q1 2011 Form 10-Q
Business context and reporting period. The quarter ended April 3, 2011; comparisons are with the three months ended April 4, 2010. Teledyne reported four segments: Instrumentation, Digital Imaging, Aerospace and Defense Electronics, and Engineered Systems. Results include DALSA from its February 12 acquisition; the piston-engine business is reported as discontinued operations.
Financial performance
- Revenue: Net sales were $468.1 million, up 15.6% from $404.9 million. Management attributed $47.6 million of incremental revenue to recent acquisitions.
- Profit and margins: Income from continuing operations was $32.5 million, up 30.0%; diluted continuing-operations EPS was $0.87 versus $0.68. Net income attributable to Teledyne, including a $0.5 million discontinued-operations loss, was $32.0 million, or $0.86 per diluted share. Gross margin was approximately 33.1%, versus 28.9%; income before other items and taxes was $54.7 million, or 11.7% of sales, versus $40.0 million, or 9.9%.
- Segment trends: Instrumentation sales rose 17.5% and operating profit 41.0%; Digital Imaging sales rose 122.1% and profit 77.3%, substantially reflecting acquisitions. Aerospace and Defense Electronics sales rose 11.3% and profit 38.5%. Engineered Systems sales fell 15.1% and profit fell 4.3%.
- Cash flow: Continuing-operations operating cash flow was $6.6 million versus $4.5 million; total operating cash flow was $3.6 million versus $3.0 million. Investing used $370.4 million, mainly for acquisitions and investments; financing provided $321.6 million, principally from borrowing. Cash ended at $29.9 million, down from $75.1 million at fiscal year-end.
- Debt and liquidity: Long-term debt and capital leases totaled $580.2 million, including $563.5 million of debt; the balance sheet reported $1.6 million current and $578.6 million long-term. The company had $313.5 million drawn on credit lines and $227.4 million available under its $550 million revolving facility. Working capital was $321.9 million. It was in compliance with debt covenants.
- Other metrics: The effective tax rate was 35.0%, down from 37.0%. Pension expense for continuing operations was $2.8 million versus $1.2 million. The company contributed $37.0 million to its domestic pension plan in Q1.
Material changes and notable items
- Teledyne acquired all of DALSA for a reported purchase price of $339.5 million, acquired 51% of Nova Sensors, and purchased a 19% interest in Optech for $18.9 million. Acquisitions were funded primarily with credit-facility borrowings and cash. DALSA’s purchase-price allocation remained preliminary.
- On April 19, 2011, after quarter-end, Teledyne completed the sale of its piston-engine businesses for $186.0 million cash before customary working-capital adjustments. The related discontinued operation had Q1 sales of $33.4 million and a $0.5 million loss. The business included $47.3 million in aircraft product-liability reserves.
- The company refinanced its prior $590 million credit facility with a $550 million facility maturing February 25, 2016. Borrowings bear variable rates; management reported that a 100-basis-point rate increase would add approximately $3.1 million to annual interest expense at the quarter-end borrowing level.
Outlook, risks and contingencies
- Management expected operating cash flow and available borrowings to cover requirements over the next 12 months. It projected 2011 capital expenditures of $50–$55 million and stated no additional pension contributions were planned for 2011 after the $32 million contribution made in Q2.
- Management emphasized growth in core markets, operational improvements, and integration of acquired businesses. It cautioned that quarterly results are not necessarily indicative of full-year results; no earnings or revenue guidance was provided.
- Risks cited include demand and funding changes in defense and government programs; energy-market conditions; commercial aviation and supplier/customer liquidity; foreign exchange and variable interest rates; pension-asset fluctuations; and acquisition integration, customer retention, and synergy risks. The company noted potential effects from the Gulf oil spill and Japan-related events.
- Environmental remediation reserves were $5.9 million. Management said excess future costs and the possible range of loss could not be reasonably estimated; adjustments could materially affect results in a period. Government-contract claims and other litigation also could affect period results, though management did not expect pending matters to materially harm financial condition.
- Canadian subsidiaries were under tax audit for 2006–2009. Unrecognized tax benefits increased by $6.4 million with DALSA; management said benefits could decline by $4.6 million over the next 12 months.
Important facts for investors to verify
- How much of sales and profit growth reflects organic performance versus DALSA and other acquisitions, and whether acquisition integration delivers expected benefits.
- The final DALSA purchase-price allocation, acquired intangible amortization, and related impact on earnings and goodwill.
- Post-sale cash proceeds, debt reduction, working-capital adjustments, and the treatment of the piston-engine business’s liabilities and reserves.
- Operating cash conversion and liquidity after acquisition spending and pension contributions; variable-rate debt exposure and covenant headroom.
- Developments in environmental, aircraft product-liability, tax-audit, and DALSA-related litigation matters.