Business Context and Reporting Period
Teledyne Technologies Incorporated filed this unaudited Form 10-Q for the quarter and nine months ended October 2, 2011. The company supplies instrumentation, digital imaging products, aerospace and defense electronics, and engineered systems. Results are compared with the quarter and nine months ended October 3, 2010.
In February 2011, Teledyne acquired DALSA for $339.5 million in cash, alongside smaller investments and acquisitions. On April 19, it sold its general aviation piston engine businesses, which are reported as discontinued operations.
Financial Results and Key Metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $496.4 million | $409.8 million | $1,467.4 million | $1,222.7 million |
| Continuing-operations net income | $34.1 million | $29.9 million | $105.3 million | $82.9 million |
| Diluted EPS from continuing operations | $0.91 | $0.81 | $2.82 | $2.25 |
| Net income attributable to Teledyne | $34.1 million | $30.3 million | $218.4 million | $83.9 million |
| Operating cash flow, continuing operations | Not presented quarterly | $139.7 million | $66.9 million |
- Margins: Gross margin was approximately 33.3% in Q3 and 33.6% for the nine months, versus 30.5% and 29.7%, respectively. Continuing-operations net margin was approximately 6.9% in Q3 and 7.2% for the nine months.
- Cash flow and investment: Total operating cash flow was $136.8 million for the nine months, including a $2.9 million use in discontinued operations. Investing activities used $207.9 million, including acquisitions and capital expenditures of $27.6 million. Financing activities provided $33.9 million.
- Liquidity: Cash was $37.9 million at October 2, down from $75.1 million at January 2. Working capital was $199.6 million, versus $306.8 million; the company attributed the decline in part to the change from an income-tax receivable to a payable position.
- Debt: Long-term debt was $274.0 million, including $24.0 million drawn on the revolving facility; capital leases were $15.3 million, of which $1.4 million was current. Revolver availability was $512.8 million. The company reported compliance with its covenants.
Material Changes Versus the Prior Comparable Period
- Q3 sales rose 21.1%; nine-month sales rose 20.0%. Recent acquisitions contributed $65.5 million of Q3 revenue and $190.4 million for the nine months.
- Continuing-operations income increased 14.0% in Q3 and 27.0% for the nine months. Nine-month net income attributable to Teledyne rose sharply to $218.4 million, primarily because of the $113.8 million after-tax gain on the engine-business sale; continuing-operations results are more representative of ongoing earnings.
- Segment sales and operating profit increased in Instrumentation, Digital Imaging, and Aerospace and Defense Electronics. Engineered Systems sales declined 9.6% in Q3 and 6.7% for the nine months, with lower engineered products and services sales cited as a key factor.
- Cost of sales as a share of revenue fell, which management attributed to DALSA’s lower cost-of-sales structure and higher sales against certain relatively flat fixed costs. SG&A as a share of revenue rose, reflecting higher research and development spending and DALSA’s cost structure.
- Interest expense increased to $3.7 million in Q3 and $12.4 million for the nine months, primarily due to higher debt and average interest rates. The company also recorded a $4.5 million pretax write-off of a private-company investment.
Outlook, Commentary, Risks, and Contingencies
- Management expected operating cash flow and available credit to meet requirements over the next 12 months, while noting additional capital could be needed to support acquisitions. No full-year earnings guidance is provided in the filing.
- Capital expenditures were expected to total $45 million to $50 million in 2011; $27.6 million had been spent through the first nine months. Management said no additional 2011 cash pension contributions were planned after $69.0 million of contributions.
- Teledyne expected to pay up to $46.9 million of additional income taxes related to the business sale in Q4 2011. Digital Imaging management expected elevated research and development and bid-and-proposal spending to continue in Q4; lower camera sales for semiconductor and electronics inspection were expected to be partly offset by custom imaging sensor sales.
- The board authorized repurchases of up to 2.5 million common shares on October 25, 2011.
- Risks identified include economic and market demand changes, potential defense-program funding cuts, acquisition and integration risks, foreign-exchange exposure, interest rates, pension-asset performance, and oil and gas price fluctuations. A hypothetical 100-basis-point rate increase was estimated to add about $0.2 million in annual interest expense on the $24.0 million revolver balance, assuming it remained outstanding for a full year.
- Environmental remediation reserves were $5.6 million; remediation at identified sites could continue for up to 30 years. A lawsuit involving DALSA seeks damages exceeding CAD $20 million; the company is defending the claim and has filed a counterclaim.
Important Facts for Investors to Verify
- Separate acquisition-driven growth from organic performance, particularly in Digital Imaging, and assess the contribution of DALSA to future margins and spending.
- Use continuing-operations earnings, rather than reported nine-month net income, when evaluating recurring profitability; verify the sale gain and related remaining tax payments.
- Monitor cash conversion, working-capital needs, pension funding, and liquidity after acquisition spending and the planned share-repurchase authorization.
- Track Engineered Systems performance, Digital Imaging spending and sales mix, and exposure to government program funding and market demand.
- Review the outcome and potential financial impact of the DALSA litigation and environmental remediation obligations.