Teledyne Technologies Incorporated — Q3 2010 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended October 3, 2010, compared with the periods ended September 27, 2009. Teledyne operates in Electronics and Communications, Engineered Systems, Aerospace Engines and Components, and Energy and Power Systems. Results are unaudited; management cautions that interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $443.9 million | $429.4 million | $1,325.6 million | $1,310.8 million |
| Income before taxes | $45.2 million | $42.6 million | $130.3 million | $118.8 million |
| Net income attributable to Teledyne | $30.3 million | $35.1 million | $83.9 million | $81.1 million |
| Diluted EPS | $0.82 | $0.96 | $2.28 | $2.22 |
| Operating cash flow | Not reported by quarter in the supplied filing text | $73.8 million | $75.1 million |
Q3 sales rose 3.4%, while net income attributable to Teledyne fell 13.7%. Nine-month sales rose 1.1% and net income rose 3.5%. Cost of sales was 69.3% of sales in Q3 versus 70.8%; for the nine months it was 70.1% versus 71.1%. SG&A was 20.1% of Q3 sales versus 19.0%, and 19.9% for the nine months versus 19.6%. The implied income-before-other-items operating margin was approximately 10.6% for Q3 and 10.0% for the nine months, compared with approximately 10.2% and 9.4%, respectively.
The Q3 earnings decline occurred despite higher sales and income before taxes, principally amid a higher effective tax rate and lower tax credits than in Q3 2009. The reported effective tax rate was 32.9% versus 17.3% in Q3 and 35.5% versus 31.3% for the nine months. Excluding disclosed tax credits, the company reported rates of 39.3% versus 39.1% for Q3 and 38.2% versus 38.8% for the nine months.
Segments
- Electronics and Communications: Q3 sales increased 10.2% to $325.2 million and operating profit rose 9.1% to $43.3 million. Nine-month sales rose 5.4% to $959.4 million and profit rose 6.0% to $125.0 million, supported by marine and environmental instrumentation, defense electronics, and acquisitions.
- Engineered Systems: Sales declined 18.4% in both periods, to $66.9 million in Q3 and $212.6 million for nine months. Q3 operating profit increased 10.3% to $7.5 million; nine-month profit declined 5.9% to $22.2 million. Lower missile-defense and gas-centrifuge program activity was partly offset by Intelek’s CML business.
- Aerospace Engines and Components: Sales increased 11.8% in Q3 and 19.4% for nine months, reflecting improved general aviation demand. Nine-month operating profit was $2.6 million versus a $2.4 million loss.
- Energy and Power Systems: Sales decreased 18.4% in Q3 and 5.8% for nine months, mainly due to lower JASSM turbine-engine sales. Nine-month operating profit increased 15.4% to $3.0 million.
Cash, liquidity, and debt
At October 3, 2010, cash was $27.1 million, current assets were $567.2 million, and current liabilities were $298.7 million; working capital was $268.5 million. Total assets were $1,527.9 million and stockholders’ equity was $759.4 million. Cash increased $1.0 million over the first nine months.
Operating cash flow was $73.8 million. Investing used $80.6 million, including $63.3 million for acquisitions and $17.4 million for capital expenditures. Financing provided $7.8 million. The company cited higher working-capital needs and $35.7 million of tax payments, compared with net tax refunds of $5.4 million in the prior-year period. Voluntary pension contributions were $37.0 million versus $117.0 million.
Debt and capital leases totaled approximately $269.1 million, comprising $250.0 million of Senior Notes, $1.0 million outstanding under the revolving credit facility, and $18.1 million of capital leases. The Notes carry fixed rates of 4.04% to 5.30% and mature in 2015, 2017, and 2020. The $590 million credit facility expires in July 2011; $586.9 million was available, although covenant capacity under the leverage test limited additional borrowing to $406.0 million. The company said it planned to refinance the facility before maturity and was in compliance with its covenants. Management expected operating cash flow and available borrowings to meet requirements for the next 12 months, but noted additional capital might be needed to support acquisitions.
Material changes, outlook, and risks
- 2010 acquisitions included Optimum Optical Systems, Intelek, and Gavia; the company also acquired a minority interest in Optical Alchemy. Acquisitions were funded primarily with borrowings and cash on hand. Goodwill increased to $547.5 million from $502.4 million at year-end.
- Q3 included $3.0 million of acquisition-related charges. The first nine months included an $8.2 million charge, primarily to correct prior-period inventory valuations. Management also reported a $0.7 million insurance benefit in other income for the nine months.
- Management anticipated higher interest expense in Q4 2010 and 2011 following issuance of the fixed-rate Senior Notes. Capital expenditures were expected to be approximately $30 million for 2010.
- Management expected reduced 2010 sales from missile-defense engineering, NASA programs, and gas-centrifuge service modules due to funding and program developments. USEC began remobilizing the American Centrifuge Plant project in September; Teledyne anticipated additional module sales in Q4 and possible further revenue in 2011 if the DOE loan guarantee were approved.
- Key risks include changes in government program funding, demand in defense, energy, and commercial aviation markets, acquisition integration and international risks, pension asset performance, and effects of oil and gas market conditions. Environmental remediation reserves were $5.4 million; aircraft product liability reserves were $44.9 million. Management said resolution of litigation, government-contract matters, or environmental issues could adversely affect results in a period, although it did not expect pending matters to materially affect financial condition.
- The filing reported effective disclosure controls and no material change in internal controls over financial reporting during the quarter. Management reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Progress and terms of refinancing the $590 million facility before its July 2011 maturity, and compliance with debt covenants.
- Whether the USEC project and DOE loan-guarantee decision produce the anticipated module revenue, and how government funding changes affect Engineered Systems.
- Persistence of underlying earnings and margins after excluding tax credits, acquisition charges, and the $8.2 million inventory valuation correction.
- Integration and profitability of the 2010 acquisitions, including their contribution to sales, operating losses, goodwill, and cash requirements.
- Developments in pension funding and assumptions, the $44.9 million aircraft product liability reserve, and environmental and government-contract contingencies.