Business context and reporting period
Teledyne Technologies Incorporated filed this unaudited Form 10-Q for the quarter ended July 4, 2010. The filing compares the three and six months ended July 4, 2010 with the corresponding periods ended June 28, 2009. Teledyne operates in Electronics and Communications, Engineered Systems, Aerospace Engines and Components, and Energy and Power Systems.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $442.5 million, up 0.3% | $881.7 million, essentially unchanged |
| Net income attributable to Teledyne | $28.6 million, up 13.5% | $53.6 million, up 16.5% |
| Diluted EPS | $0.78, versus $0.69 | $1.46, versus $1.26 |
| Net cash from operating activities | Not provided separately | $50.1 million, versus $28.2 million |
For the quarter, cost of sales was 70.0% of revenue, compared with 71.1%; for the first six months it was 70.6%, compared with 71.2%. Selling, general and administrative expenses were 19.6% of quarterly sales versus 19.0%, and 19.8% for both six-month periods. The filing attributes improved earnings principally to lower pension expense, cost containment and favorable sales/mix, partly offset by an $8.2 million inventory-related charge.
Six-month operating cash flow exceeded capital expenditures of $10.5 million. Investing activities used $27.2 million, including acquisitions and investments; financing activities used $12.5 million, primarily from $14.2 million of net debt repayments. Cash increased to $36.5 million from $26.1 million at fiscal year-end.
Financial position and material changes
At July 4, 2010, current assets were $562.0 million and current liabilities were $276.0 million; reported working capital was $286.0 million, up from $250.6 million at January 3, 2010, principally reflecting higher receivables. Total assets were $1.456 billion and stockholders’ equity was $720.3 million.
Outstanding credit-facility borrowings were $226.0 million at a weighted average interest rate of 1.1%; capital leases were $11.1 million. Cash was $36.5 million. The $590 million facility had $309.2 million of available capacity after borrowings and letters of credit, and matures in July 2011. Teledyne reported compliance with its covenants. It entered into an agreement to issue $250 million of senior notes in September 2010, at fixed rates of 4.04% to 5.30%, with maturities from 2015 to 2020; proceeds were intended mainly to repay facility borrowings and for general corporate purposes, including acquisitions.
Segment results were mixed. Six-month Electronics and Communications sales rose 3.1% to $634.2 million, while Engineered Systems sales fell 18.4% to $145.7 million. Aerospace Engines and Components sales rose 23.5% to $68.8 million and shifted from a $3.6 million operating loss to $1.6 million of operating profit. Energy and Power Systems sales increased 2.8% to $33.0 million.
Outlook, risks and unusual items
- Accounting adjustment: Teledyne recorded an $8.2 million non-cash, pre-tax charge in Q2 to correct prior-period cost-of-sales errors, primarily from incorrect inventory valuations. It reduced Q2 and six-month net income by $5.1 million. Management concluded the errors were immaterial to each prior period and did not restate prior results; the adjustment did not affect credit-covenant compliance.
- Business outlook: Management anticipated lower 2010 sales in missile-defense engineering services and gas centrifuge service modules due to funding and program changes, and lower NASA sales in Q3 and Q4. Additional centrifuge work in 2011 was possible if government support for USEC’s American Centrifuge Plant progressed. Teledyne expected 2010 capital expenditures of approximately $35 million and a voluntary pension contribution of approximately $37 million in Q3. It stated operating cash flow and available credit were expected to meet requirements over the next 12 months. No consolidated revenue or earnings guidance is stated in the filing.
- Acquisitions: During the period, Teledyne acquired Optimum Optical Systems and minority interests in Optical Alchemy and Intelek. After quarter-end, it completed the remaining Intelek acquisition for $38.5 million, including acquisition expenses, funded primarily with credit-facility borrowings and cash.
- Contingencies and exposures: Environmental remediation reserves were $2.9 million; aircraft product-liability reserves were $45.0 million. Management said environmental and other legal matters could affect results in a period, although it did not expect currently known matters to materially affect financial condition. A 100-basis-point increase in interest rates was estimated to increase annual interest expense by about $2.3 million, assuming facility debt remained at $226 million for a full year.
- Other items: Q2 included a $0.7 million insurance benefit and $0.7 million of acquisition-related professional fees. Aerospace Engines and Components reversed $1.2 million of product recall and replacement reserves. The filing identified government-program funding, economic and market conditions, customer and supplier liquidity, energy-market activity, pension-asset returns, acquisition integration and foreign-exchange changes among forward-looking risks.
Key facts for investors to verify
- How much of the reported earnings growth reflects lower pension expense and other recurring operating improvements, versus the one-time inventory correction, tax benefits, insurance proceeds and reserve reversal.
- Whether the Engineered Systems declines—especially in missile defense, centrifuge and NASA work—continue, and whether potential 2011 centrifuge activity materializes.
- Completion and integration of the Intelek acquisition, its contribution to results, and the associated funding and leverage effects.
- Issuance of the $250 million senior notes, refinancing of the credit facility before its July 2011 maturity, and ongoing covenant and liquidity headroom.
- Whether the expected $37 million pension contribution and approximately $35 million of 2010 capital expenditures affect cash generation as anticipated.