Teledyne Technologies Incorporated — Q3 2012 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2012; comparisons are with the third quarter ended October 2, 2011, and the corresponding nine-month periods. Teledyne operates in Instrumentation, Digital Imaging, Aerospace and Defense Electronics, and Engineered Systems. The 2012 results include five acquisitions, notably LeCroy, acquired August 3 and included in Instrumentation.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $547.4m | $496.4m | $1,559.9m | $1,467.4m |
| Income from continuing operations attributable to Teledyne | $42.7m | $34.1m | $117.9m | $105.3m |
| Diluted EPS from continuing operations | $1.14 | $0.91 | $3.16 | $2.82 |
| Cost of sales as a percentage of sales | 63.8% | 66.7% | 65.4% | 66.4% |
| Operating cash flow from continuing operations | — | $67.6m | $139.7m |
Q3 sales increased 10.3%; continuing-operations income attributable to Teledyne rose 25.2%. Nine-month sales grew 6.3% and continuing-operations income rose about 12%. Gross margin, calculated as sales less cost of sales, was 36.2% in Q3 and 34.6% for nine months, up from 33.3% and 33.6%, respectively. Management attributed the improvement partly to acquisition and product mix. SG&A rose to $138.1m in Q3 and $364.3m year to date, reflecting acquisitions, higher R&D, acquired-intangible amortization, and Q3 acquisition costs of $3.8m.
Segment sales and operating profit were mixed. Q3 Instrumentation sales rose 23.4%, but profit fell 7.1% to $29.9m; Digital Imaging sales rose 13.8% and profit increased to $7.6m; Aerospace and Defense Electronics sales fell 4.1% and profit fell 2.8%; Engineered Systems sales rose 11.2% and profit rose 29.7%. Year-to-date, Instrumentation profit declined 5.4%, while Digital Imaging profit grew 40.6%; the other two segments recorded modest profit growth.
At September 30, cash was $24.2m, working capital was $340.7m, and total assets were $2,434.0m. Total debt was approximately $633m before capital leases; capital leases were $14.7m. The $550m revolver had $367.9m outstanding and $169.9m available borrowing capacity. The company was in compliance with covenants; actual leverage was 2.0x versus a 3.25x maximum, and interest coverage was 14.4x versus a 3.0x minimum. On October 22, Teledyne entered into $200m of term loans due in October 2015 and applied proceeds against the revolver.
Year-to-date investing cash use was $431.2m, including $389.2m for acquisitions and $43.0m of capital expenditures. Financing provided $338.4m, including $318.2m of net debt proceeds. Operating cash flow was lower year over year, reflecting collection timing and voluntary pension contributions of $92.8m, versus $69.0m in 2011.
Material changes, outlook, risks, and unusual items
- The 2012 acquisition program included LeCroy, PDM Neptec, BlueView, VariSystems, and a controlling interest in Optech. Acquisitions added $58.3m of Q3 revenue and $114.4m for the first nine months; integration costs and acquired-intangible amortization affected expenses. LeCroy purchase-price allocation remained in progress.
- Nine-month 2011 net income included a $113.8m after-tax gain on the sale of the piston-engine businesses. Thus, total net income fell to $117.9m from $218.4m despite growth in continuing operations.
- Effective tax rates were 24.5% for Q3 and 28.4% for nine months, including benefits of $3.1m and $4.3m, respectively, from remeasurement of uncertain tax positions. Excluding those benefits, rates were 30.0% and 31.0%.
- Management expected operating cash flow and available credit to meet requirements over the next 12 months and projected 2012 capital expenditures of about $76m. The filing provides no earnings guidance.
- Risks include demand and government-program funding, potential defense-spending reductions, energy-market conditions, acquisition integration and international exposure, foreign-exchange movements, and variable-rate borrowing costs. A 100-basis-point rate increase was estimated to add about $3.7m to annual interest expense on the then-outstanding revolver balance. A hypothetical 10% U.S. dollar move would change the fair value of specified Canadian-dollar forward contracts by about $8.2m.
- Environmental remediation reserves were $3.3m; remediation at identified sites may extend up to 30 years. A DALSA-related lawsuit seeks damages exceeding CAD $20m; management did not believe pending matters were likely to materially affect financial condition, though a period’s results could be affected. Tax audits were ongoing in Canada and California; management did not expect their resolution to have a material adverse effect.
Important facts for investors to verify
- How much of sales and profit growth reflects acquired businesses versus organic performance, particularly following LeCroy’s acquisition.
- Whether acquisition integration costs, amortization, and the LeCroy purchase-price allocation materially affect future margins or goodwill.
- Whether cash conversion improves after the unusually large pension contributions and receivables-collection timing effects.
- Debt, revolver availability, interest-rate exposure, and covenant headroom following the October term-loan refinancing.
- The durability of segment trends, especially weaker Instrumentation profit and lower Aerospace and Defense Electronics sales, and the impact of defense and energy-market risks.