Teledyne Technologies Incorporated — Q3 2019 Form 10-Q
Reporting period: Third quarter ended September 29, 2019; comparisons are with the quarter ended September 30, 2018. The filing also reports nine-month results. Teledyne supplies instrumentation, digital imaging, aerospace and defense electronics, and engineered systems.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $802.2 million | $725.3 million | $2,329.4 million | $2,153.4 million |
| Operating income | $128.7 million | $105.5 million | $357.9 million | $305.4 million |
| Net income | $106.7 million | $90.3 million | $286.6 million | $242.7 million |
| Diluted EPS | $2.84 | $2.43 | $7.66 | $6.56 |
| Operating margin | 16.1% | 14.5% | 15.4% | 14.2% |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $314.2 million | $321.4 million |
Q3 sales rose 10.6%, operating income 22.0%, and net income 18.2% year over year. Nine-month sales rose 8.2%, operating income 17.2%, and net income 18.1%. Nine-month operating cash flow declined $7.2 million, with higher income tax payments partly offset by stronger operating results and acquisition contributions. Capital expenditures were $64.5 million for the first nine months.
Cash was $128.5 million at September 29, 2019, versus $142.5 million at December 30, 2018. Current assets were $1,238.1 million and current liabilities $835.5 million. Current debt was $206.1 million; long-term debt was $719.3 million. The balance sheet amounts imply debt carrying value of $925.4 million, while the debt note lists total debt of $926.3 million before specified deductions. The $750 million credit facility had $494.7 million of available capacity; the company reported compliance with covenants.
Segments and material changes
- Instrumentation: Q3 sales increased 10.4% to $282.9 million and operating income rose 45.7% to $52.0 million. Nine-month sales increased 6.0% and operating income 35.0%.
- Digital Imaging: Q3 sales increased 10.6% to $244.0 million, but operating income declined 2.6% to $41.2 million, mainly reflecting product mix and higher SG&A. Nine-month sales rose 11.2% and operating income 8.6%.
- Aerospace and Defense Electronics: Q3 sales rose 10.5% and operating income 19.7%; nine-month sales rose 9.6% and operating income 14.7%.
- Engineered Systems: Q3 sales rose 11.5% and operating income 10.4%. Nine-month sales rose 4.5%, while operating income fell 4.4%, primarily due to lower turbine-engine sales.
Q3 sales growth included $36.1 million of organic growth and $40.8 million from acquisitions. Nine-month growth included $97.8 million of organic growth and $78.2 million from acquisitions. Teledyne acquired Roper Technologies’ scientific imaging businesses for $225 million, 3M’s gas and flame detection business for $230 million, and Micralyne for $25 million. The acquisitions were funded with cash and credit-facility borrowings; preliminary purchase-price allocations remained under review.
Cost of sales as a share of sales improved to 60.8% from 61.5% in Q3 and to 60.8% from 61.8% for the first nine months. Q3 SG&A was 23.2% of sales versus 23.9%. Results included $17.0 million of favorable cumulative contract-estimate adjustments to operating income in the first nine months, primarily in Digital Imaging. The company also realigned some business units between segments and recast prior-period segment data; the change did not affect consolidated financial statements.
Liquidity, outlook and risks
- Investing cash outflow was $547.8 million for the first nine months, including $483.7 million for acquisitions. Financing activities provided $216.7 million, including $196.0 million of net credit-facility proceeds.
- Management expected operating cash flow and available credit to meet requirements over the next 12 months. It forecast approximately $90 million of 2019 capital expenditures; $64.5 million had been spent through September 29.
- Management expected a 21.9% 2019 annual effective tax rate excluding discrete items. Reported effective rates were 13.5% in Q3 and 16.7% for nine months, reflecting discrete tax benefits of $10.4 million and $17.8 million, respectively.
- The credit-facility maturity was extended to March 2024. Reported covenant measures were leverage of 1.6x against a 3.25x maximum and interest coverage of 19.5x against a 3.0x minimum.
- Disclosed risks include changes in defense and commercial-market demand, government funding and policy, Brexit, trade restrictions and tariffs, cybersecurity threats, energy-market conditions, Boeing 737 MAX grounding effects, foreign exchange and interest-rate changes, and acquisition integration. A 100-basis-point rate increase was estimated to add about $3.3 million to annual interest expense on the specified $325 million of variable-rate debt.
- Environmental remediation reserves were $6.0 million. Management did not expect pending lawsuits and claims, individually or collectively, to have a material adverse effect, while noting outcomes cannot be predicted with certainty. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- How much of sales and profit growth is sustainable organic growth versus acquired revenue, and whether acquisition integration and synergies meet expectations.
- Whether Digital Imaging’s Q3 operating-income decline and Engineered Systems’ year-to-date decline persist, and how segment margins develop.
- The contribution and repeatability of favorable contract-estimate adjustments and discrete tax benefits; reported earnings benefited from both.
- Debt figures differ slightly across the balance sheet and debt note; confirm the applicable gross and carrying-value amounts and near-term maturities.
- Whether the company achieves its 2019 capital-expenditure outlook and maintains sufficient liquidity and covenant headroom.