Teledyne Technologies Incorporated — Q3 2017 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended October 1, 2017, compared with periods ended October 2, 2016. Teledyne supplies instrumentation, digital imaging products and software, aerospace and defense electronics, and engineered systems. Results include the e2v acquisition, completed March 28, 2017.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $662.2 million | $526.8 million | $1,899.4 million | $1,597.0 million |
| Operating income | $92.9 million | $68.8 million | $237.2 million | $183.3 million |
| Net income | $69.0 million | $52.0 million | $159.6 million | $137.9 million |
| Diluted EPS | $1.90 | $1.46 | $4.41 | $3.90 |
- Q3 sales rose 25.7%, operating income 35.0%, net income 32.7%, and diluted EPS 30.1%. Nine-month sales rose 18.9%, operating income 29.4%, net income 15.7%, and diluted EPS 13.1%.
- Operating margin was approximately 14.0% in Q3 2017 versus 13.1% in Q3 2016, and 12.5% for the first nine months versus 11.5%. Cost of sales was 61.3% of sales in Q3 versus 60.2%, and 62.0% year to date versus 61.2%.
- Nine-month operating cash flow was $248.3 million, versus $250.7 million. Capital expenditures were $40.5 million. Investing cash outflow was $813.2 million, including acquisition spending; financing provided $535.6 million. Cash declined to $82.5 million from $98.6 million at January 1, 2017.
- Total debt, including capital leases, was $1,195.7 million; cash was $82.5 million. The company reported $447.5 million of available capacity under its $750 million credit facility and compliance with debt covenants. The actual leverage ratio was 2.6 to 1 against a maximum of 3.25 to 1; interest coverage was 10.9 to 1 against a minimum of 3.0 to 1.
Material changes and drivers
- Growth reflected organic sales increases and $205.8 million in incremental nine-month sales from recent acquisitions, primarily e2v. Digital Imaging sales increased 71.6% year to date, with e2v contributing $152.7 million of incremental sales in that segment.
- All four segments had higher nine-month sales and operating income. In Q3, Aerospace and Defense Electronics operating income declined 6.7% despite higher sales, reflecting unfavorable product mix; other segments increased operating income.
- e2v acquisition-related pretax charges totaled $28.1 million for the first nine months, including transaction costs, inventory fair-value step-up amortization, financing commitment expense, and a foreign-currency option expense. Higher debt levels also increased interest expense.
- Other expense was $13.0 million year to date, compared with $15.1 million of other income in 2016. The prior-year period included a $17.9 million gain on sale of a facility.
Outlook, risks, and contingencies
- Management expects operating cash flow and available credit to meet requirements over the next 12 months. It expected 2017 capital expenditures of up to $70 million; $40.5 million had been spent through October 1. No 2017 domestic pension contributions were planned.
- Management estimated a 27.7% full-year 2017 effective tax rate excluding discrete items. Q3 and nine-month reported effective rates were 15.6% and 19.7%, respectively, reflecting net discrete tax benefits of $9.9 million and $15.9 million.
- Adoption of the new revenue standard was planned for January 1, 2018 using the modified retrospective method. The company expected changes to timing of revenue recognition for certain contracts and related balance-sheet presentation; the cumulative retained-earnings impact was not yet known.
- Key stated risks include successful integration of e2v, changes in defense and other government spending, demand in energy, aviation and industrial markets, Brexit and other government policy changes, foreign-exchange and interest-rate movements, and cybersecurity threats. A 100-basis-point interest-rate increase was estimated to raise annual interest expense by about $5.7 million, assuming specified variable-rate debt remained outstanding for a full year.
- Environmental remediation reserves were $5.5 million; remediation may continue for up to 30 years. Management did not believe pending litigation was likely to have a material adverse effect on the financial statements. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- How much reported growth and operating profit are attributable to e2v and other acquisitions, and whether integration and expected benefits are progressing.
- Whether acquisition-related charges, higher acquisition-driven cost of sales, and unfavorable contract-estimate adjustments persist or normalize.
- Debt repayment, variable-rate exposure, covenant headroom, and cash conversion as acquisition spending subsides.
- The realized full-year tax rate after discrete benefits and the eventual financial-statement effect of the 2018 revenue-standard adoption.
- Trends in segment margins, particularly Digital Imaging’s acquisition-influenced cost structure and Aerospace and Defense Electronics’ product mix.