Business context and reporting period
Teledyne Technologies Incorporated filed this Form 10-K for the fiscal year ended January 3, 2016. Fiscal 2015 included 53 weeks; fiscal 2014 included 52. Teledyne supplies high-technology instrumentation, digital imaging, aerospace and defense electronics, and engineered systems. About 74% of 2015 sales were to commercial and international customers and 26% to the U.S. Government.
Financial results and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Sales | $2,298.1 million | $2,394.0 million |
| Operating income | $281.7 million | $294.5 million |
| Net income attributable to Teledyne | $195.8 million | $217.7 million |
| Diluted EPS | $5.44 | $5.75 |
| Operating margin | 12.3% | 12.3% |
| Gross margin | 37.9% | 37.9% |
| Cash from operating activities | $210.2 million | $287.9 million |
| Free cash flow | $163.2 million | $244.4 million |
| Cash at year-end | $85.1 million | $141.4 million |
| Working capital | $434.6 million | $402.7 million |
Gross margin is calculated from reported sales less cost of sales. Operating cash flow fell primarily because of lower net income, lower customer deposits and advance payments, and higher income tax payments. Capital expenditures were $47.0 million; the company defines free cash flow as operating cash flow less capital expenditures.
At year-end, outstanding debt was $765.5 million, and capital lease obligations were $8.6 million. Available capacity under the $750 million credit facility was $588.2 million; the facility was extended to December 2020. Teledyne reported compliance with debt covenants, with a 2.1-to-1 net debt/EBITDA ratio against a 3.25-to-1 maximum and 15.9-to-1 interest coverage against a 3.0-to-1 minimum. The company reported no planned 2016 contribution to its domestic qualified pension plan.
Material changes versus the prior period
- Sales declined 4.0% and operating income declined 4.3%; net income attributable to Teledyne fell 10.1%, despite the additional fiscal week.
- Instrumentation sales fell 5.8% to $1,051.1 million, mainly due to weaker marine and electronic test-and-measurement demand, including reduced offshore oil exploration activity. Acquisitions added $32.1 million of segment sales.
- Digital Imaging sales declined 6.1% to $379.0 million, but operating income increased 7.8% to $40.0 million on improved margins and cost reductions.
- Aerospace and Defense Electronics sales fell 1.6% to $593.4 million and operating income fell 4.0% to $84.8 million, reflecting lower microwave and interconnect sales and weaker defense product margins; avionics and relay sales partly offset declines.
- Engineered Systems sales increased 1.0% to $274.6 million, while operating income decreased 16.9% to $26.1 million. Lower sales of higher-margin turbine engines and higher pension expense weighed on results.
- Cash used for acquisitions and investments declined to $66.7 million from $195.8 million in 2014. 2015 transactions included ICM, Bowtech, and the purchase of the remaining Optech interest.
- Teledyne repurchased 2.56 million shares for $243.8 million, compared with $146.6 million in 2014. The board authorized a further 3.0 million-share repurchase program in January 2016.
Outlook, risks, contingencies, and unusual items
- Management expected to spend approximately $60 million on 2016 capital expenditures and approximately $175 million on company-funded research and development and bid-and-proposal costs. The filing does not provide earnings or revenue guidance.
- Backlog of confirmed orders was $802.8 million at year-end, down from $944.6 million a year earlier; Teledyne expected to fulfill 96% during 2016.
- Management cited the oil-and-gas downturn as a 2015 headwind, particularly for marine instrumentation. Other key risks include changes in government funding and defense priorities, fixed-price contract cost overruns, international and foreign-exchange exposure, cybersecurity, supply constraints, acquisitions and integration, and potential impairment of goodwill.
- 2015 included $8.4 million of severance and facility-consolidation charges and $9.8 million of net discrete tax benefits. The reported effective tax rate was 24.3%; excluding discrete tax benefits, management calculated 28.1%.
- Goodwill was $1,140.2 million and net acquired intangibles were $243.3 million. No goodwill impairment was identified; a $0.5 million impairment charge was recorded for acquired intangible assets.
- Environmental remediation reserves were $8.7 million. Management did not believe currently pending litigation or environmental matters were likely to materially harm financial condition or liquidity, while noting that outcomes and potential losses in some matters could not be estimated clearly.
- The company reported effective disclosure and financial-reporting controls and received unqualified audit opinions. The control assessment excluded the 2015 Bowtech and ICM acquisitions.
Important facts for investors to verify
- Whether the decline in marine instrumentation and order backlog persists, particularly given oil-market conditions.
- Whether operating cash flow recovers from the 2015 decline and supports acquisitions, capital spending, and share repurchases without materially increasing leverage.
- How segment margins develop, especially in Engineered Systems and Aerospace and Defense Electronics.
- Whether the 2016 capital-spending and company-funded R&D expectations, and the projected backlog conversion, are achieved.
- Potential tax, environmental, pension, foreign-exchange, and government-contract exposures, along with integration and control assessments for the 2015 acquisitions.