Teledyne Technologies Incorporated — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; comparisons are with the quarter and six months ended July 1, 2018. Teledyne supplies instrumentation, digital imaging products and software, aerospace and defense electronics, and engineered systems.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $782.0m | $732.5m | $1,527.2m | $1,428.1m |
| Operating income | $131.9m | $111.5m | $229.2m | $199.9m |
| Net income | $104.6m | $85.9m | $179.9m | $152.4m |
| Diluted EPS | $2.80 | $2.32 | $4.82 | $4.13 |
| Operating margin | 16.9% | 15.2% | 15.0% | 14.0% |
Sales rose 6.8% in Q2 and 6.9% year to date; net income increased 21.8% and 18.0%, respectively. Management attributed first-half sales growth to $61.7m of organic growth and $37.4m of incremental sales from the acquired scientific imaging businesses. Cost of sales fell to 59.3% of sales in Q2 from 61.0%, and to 60.7% for the six months from 62.0%.
Segments: Q2 sales grew in each segment. Digital Imaging (+11.5%) and Aerospace and Defense Electronics (+10.1%) led growth; Instrumentation increased 0.6%. Operating income increased across all segments except Engineered Systems. First-half Engineered Systems operating income declined 17.8%, largely due to lower turbine-engine sales. Corporate expense increased to $34.4m from $26.7m for the six months.
Cash flow, liquidity and debt
- First-half operating cash flow was $163.3m, down from $179.5m, reflecting higher income tax payments, partly offset by higher operating income.
- Investing cash outflow was $261.6m, including $222.5m of net cash paid for businesses; capital expenditures were $39.4m. Financing provided $64.6m, including $47.5m of net credit-facility proceeds. Cash declined $34.4m to $108.1m.
- At June 30, cash was $108.1m and current assets and liabilities were $1,161.0m and $711.0m, respectively. Available capacity under the $750m credit facility was $644.8m; the facility maturity was extended to March 2024. Teledyne reported covenant compliance, with net debt/EBITDA of 1.4x and EBITDA/interest of 22.7x.
- Debt disclosures are not fully consistent: the debt note reports total debt of $792.7m, while MD&A reports $791.7m. The balance-sheet current debt and long-term debt amounts also sum to $791.7m. Verify the reported debt figure.
Outlook, commentary and notable items
- Management expects operating cash flow and available credit to cover requirements over the next 12 months. Planned 2019 capital expenditures are approximately $90m. The company expects a 21.9% annual effective tax rate, excluding discrete items. No full-year sales or earnings guidance is stated in the provided filing text.
- Teledyne acquired Roper Technologies’ scientific imaging businesses for $225m in cash in February; they contributed $23.3m of Q2 sales and $4.0m of Q2 operating profit. Purchase accounting remained preliminary at quarter-end.
- A $230m cash acquisition of 3M’s gas and flame detection business was pending, expected to close in Q3 2019 subject to customary conditions, including French regulatory approval.
- First-half over-time contract estimate revisions added approximately $12.6m to operating income, primarily in Digital Imaging. Q2 and first-half results included discrete tax benefits of $4.3m and $7.4m, respectively. Stock-option compensation was $14.7m in the first half, versus $10.3m, partly reflecting immediate expense for executive grants.
- Key risks cited include changes in demand and government program funding, defense spending, energy markets and commercial aviation, Brexit and government policy, tariffs and sanctions, cybersecurity, foreign exchange and interest-rate movements, and acquisition integration. Environmental remediation reserves were $6.2m; management did not expect pending litigation to materially adversely affect the financial statements.
Investor verification priorities
- Reconcile the $791.7m versus $792.7m total-debt disclosures and related current-debt presentation.
- Track the closing, regulatory approval, financing and integration of the 3M gas and flame detection acquisition.
- Assess how much reported growth and margin improvement is organic and sustainable, including the effects of the Roper acquisition and favorable contract-estimate revisions.
- Monitor cash conversion, working-capital trends, tax payments, and progress toward the $90m full-year capital expenditure plan.
- Review exposure to government-program demand, energy and aviation markets, foreign exchange and interest rates, and acquisition execution.