Business context and reporting period
Teledyne Technologies Incorporated filed this unaudited Form 10-Q for the three months ended April 3, 2016, compared with the three months ended March 29, 2015. The company supplies instrumentation, digital imaging products and software, aerospace and defense electronics, and engineered systems.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $530.5 million | $565.0 million | Down 6.1% |
| Operating income | $61.0 million | $67.3 million | Down 9.4% |
| Operating margin | 11.5% | 11.9% | Down 0.4 percentage points |
| Net income | $38.4 million | $43.7 million | Down 12.1% |
| Diluted EPS | $1.10 | $1.20 | Down 8.3% |
| Operating cash flow | $69.1 million | $16.7 million | Up $52.4 million |
| Capital expenditures | $14.2 million | $7.7 million | Up $6.5 million |
Cost of sales was 61.2% of sales in both periods. SG&A was $144.7 million, or 27.3% of sales, versus $151.8 million, or 26.9%. The effective tax rate was 28.9%, compared with 29.8%.
Cash was $83.2 million at April 3, 2016, versus $85.1 million at January 3, 2016. Total current assets were $833.4 million and current liabilities $391.3 million. Debt was $711.5 million, with $8.0 million of capital leases; available borrowing capacity under the $750 million credit facility was $640.5 million. The company reported compliance with debt covenants.
Material changes and operating drivers
- Instrumentation sales fell 17.2% to $223.7 million, principally due to lower marine instrumentation sales to energy exploration and production markets. Segment operating income declined 25.4% to $31.4 million.
- Digital Imaging sales were nearly flat at $89.9 million, while operating income declined 11.8% to $8.2 million, reflecting product mix and slightly lower sales.
- Aerospace and Defense Electronics sales rose 8.1% to $152.6 million and operating income increased 24.2% to $24.1 million, with higher sales and improved margins.
- Engineered Systems sales increased 1.9% to $64.3 million and operating income rose 19.4% to $8.0 million.
- Operating cash flow increased substantially, which management attributed mainly to lower bonus, payroll and income-tax payments; the prior-year quarter included legal-matter payments. The increase therefore was not solely attributable to improved earnings.
Outlook, risks and unusual items
- Management expected the fiscal 2016 effective tax rate to be approximately 28.8%, excluding discrete items, and planned capital expenditures of up to $60 million. It said operating cash flow and available credit were expected to meet requirements over the next 12 months. No earnings or revenue guidance was provided in the filing text.
- After quarter-end, Teledyne completed three acquisitions for initial aggregate cash consideration of $60 million. It also agreed to sell the assets of its printed circuit technology business for $9.3 million, subject to conditions and approvals.
- Management cited demand, government-program funding and defense spending, oil and gas market conditions, foreign exchange, interest rates, cybersecurity, and acquisition integration as risks. It reported no material changes to previously disclosed risk factors.
- Environmental remediation reserves were $8.5 million; the company expected remediation at identified sites to take up to 30 years. Management did not expect pending lawsuits and claims to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
- Changes in percentage-of-completion contract estimates produced aggregate favorable operating-income effects of $6.7 million and unfavorable effects of $7.6 million in Q1 2016; no individual contract effect was material. Q1 2015 included a $1.2 million pension-plan freeze gain.
Important facts for investors to verify
- Whether marine-instrumentation weakness, particularly exposure to energy exploration and production, persists and how it affects segment margins.
- The cash-flow improvement’s sustainability given management’s cited timing of payroll, bonus, tax, and legal payments.
- Acquisition funding, integration, and expected contribution from the three post-quarter acquisitions, as well as completion of the planned asset sale.
- Debt and liquidity details: the filing reports $640.5 million of available facility capacity and covenant ratios of 2.0-to-1 leverage and 15.6-to-1 interest coverage against respective limits of 3.25-to-1 and minimum 3.0-to-1.
- Foreign-exchange and floating-rate exposure: management estimated a 100-basis-point rate increase would add about $2.9 million in annual interest expense on the specified $286.5 million of variable-rate debt; a 10% U.S. dollar movement would change the fair value of designated currency hedges by approximately $7.3 million.