Business context and reporting period
Teledyne Technologies Incorporated filed this Form 10-K for fiscal 2012, the 52-week year ended December 30, 2012. It supplies advanced instrumentation, digital imaging, aerospace and defense electronics, and engineered systems to commercial and government customers. Approximately 68% of 2012 sales were commercial, 32% were U.S. Government-related, and 39% were international.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Sales | $2,127.3 million | $1,941.9 million |
| Income from continuing operations attributable to Teledyne | $161.8 million | $142.1 million |
| Diluted EPS from continuing operations | $4.33 | $3.81 |
| Net income attributable to Teledyne, including discontinued operations | $164.1 million | $255.2 million |
| Operating cash flow from continuing operations | $189.5 million | $219.5 million |
| Capital expenditures | $65.3 million | $41.7 million |
| Free cash flow, as defined by the company | $124.2 million | $177.8 million |
| Cash and cash equivalents at year-end | $45.8 million | $49.4 million |
| Working capital at year-end | $337.5 million | $268.5 million |
| Long-term debt and capital leases, net of current portion | $556.2 million | $311.4 million |
Gross margin rose to approximately 35.2% from 33.5%; income before other income, expense and taxes was 11.4% of sales versus 11.7%. The effective tax rate was 28.7%, compared with 32.9%. Teledyne reported $543.3 million of long-term debt and $458.6 million of available capacity under its $550 million revolving facility. It was in compliance with debt covenants.
Material changes versus the prior comparable period
- Sales grew 9.5%; continuing-operations net income attributable to Teledyne rose 13.9%. Acquisitions contributed $180.7 million of incremental sales.
- Instrumentation sales increased 21.5% and Digital Imaging sales increased 18.9%, principally reflecting acquisitions and higher product sales. Aerospace and Defense Electronics sales declined 1.5%, and Engineered Systems sales declined 1.1%.
- Segment operating profit and other segment income increased 7.2% to $279.8 million. Aerospace and Defense Electronics was the only segment with lower operating profit.
- Reported total net income fell from $255.2 million to $164.1 million mainly because 2011 included a $113.8 million gain on the sale of the general aviation piston engine businesses. Continuing-operations results provide a more comparable view.
- Acquisition spending was $389.2 million. Acquisitions included LeCroy, PDM Neptec, BlueView, VariSystems, and a controlling interest in Optech; goodwill increased to $990.2 million.
Outlook, commentary, risks and unusual items
- Management described 2012 as a year of record sales and earnings and emphasized targeted acquisitions, product development, and operational excellence. The filing does not provide specific full-year 2013 revenue or earnings guidance.
- Management expected approximately $157.1 million of company-funded R&D and bid-and-proposal spending and approximately $90 million of capital expenditures in 2013. Year-end confirmed-order backlog was $952.5 million; the company expected to fulfill 99% during 2013.
- Teledyne announced a pending RESON A/S acquisition for approximately €53 million, including net debt, with closing anticipated in the first quarter of 2013, subject to customary conditions.
- Operating cash flow and available credit were expected to fund working capital, capital expenditures, debt service, pension contributions and acquisitions. The company made a voluntary $83 million pension contribution in January 2013, following $92.8 million in 2012 contributions.
- 2012 included $5.4 million in net tax benefits. The American Taxpayer Relief Act was expected to provide an approximately $2.9 million tax benefit in first-quarter 2013 and reduce the estimated 2013 effective tax rate by about 1.2 percentage points versus 2012. Additional severance and relocation costs of approximately $4 million were expected in the first half of 2013 in certain electronics manufacturing services businesses.
- Key risks include potential U.S. defense-budget reductions and sequestration, government contract funding and termination risk, fixed-price contract cost overruns, cyclicality in commercial markets, acquisition integration, foreign currency and international exposure, pension funding and investment assumptions, and single-source suppliers. Environmental remediation reserves were $3.2 million; management did not expect excess future costs to materially harm financial condition or liquidity, but period results could be affected.
- The 2012 internal-control assessment excluded the newly acquired LeCroy, VariSystems, BlueView, PDM Neptec and Optech businesses. Management and the auditor reported effective controls for the assessed scope; the financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Separate continuing-operations growth from the 2011 discontinued-operation sale gain when comparing earnings and EPS.
- Assess acquisition contribution, integration costs, acquired goodwill and intangible assets, and the expected returns from the 2012 transactions and pending RESON deal.
- Monitor cash conversion, working-capital growth, planned capital spending, debt levels and pension contributions; reported free cash flow declined year over year.
- Review exposure to government funding and defense-budget changes, fixed-price contracts, pension assumptions, environmental matters and the acquired businesses’ internal controls.