Teledyne Technologies Incorporated — Q2 2018 Form 10-Q
Reporting period: Second quarter and six months ended July 1, 2018; comparisons are with periods ended July 2, 2017. Amounts are in millions of dollars except per-share data.
Business context and results
Teledyne supplies instrumentation, digital imaging, aerospace and defense electronics, and engineered systems. It reported Q2 sales of $732.5, up 9.1%, and six-month sales of $1,428.1, up 15.4%. Growth reflected organic sales and acquisitions; e2v contributed materially to the first-half comparison.
Key financial metrics
- Profit: Q2 operating income was $111.5, up 34.7%, and net income was $85.9, up 42.9%. Diluted EPS was $2.32 versus $1.66. For six months, operating income was $199.9, up 45.3%, net income was $152.4, up 68.2%, and diluted EPS was $4.13 versus $2.50.
- Margins: Q2 operating margin was approximately 15.2% versus 12.3%; six-month operating margin was approximately 14.0% versus 11.1%. Cost of sales was 61.0% of sales in Q2 versus 62.8%, and 62.0% for six months versus 62.9%.
- Cash flow: Six-month operating cash flow was $179.5 versus $140.4. Capital expenditures were $47.2 versus $24.9; operating cash flow less capital expenditures was $132.3 versus $115.5. Cash at July 1 was $101.4.
- Debt and liquidity: Debt was $947.8 at July 1, compared with $1,068.2 at year-end; the company separately reported $6.0 of capital leases. Available credit-facility borrowing capacity was $674.9, and the company was in compliance with covenants. Management said operating cash flow and available borrowing capacity should meet requirements over the next 12 months.
- Other: Total assets were $3,882.9 and stockholders’ equity was $2,102.7. Remaining performance obligations were $1,632.6; approximately 83% was expected to be recognized as revenue within 12 months.
Material changes and segment performance
- Q2 sales increased across all segments except Engineered Systems. Instrumentation sales rose 12.3%, Digital Imaging 12.5%, and Aerospace and Defense Electronics 7.7%; Engineered Systems declined 6.4%.
- Digital Imaging led first-half growth, with sales up 38.9% and operating income up 80.7%; e2v contributed $77.0 of incremental sales and $24.4 of incremental operating income. Comparisons also reflect e2v-related acquisition and inventory step-up costs in 2017.
- Engineered Systems sales and operating income declined in Q2 and were slightly lower for the first half. Aerospace and Defense Electronics sales rose, but its cost-of-sales percentage increased in both comparison periods, partly reflecting product mix.
- Teledyne realigned certain e2v microwave products from Aerospace and Defense Electronics to Digital Imaging; prior segment results were adjusted. It adopted ASC 606 on January 1, 2018 using the modified retrospective method, so prior-year figures were not restated. The filing’s reconciliation shows ASC 606 increased reported Q2 sales by $11.1 and first-half sales by $43.5 relative to the amounts calculated without adoption; net income was higher by $3.5 and $10.5, respectively.
Outlook, commentary, risks, and unusual items
- Management expected approximately $90 of 2018 capital expenditures, including $47.2 spent in the first half, and an annual effective tax rate of 21.3%, excluding discrete items. No revenue or EPS guidance was provided.
- The 2018 effective tax rates were 17.7% for Q2 and 18.3% for six months, benefiting from discrete tax items and lower U.S. corporate tax rates. The filing reports a $4.7 provisional Tax Act charge in 2017 and a further $0.6 adjustment in Q1 2018.
- Q2 other expense was $3.7 versus $0.7, primarily reflecting higher foreign-currency impacts. Non-designated derivative losses were $17.0 in Q2 and $17.8 for six months, largely offset by gains on underlying items. Foreign-currency translation reduced Q2 comprehensive income.
- Risks highlighted include changes in government and defense-program spending, demand in energy and commercial aviation markets, Brexit-related impacts, foreign-exchange and interest-rate movements, cybersecurity, and tariffs or retaliatory trade restrictions that could raise input costs, disrupt supply, or affect sales.
- Environmental remediation reserves were $4.7; management did not believe pending litigation and claims were likely to have a material adverse effect. The company estimated remediation at identified sites could take up to 30 years.
Important facts for investors to verify
- Assess reported growth against ASC 606’s adoption effects and the differing e2v acquisition contribution between periods.
- Track Digital Imaging’s growth and margins, Engineered Systems’ weakness, and Aerospace and Defense Electronics’ higher cost-of-sales ratio.
- Monitor conversion of the $1.63 billion remaining performance obligations into revenue and cash, including the rise in unbilled receivables.
- Review foreign-exchange exposure, tariff and supply-chain developments, and the effect of variable-rate debt; management estimated a 100-basis-point rate increase would add about $3.3 of annual interest expense on specified variable-rate borrowings.
- Confirm that capital spending, liquidity, and covenant headroom remain consistent with management’s stated expectations.