Teledyne Technologies Incorporated — Q3 2020 Form 10-Q
Reporting period: Third quarter and nine months ended September 27, 2020; comparisons are with the corresponding 2019 periods. Amounts are in millions except per-share data.
Business context and results
Teledyne supplies instrumentation, digital imaging, aerospace and defense electronics, and engineered systems. Its reportable segments are Instrumentation, Digital Imaging, Aerospace and Defense Electronics, and Engineered Systems. The company cited COVID-19-related commercial aerospace weakness and deferred medical and dental procedures as pressures on sales.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $749.0 | $802.2 | $2,276.9 | $2,329.4 |
| Operating income | $122.5 | $128.7 | $336.3 | $357.9 |
| Net income | $93.9 | $106.7 | $269.8 | $286.6 |
| Diluted EPS | $2.48 | $2.84 | $7.14 | $7.66 |
| Operating margin | 16.4% | 16.0% | 14.8% | 15.4% |
Financial position, cash flow and liquidity
- Nine-month operating cash flow was $382.5, up from $314.2, reflecting lower tax payments, improved receivables collections and acquisition-related cash flow, partly offset by higher accounts payable and severance payments.
- Investing activities used $80.9, versus $547.8 in 2019, when acquisitions were substantially larger. Capital expenditures were $52.0 versus $64.5.
- Cash and cash equivalents totaled $454.5 at September 27, 2020, up from $199.5 at December 29, 2019. The balance included $254.0 of cash equivalents.
- Total debt was $786.7, including $761.1 of long-term debt; the company repaid $75.0 of 5.30% senior notes in September. Credit-facility borrowing was $125.0, with $614.7 of available capacity. The company reported compliance with debt covenants.
- Current assets were $1,535.1 and current liabilities $671.2. Management said operating cash flow and available borrowings should meet expected requirements over the next 12 months.
Changes versus prior year
- Q3 sales fell 6.6%, operating income fell 4.8%, and net income fell 12.0%. For the first nine months, sales declined 2.3%, operating income 6.0%, and net income 5.9%.
- Aerospace and Defense Electronics was the largest weakness: Q3 sales declined 18.2% and operating income 32.4%; nine-month sales declined 14.5% and operating income 47.9%. Commercial aerospace weakness, lower commercial space sales, severance and facility consolidation costs, and unfavorable contract estimate changes affected results.
- Digital Imaging Q3 operating income rose 10.4% despite slightly lower sales, supported by product mix. Engineered Systems sales and operating income increased in both the quarter and nine-month period. Instrumentation nine-month sales and operating income increased, aided in part by acquisitions.
- Cost of sales was 61.2% of sales in Q3 versus 60.8%, and 62.0% for nine months versus 60.8%. Nine-month results included $22.9 of severance, facility consolidation, acquisition and other costs, compared with $5.7 in 2019. The quarter included $3.9 versus $2.0.
Outlook, risks and unusual items
- No broad revenue or earnings forecast was provided. Management expected a 22.7% fiscal 2020 effective tax rate before discrete tax items, approximately $70.0 of 2020 capital expenditures, and no domestic qualified pension contributions in 2020.
- COVID-19 impacts remained uncertain. The company identified risks from disruption to operations and supply chains, customer and supplier financial distress, weak commercial aviation, changes in government program funding, energy-market conditions, trade measures, geopolitical tensions, foreign exchange and cybersecurity.
- OneWeb-related exposure was described as substantially reduced: OneWeb secured financing, Teledyne received an advance payment in October, modified contract terms were agreed, and limited production resumed. Risk remained, including the need for OneWeb to exit bankruptcy successfully.
- COVID-19 impairment reviews found no triggering event for goodwill or indefinite-lived intangible assets as of September 27; management said it would continue monitoring conditions. OakGate’s purchase-price allocation remained in progress.
- Favorable changes in contract estimates added approximately $16.6 to nine-month operating income, primarily in Digital Imaging and Engineered Systems; Aerospace and Defense Electronics also had unfavorable contract estimate changes. Results included $15.8 of nine-month discrete tax benefits, versus $17.8 in 2019; the Q3 amounts were $1.2 and $10.4, respectively.
- Environmental remediation reserves were $6.6, with expenditures expected over many years. Management did not believe pending legal matters were likely to have a material adverse effect on the financial statements.
Key facts for investors to verify
- Whether commercial aerospace weakness and related margin pressure persist, particularly in Aerospace and Defense Electronics.
- Whether operating cash flow remains strong and cash balances and credit availability support acquisitions, capital spending and other requirements.
- How OneWeb’s bankruptcy outcome, advance payment and modified contract terms affect remaining exposure and production.
- Whether the expected 22.7% tax rate before discrete items and approximately $70.0 capital-spending estimate remain appropriate.
- Whether contract estimate revisions, restructuring costs, acquisition integration, or COVID-19 conditions materially change future margins or impairment assessments.