Teledyne Technologies Incorporated — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended April 1, 2018. Dollar amounts are in millions except per-share data.
Business context and results
Teledyne supplies instrumentation, digital imaging products and software, aerospace and defense electronics, and engineered systems. It acquired Roper Technologies’ scientific imaging businesses on February 5 for $225.0 million in cash; the businesses are included in Digital Imaging results from that date.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $745.2 | $695.6 | +7.1% |
| Operating income | $97.3 | $88.4 | +10.1% |
| Net income | $75.3 | $66.5 | +13.2% |
| Diluted EPS | $2.02 | $1.81 | +11.6% |
| Operating margin | 13.1% | 12.7% | +0.4 percentage points |
| Cost of sales / sales | 62.3% | 63.0% | Improved |
Sales increased in all four segments. Instrumentation sales were $256.5 (+7.3%) and operating income $39.9 (+43.5%); Digital Imaging sales were $235.3 (+11.5%) and operating income $37.0 (+6.9%); Aerospace and Defense Electronics sales were $180.4 (+3.9%) and operating income $33.8 (+6.6%). Engineered Systems sales were $73.0 (+1.4%), but operating income fell 34.7% to $4.7, primarily because of lower turbine-engine sales and unfavorable product mix. Corporate expense rose to $18.1 from $12.9, mainly reflecting higher stock-option expense.
Cash flow, balance sheet and liquidity
- Operating cash flow was $80.1, versus $71.6. Capital expenditures were $21.3, versus $19.8.
- Investing cash outflow was $243.8, including the $225.0 acquisition. Financing cash inflow was $124.3, mainly from $120.0 net credit-facility proceeds. Cash declined to $106.2 from $142.5.
- At March 31, cash was $106.2 and total current assets $1,117.5; current liabilities were $723.7. The current portion of debt and other debt was $131.8.
- Debt was reported as $856.4 in MD&A. The debt note lists total debt of $857.5 before deductions for the current portion and debt issuance costs; investors should reconcile these presentations. Long-term debt on the balance sheet was $724.6.
- Available credit-facility capacity was $571.2, with $149.0 drawn under the facility and $34.7 of letters of credit outstanding. The facility maturity was extended to March 2024; capacity may increase by up to $250.0 subject to conditions. The company reported compliance with covenants, with net leverage of 1.6x against a 3.25x maximum.
- Operating lease right-of-use assets were $134.3 and operating lease liabilities $144.0 after adoption of the new lease standard. The company said liquidity was sufficient for expected needs over the next 12 months.
Outlook, commentary and material items
- Management expected 2019 capital expenditures of approximately $90.0, including $21.3 spent in Q1, and an annual effective tax rate of 22.3% excluding discrete items. No full-year sales or earnings guidance was provided in this filing.
- Management said higher sales and operating income supported Q1 operating cash flow, partly offset by higher tax payments, including repatriation taxes. The Q1 effective tax rate was 18.9%, including $3.1 of net discrete tax benefits; excluding these benefits, the rate was 22.3%.
- Remaining performance obligations were $1,760.0; approximately 79% was expected to be recognized as revenue in the next 12 months. Contract estimate revisions contributed $2.8 of favorable Q1 operating income, with no individual contract effect material to the statements.
- The acquisition added $14.1 of Q1 Digital Imaging sales. Purchase accounting remained preliminary; the company was still assigning certain acquired assets and liabilities, including intangibles and related tax and goodwill effects. Goodwill increased to $1,885.1, including $145.4 related to the acquisition.
- Risks highlighted include changes in defense and commercial markets and government funding, energy-market conditions, Brexit, tariffs and sanctions, cyber threats, acquisition integration, and foreign-exchange and interest-rate movements. A 100-basis-point interest-rate increase was estimated to raise annual interest expense by about $2.5, assuming $249.0 of variable-rate debt remained outstanding for a full year.
- Environmental remediation reserves were $6.4; remediation at identified sites may extend up to 30 years. Management did not expect pending litigation and claims to have a material adverse effect, while noting outcomes cannot be predicted with certainty. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Reconcile the $856.4 debt figure in MD&A with the $857.5 total debt in the debt note and the balance-sheet classifications.
- Track the integration, purchase-price allocation and subsequent contribution of the Roper scientific imaging businesses.
- Assess Engineered Systems’ lower operating income and the cost, mix and sales trends affecting segment margins.
- Compare actual full-year capital spending and effective tax rate with management’s stated expectations.
- Monitor cash conversion, working-capital movements, acquisition-related borrowing, covenant headroom and exposure to interest rates and foreign currencies.