Teledyne Technologies Incorporated — Q1 2015 Form 10-Q
Business context and period: The filing covers the three months ended March 29, 2015, compared with the three months ended March 30, 2014. Teledyne supplies instrumentation, digital imaging, aerospace and defense electronics, and engineered systems. Results are unaudited and may not indicate full-year performance.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $565.0 million | $573.5 million | Down 1.5% |
| Operating income | $67.3 million | $66.0 million | Up 2.0% |
| Net income attributable to Teledyne | $43.7 million | $45.8 million | Down 4.6% |
| Diluted EPS | $1.20 | $1.20 | Unchanged |
| Operating cash flow | $16.7 million | $27.1 million | Down $10.4 million |
- Cost of sales was 61.2% of sales versus 61.3%; SG&A was 26.9% versus 27.2%. Operating margin was approximately 11.9% versus 11.5% (calculated from reported amounts).
- Operating cash flow less capital expenditures was approximately $9.0 million. Investing cash use was $26.2 million, including the $18.8 million Bowtech acquisition; financing cash use was $13.7 million.
- Cash was $110.2 million at March 29, down from $141.4 million at December 28, 2014. Working capital was $417.4 million, versus $402.7 million.
- Total debt including capital leases was reported as $830.0 million; the debt table lists $820.4 million of debt plus $9.6 million of capital leases. Borrowings under the revolving facility were $233.0 million, with $502.5 million of available capacity. The company was in compliance with covenants; leverage was 2.1x against a 3.25x maximum and interest coverage was 19.0x against a 3.0x minimum.
Material changes and segment results
- Instrumentation sales rose 4.4% to $270.3 million and operating profit rose 12.3% to $42.1 million, supported by marine and environmental instrumentation and acquisitions. Reported sales included $12.1 million of incremental acquisition revenue.
- Digital Imaging sales declined 11.3% to $90.4 million; operating profit fell 4.1% to $9.3 million, reflecting lower government R&D contract, remote-sensing imager, and semiconductor inspection camera sales.
- Aerospace and Defense Electronics sales declined 7.9% to $141.2 million and operating profit fell 18.5% to $19.4 million, reflecting weaker sales and lower margins for many defense electronics products.
- Engineered Systems sales rose 6.2% to $63.1 million and operating profit rose 9.8% to $6.7 million, mainly on higher engineered products and energy systems sales.
- Lower corporate expense helped operating income increase despite lower revenue. Net income declined primarily as the effective tax rate rose to 29.8% from 25.8%; excluding discrete tax items, both periods’ rates were 29.5%. Q1 2014 included a $2.3 million discrete tax benefit.
Outlook, risks and notable items
- Management expected a 2015 effective tax rate of approximately 29.5%, excluding discrete items, and capital expenditures of up to $60 million. It expected operating cash flow and available credit to meet requirements for the next 12 months; no domestic pension contributions were planned for 2015.
- Instrumentation outlook included acquisition-supported marine sales and growth in marine interconnect systems, partly offset by reduced geophysical sensor sales tied to oil and gas exploration. The filing gives no overall earnings or revenue guidance.
- The February 2015 $142.0 million accelerated share repurchase (ASR) returned 1.425 million shares initially; it was funded partly with $120 million of floating-rate borrowings. The final share count remained subject to settlement. Shares outstanding fell during the quarter.
- Bowtech was acquired for $18.8 million on February 2. Purchase accounting for Bowtech and Bolt remained preliminary. On April 29, Teledyne acquired the remaining 49% interest in Optech for CAD $26.5 million.
- A one-time $1.2 million gain arose from freezing the non-qualified pension plan for top executives. Foreign currency translation reduced other comprehensive income by $49.2 million, contributing to a $2.9 million comprehensive loss.
- Environmental remediation reserves were $9.5 million; remediation may continue for up to 30 years. Management did not expect pending legal matters to materially affect financial condition, but resolutions could materially affect results in a given period.
- Key risks include defense and government program funding, demand in energy exploration and other end markets, oil and gas prices, foreign exchange, interest rates, cybersecurity, and acquisition integration. A 100-basis-point interest-rate increase was estimated to raise annual interest expense by approximately $4.3 million on the specified $433 million of variable-rate debt.
Most important facts for investors to verify
- Whether declines in Digital Imaging and Aerospace and Defense Electronics persist, and whether Instrumentation acquisition growth offsets weaker oil-and-gas-related demand.
- Cash generation and liquidity after the ASR, acquisitions, and scheduled liabilities; reconcile the $830.0 million total including leases with the $820.4 million debt figure excluding leases.
- Final settlement amounts and share delivery under the February 2015 and September 2014 ASRs, and the resulting share count and leverage.
- Final Bowtech and Bolt purchase-price allocations, including intangible assets, goodwill, and tax effects.
- Developments in environmental remediation and legal contingencies, and the effect of foreign exchange and variable-rate debt costs.