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TDY > SEC Filings for TDY > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for TELEDYNE TECHNOLOGIES INC


7-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Teledyne Technologies Incorporated provides enabling technologies for industrial growth markets. We have evolved from a company that was primarily focused on aerospace and defense to one that serves multiple markets that require advanced technology and high reliability. These markets include deepwater oil and gas exploration and production, oceanographic research, air and water quality environmental monitoring, factory automation and medical imaging. Our products include monitoring instrumentation for marine and environmental applications, harsh environment interconnects, electronic test and measurement equipment, digital imaging sensors and cameras, aircraft information management systems, and defense electronic and satellite communication subsystems. We also supply engineered systems for defense, space, environmental and energy applications. We differentiate ourselves from many of our direct competitors by having a customer and company sponsored applied research center that augments our product development expertise.

Strategy/Overview
Our strategy continues to emphasize growth in our core markets of instrumentation, digital imaging, aerospace and defense electronics and engineered systems. Our core markets are characterized by high barriers to entry and include specialized products and services not likely to be commoditized. We intend to strengthen and expand our core businesses with targeted acquisitions and through product development. We aggressively pursue operational excellence to continually improve our margins and earnings. Operational excellence includes the rapid integration of the businesses we acquire. Using complementary technology across our businesses and internal research and development, we seek to create new products to grow our company and expand our addressable markets. We continue to evaluate our businesses to ensure that they are aligned with our strategy.
Our first quarter 2013 sales were $569.4 million, compared with sales of $494.0 million for the same period of 2012, an increase of 15.3%. Net income attributable to Teledyne of $40.4 million ($1.07 per diluted share) for the first quarter of 2013, compared with $35.7 million ($0.96 per diluted share) for the first quarter of 2012, an increase of 13.2%. We acquired RESON A/S ("RESON") to complement marine instrumentation. We amended our revolving credit facility to increase the borrowing capacity to $750.0 million and extend the maturity date to March 1, 2018, to support our strategy.

Our Recent Acquisitions
On March 1, 2013, Teledyne acquired RESON for $69.7 million, net of cash acquired. RESON headquartered in Slangerup, Denmark, provides multibeam sonar systems and specialty acoustic sensors for hydrography, global marine infrastructure and offshore energy operations. RESON had sales of 50.8 million for its fiscal year ended December 31, 2012, and is part of the Instrumentation segment.
On February 25, 2012, Teledyne acquired VariSystems for $34.9 million, net of cash acquired. Teledyne paid a $1.4 million purchase price adjustment in the second quarter of 2012. VariSystems, headquartered in Calgary, Alberta, Canada, supplies custom harsh environment interconnects used in energy exploration and production. VariSystems is part of the Aerospace and Defense Electronics segment.
For our fiscal year 2012, we made four other acquisitions. We acquired a majority interest in the parent company of Optech Incorporated ("Optech") in the second quarter, and LeCroy Corporation ("LeCroy"), the parent company of PDM Neptec Limited ("PDM Neptec") and BlueView Technologies, Inc. ("BlueView") in the third quarter.
Teledyne funded the purchases from borrowings under its credit facility and cash on hand.
For a further description of the Company's acquisition activity for the fiscal year ended December 30, 2012, please refer to Note 3 of our 2012 Form 10-K ("2012 Form 10-K").


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Results of Operations
                                                 First Quarter
(in millions)                                              2012
Net Sales                                    $ 569.4     $ 494.0
Costs and expenses
Cost of sales                                  365.4       328.1
Selling, general and administrative expenses   145.1       110.4
Total costs and expenses                       510.5       438.5
Income before other expense and income taxes    58.9        55.5
Other expense, net                              (0.5 )      (0.4 )
Interest and debt expense, net                  (5.4 )      (4.0 )
Income before income taxes                      53.0        51.1
Provision for income taxes                      13.2        15.5
Net income                                      39.8        35.6
Noncontrolling interest                          0.6         0.1
Net income attributable to Teledyne          $  40.4     $  35.7

First quarter of 2013 compared with the first quarter of 2012 Our first quarter 2013 sales were $569.4 million, compared with sales of $494.0 million for the same period of 2012, an increase of 15.3%. Net income attributable to Teledyne was $40.4 million ($1.07 per diluted share) for the first quarter of 2013, compared with $35.7 million ($0.96 per diluted share) for the first quarter of 2012, an increase of 13.2%.
The first quarter of 2013, compared with the same period in 2012, reflected higher sales in each business segment except the Engineered Systems segment. The increase in sales included the impact of acquisitions as well as higher organic sales. Incremental revenue in the first quarter of 2013 from recent acquisitions was $65.0 million. The first quarter of 2013, compared with the same period in 2012, reflected higher operating profit in each business segment except the Aerospace and Defense Electronics segment.
Segment earnings increased to $68.4 million for the first quarter of 2013, from $65.0 million for the same period of 2012. Segment earnings reflected $0.4 million of acquisition related transaction costs, $0.9 million in additional intangible asset amortization, $1.7 million of severance and relocation costs associated with certain electronic manufacturing businesses and lower LIFO expense of $0.8 million. The incremental operating profit included in the results for the first quarter of 2013 from recent acquisitions was $0.6 million and included acquisition related transaction costs.
The first quarter of 2013 included pension expense of $4.3 million, compared with pension expense of $1.7 million in the first quarter of 2012. The increase in pension expense primarily reflected the impact of using a 4.4 percent discount rate to determine the benefit obligation for the domestic plan in 2013 compared with a 5.5 percent discount rate used in 2012. Pension expense allocated to contracts pursuant to U.S. Government Cost Accounting Standards ("CAS") was $3.6 million in the first quarter of 2013, compared with $3.2 million in the first quarter of 2012.
In the first quarter of 2013 and 2012, we recorded a total of $1.8 million and $1.5 million, respectively, in stock option compensation expense. Employee stock option grants are expensed evenly over the three year vesting period.


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The table below presents sales and cost of sales by segment and total company:

                                   First Quarter     First Quarter
(Dollars in millions)                  2013              2012
Instrumentation
Sales                             $       221.2     $       160.6
Cost of sales                     $       118.6     $        94.6
Cost of sales % of sales                   53.6 %            58.9 %
Digital Imaging
Sales                             $       102.4     $        94.2
Cost of sales                     $        67.1     $        62.6
Cost of sales % of sales                   65.5 %            66.5 %
Aerospace and Defense Electronics
Sales                             $       174.6     $       164.8
Cost of Sales                     $       120.5     $       109.8
Cost of sales % of sales                   69.0 %            66.6 %
Engineered Systems
Sales                             $        71.2     $        74.4
Costs of sales                    $        59.2     $        61.1
Cost of sales % of sales                   83.1 %            82.1 %
Total Company
Sales                             $       569.4     $       494.0
Costs of sales                    $       365.4     $       328.1
Cost of sales % of sales                   64.2 %            66.4 %

Cost of sales increased by $37.3 million in the first quarter of 2013, compared with the first quarter of 2012, which primarily reflected the impact of higher sales. Cost of sales as a percentage of sales for the first quarter of 2013 decreased to 64.2% from 66.4% in the first quarter of 2012 and reflected the impact of the LeCroy acquisition which carries a lower cost of sales percentage than the average for our other businesses.
Certain contracts are accounted for under the percentage of completion ("POC") method and related contract cost and revenue estimates for significant contracts are generally reviewed and reassessed quarterly. The aggregate effects of these changes in estimates on contracts accounted for under the POC accounting method, in the first quarter of 2013 and 2012, were $5.1 million and $0.7 million of favorable operating income and $6.2 million and $1.3 million of unfavorable operating income, respectively.
Selling, general and administrative expenses, including research and development and bid and proposal expense, increased by $34.7 million in the first quarter of 2013, compared with the first quarter of 2012, due to recent acquisitions which included $25.2 million at LeCroy, $0.4 million in acquisition related transaction costs and $0.9 million in higher acquired intangible asset amortization expense. Selling, general and administrative expenses for the first quarter of 2013, as a percentage of sales, increased to 25.5%, compared with 22.3% in the first quarter of 2012 and reflected the impact of acquisition related transaction costs, higher research and development expense and also reflected the impact of the LeCroy acquisition which carries a higher selling, general and administrative expense percentage than the average for our other businesses. Corporate expense was $9.5 million for the first quarter of 2013, compared with $9.5 million for the first quarter of 2012.
Interest expense, net of interest income, was $5.4 million in the first quarter of 2013, compared with $4.0 million for the first quarter of 2012. The increase in interest expense primarily reflected the impact of higher outstanding debt levels.
The income tax provision is calculated using an estimated annual effective tax rate, based upon estimates of annual income, permanent items, statutory tax rates and planned tax strategies in the various jurisdictions in which we operate except that certain loss jurisdictions and discrete items, such as the resolution of uncertain tax positions, are treated separately. The Company's effective income tax rate for the first quarter of 2013 was 24.9% compared with 30.3% for the first quarter of 2012. The decrease in the effective tax rates in 2013 from 2012, reflected net tax benefits for discrete items of $2.7 million, compared to net tax benefits for discrete items of $1.1 million for the first quarter of 2012. The net tax benefits in 2013 primarily relate to the retroactive reinstatement of certain tax benefits and credits from the enactment of the American Taxpayer Relief Act of 2012 signed into law on January 2, 2013. Excluding the net tax benefits in both periods, the effective tax rates would have


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been 30.0% for the first quarter of 2013, compared with 32.5% for the first quarter of 2012. The Company's effective tax rate for 2013 is expected to be 30.0%, based on the projected mix of earnings before tax by jurisdiction, excluding the impact of any matters that would be treated as discrete.

Segment Results:
The following table sets forth the sales and operating profit for each segment
(amounts in millions):
                                     First Quarter     First Quarter       %
                                         2013              2012          Change
Net sales:
Instrumentation                     $       221.2     $       160.6      37.7  %
Digital Imaging                             102.4              94.2       8.7  %
Aerospace and Defense Electronics           174.6             164.8       5.9  %
Engineered Systems                           71.2              74.4      (4.3 )%
Total net sales                     $       569.4     $       494.0      15.3  %
Segment operating profit:
Instrumentation                     $        35.0     $        31.6      10.8  %
Digital Imaging                               5.2               4.3      20.9  %
Aerospace and Defense Electronics            21.8              22.9      (4.8 )%
Engineered Systems                            6.4               6.2       3.2  %
Total segment operating profit               68.4              65.0       5.2  %
Corporate expense                            (9.5 )            (9.5 )       -  %
Other expense, net                           (0.5 )            (0.4 )    25.0  %
Interest expense, net                        (5.4 )            (4.0 )    35.0  %
Income before income taxes                   53.0              51.1       3.7  %
Provision for income taxes                   13.2              15.5     (14.8 )%
Net income                                   39.8              35.6      11.8  %
Noncontrolling interest                       0.6               0.1     500.0  %
Net income attributable to Teledyne $        40.4     $        35.7      13.2  %



Instrumentation
                                                          First       First
                                                         Quarter     Quarter
(Dollars in millions)                                     2013        2012
Sales                                                   $ 221.2     $ 160.6
Cost of sales                                           $ 118.6     $  94.6
Selling, general and administrative expenses            $  67.6     $  34.4
Operating profit                                        $  35.0     $  31.6
Cost of sales % of sales                                   53.6 %      58.9 %
Selling, general and administrative expenses % of sales    30.6 %      21.4 %
Operating profit % of sales                                15.8 %      19.7 %

First quarter of 2013 compared with the first quarter of 2012 The Instrumentation segment's first quarter 2013 sales were $221.2 million, compared with $160.6 million in the first quarter of 2012, an increase of 37.7%. First quarter 2013 operating profit was $35.0 million, compared with operating profit of $31.6 million in the first quarter of 2012, an increase of 10.8%.


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The first quarter 2013 sales increase resulted from higher sales of both marine and electronic test and measurement instrumentation, partially offset by lower sales of environmental instrumentation. The higher sales of $19.6 million for marine instrumentation products reflected increased sales of interconnect systems used in offshore energy production, as well as higher sales of marine acoustic sensors and autonomous underwater vehicles and also included a total of $11.2 million in revenue from recent acquisitions including the March 1, 2013 acquisition of RESON. Increased sales of $43.4 million for electronic test and measurement instrumentation resulted from the August 2012 acquisition of LeCroy. The decrease in sales of $2.4 million for environmental instrumentation primarily reflected lower sales of laboratory instruments, partially offset by increased sales of air monitoring instrumentation. The increase in operating profit reflected the impact of higher sales, partially offset by $1.3 million in additional intangible asset amortization, $0.4 million in acquisition related transaction costs and $0.2 million in inventory purchase accounting charges related to the recent acquisitions. The incremental operating profit included in the results for the first quarter of 2013 from recent acquisitions was $2.4 million.
First quarter cost of sales increased by $24.0 million, compared with the first quarter of 2012, and reflected the impact of higher sales and product mix differences. The decrease in the cost of sales percentage largely reflected the impact of the LeCroy acquisition which carries a lower cost of sales percentage than the average for our other businesses in this segment. First quarter selling, general and administrative expenses, including research and development and bid and proposal expense, in increased by $33.2 million, compared with the first quarter of 2012, and primarily reflected the impact acquisitions, primarily LeCroy. The LeCroy acquisition represented $25.2 million of the increase in selling, general and administrative expenses, and included $9.4 million in research and development expenses. The increase in the selling, general and administrative expense percentage to 30.6 percent in the first quarter of 2013 from 21.4 percent in the first quarter of 2012, largely reflected the impact of the LeCroy acquisition which carries a higher selling, general and administrative expense percentage than the average for our other businesses in this segment.

Digital Imaging
                                                          First       First
                                                         Quarter     Quarter
(Dollars in millions)                                     2013        2012
Sales                                                   $ 102.4     $  94.2
Cost of sales                                           $  67.1     $  62.6
Selling, general and administrative expenses            $  30.1     $  27.3
Operating profit                                        $   5.2     $   4.3
Cost of sales % of sales                                   65.5 %      66.5 %
Selling, general and administrative expenses % of sales    29.4 %      29.0 %
Operating profit % of sales                                 5.1 %       4.6 %

First quarter of 2013 compared with the first quarter of 2012 The Digital Imaging segment's first quarter 2013 sales were $102.4 million, compared with $94.2 million in the first quarter of 2012, an increase of 8.7%. Operating profit was $5.2 million for the first quarter of 2013, compared with operating profit of $4.3 million in the first quarter of 2011, an increase of 20.9%.
The 2013 sales increase included $9.3 million in revenue from the April 2, 2012, acquisition of a majority interest in the parent company of Optech Incorporated ("Optech") and greater sales of medical imaging and infrared sensors, partially offset by decreased sales of imagers for remote sensing applications. Operating profit in 2013 reflected the impact of higher sales, partially offset by an operating loss of $1.4 million at Optech.
Cost of sales increased by $4.5 million, compared with the first quarter of 2013, and primarily reflected the impact of higher sales. The lower cost of sales percentage in 2013 reflected the results of the Optech acquisition, which carries a lower cost of sales percentage than the average for our other businesses in this segment.


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Aerospace and Defense Electronics
                                                          First       First
                                                         Quarter     Quarter
(Dollars in millions)                                     2013        2012
Sales                                                   $ 174.6     $ 164.8
Cost of sales                                           $ 120.5     $ 109.8
Selling, general and administrative expenses            $  32.3     $  32.1
Operating profit                                        $  21.8     $  22.9
Cost of sales % of sales                                   69.0 %      66.6 %
Selling, general and administrative expenses % of sales    18.5 %      19.5 %
Operating profit % of sales                                12.5 %      13.9 %

First quarter of 2013 compared with the first quarter of 2012 The Aerospace and Defense Electronics segment's first quarter 2013 sales were $174.6 million, compared with $164.8 million in the first quarter of 2012, an increase of 5.9%. Operating profit was $21.8 million for the first quarter of 2013, compared with operating profit of $22.9 million in the first quarter of 2012, a decrease of 4.8%.
The 2013 sales increase reflected higher net sales of $7.1 million from microwave and interconnect systems collectively, which included $1.0 million in incremental revenue from the acquisition of VariSystems Inc. The sales increase also reflected $1.1 million from avionics products and electronic relays and $1.6 million for electronic manufacturing service products. Operating profit in 2013 decreased and reflected the impact of $1.7 million for severance and relocation costs associated with certain electronic manufacturing businesses, partially offset by higher sales and lower LIFO expense of $0.7 million. We expect additional severance and relocation costs associated with certain electronic manufacturing services businesses in the second quarter and full year of 2013.
For the first quarter of 2013 the change in operating profit from recent acquisitions was a decrease of $0.4 million. First quarter cost of sales increased by $10.7 million, compared with the first quarter of 2012, and reflected the impact of higher sales and product mix differences. Cost of sales as a percentage of sales for the first quarter of 2013 increased to 69.0% from 66.6% in the first quarter of 2012 and reflected the impact of severance and relocation costs and product mix differences.

Engineered Systems
                                                          First       First
                                                         Quarter     Quarter
(Dollars in millions)                                     2013        2012
Sales                                                   $  71.2     $  74.4
Cost of sales                                           $  59.2     $  61.1
Selling, general and administrative expenses            $   5.6     $   7.1
Operating profit                                        $   6.4     $   6.2
Cost of sales % of sales                                   83.1 %      82.1 %
Selling, general and administrative expenses % of sales     7.9 %       9.6 %
Operating profit % of sales                                 9.0 %       8.3 %

First quarter of 2013 compared with the first quarter of 2012 The Engineered Systems segment's first quarter 2013 sales were $71.2 million, compared with $74.4 million in the first quarter of 2012, a decrease of 4.3%. Operating profit was $6.4 million for the first quarter 2013, compared with operating profit of $6.2 million in the first quarter of 2012, an increase of 3.2%.
The first quarter 2013 sales decrease reflected lower energy systems sales of $3.7 million and lower sales of $0.9 million related to turbine engines, partially offset by higher sales of $1.4 million from engineered products and services, including missile defense programs. Operating profit in the first quarter of 2013 reflected the impact of higher margins for engineered products and services, partially offset by lower sales and $1.1 million in higher net pension expense.
First quarter cost of sales decreased by $1.9 million, compared with the first quarter of 2012, and reflected the impact of lower sales partially offset by higher pension expense. Cost of sales as a percentage of sales for the first quarter of 2013 increased slightly to 83.1% from 82.1% in the first quarter of 2012 and reflected higher pension expense. The decrease the selling, general and administrative expense percentage primarily reflected the impact of cost reductions.


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Financial Condition, Liquidity and Capital Resources Our net cash used by operating activities was $56.7 million for the first three months of 2013, compared with net cash used by operating activities of $19.7 million for the same period of 2012. The lower cash provided by operating activities from in the first three months of 2013 reflected the impact of a voluntary $83.0 million cash contribution to the domestic pension plan in the first quarter of 2013, compared with a voluntary $50.0 million cash contribution to the domestic pension plan for the first quarter of 2012. No further cash pension contributions are planned for the remainder of 2013 for the domestic pension plan. The first quarter of 2013 also reflected higher income tax payments of $4.2 million compared with the first quarter of 2012.
Our net cash used in investing activities was $86.0 million for the first three months of 2013, compared with net cash used by investing activities of $45.5 million for the first three months of 2012. The 2013 amount includes the acquisition of RESON and the 2012 amount includes the acquisition of VariSystems.
Capital expenditures for the first three months of 2013 and 2012 were $16.3 million and $10.6 million, respectively.
Our goodwill was $1,014.8 million at March 31, 2013 and $990.2 million at December 30, 2012. The increase in the balance of goodwill in 2013 resulted from the RESON acquisition partially offset by the impact of exchange rate changes. Teledyne's net acquired intangible assets were $280.1 million at March 31, 2013 and $265.7 million at December 30, 2012. The increase in the balance of acquired intangible assets in 2013 resulted from the RESON acquisition, partially offset by amortization and the impact of exchange rate changes. The Company's cost to acquire RESON has been allocated to the assets acquired and liabilities assumed based upon their respective fair values as of the date of the completion of the acquisition. The differences between the fair value of the consideration paid and the estimated fair value of the assets and liabilities acquired has been recorded as goodwill. The Company has completed the process of specifically identifying the amounts assigned to assets and liabilities and acquired intangible assets and the related impact on goodwill for the RESON acquisition. Financing activities provided cash of $145.9 million for the first three months of 2013, compared with cash provided by financing activities of $100.7 million for the first three months of 2012. Cash provided by financing activities for the first three months of 2013 and 2012 included net borrowings of $140.1 million and $88.1 million, respectively. Proceeds from the exercise of stock options were $4.8 million and $7.7 million for the first three months of 2013 and 2012, respectively. The first three months of 2013 and 2012 included $1.8 million and $2.9 million, respectively, in excess tax benefits related to stock option exercises.
Working capital was $397.2 million at March 31, 2013, compared with $337.5 million at December 30, 2012. The increase in working capital primarily reflected the impact of current year acquisitions and lower payroll accruals due to first quarter payments.
Our principal cash and capital requirements are to fund working capital needs, capital expenditures, income tax payments, pension contributions, debt service . . .

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