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TDY > SEC Filings for TDY > Form 10-Q on 2-Aug-2013All Recent SEC Filings

Show all filings for TELEDYNE TECHNOLOGIES INC

Form 10-Q for TELEDYNE TECHNOLOGIES INC


2-Aug-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 second quarter 2013 sales were $601.0 million, compared with sales of $518.5 million for the same period of 2012, an increase of 15.9%. Net income attributable to Teledyne of $42.9 million ($1.13 per diluted share) for the second quarter of 2013, compared with $39.5 million ($1.06 per diluted share) for the second quarter of 2012, an increase of 8.6%.

Our Recent Acquisitions
On May 8, 2013, a subsidiary of Teledyne acquired Axiom IC B.V. ("Axiom"), for an initial payment of $4.0 million, net of cash acquired, with an additional $1.3 million expected to be paid in equal installments over three years. Axiom is a fabless semiconductor company that develops high-performance CMOS mixed-signal integrated circuits. Axiom is located in the Netherlands and is part of the Digital Imaging segment.
On March 1, 2013, Teledyne acquired all the outstanding shares of 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 August 3, 2012, Teledyne acquired LeCroy Corporation ("LeCroy") for $301.3 million, net of cash acquired. LeCroy, headquartered in Chestnut Ridge, New York is a leading supplier of oscilloscopes, protocol analyzers and signal integrity test solutions. LeCroy had sales of $178.1 million for its fiscal year ended June 30, 2011 and is part of the Instrumentation segment.
On April 2, 2012, Teledyne acquired a majority interest in the parent company of Optech Incorporated ("Optech") for $27.9 million, net of $4.8 million in cash acquired. The purchase increased Teledyne's ownership percentage to 51 percent from the original 19 percent interest purchased in the first quarter of 2011. With the April 2012 purchase, we now consolidate Optech's financial results into Teledyne's results with an appropriate adjustment for the minority ownership. At the time of the purchase, the value of Optech's total equity was based on the same per share price as those shares purchased by Teledyne to obtain the majority interest in 2012 and the value of the non-controlling interest was 49.0% of Optech's total equity and was equal to $49.8 million. The minority ownership of Optech was $48.1 million and $49.8 million at June 30, 2013 and December 30, 2012, respectively. Optech is part of the Digital Imaging segment.


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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 Instrumentation segment.
For our fiscal year 2012, we made two other acquisitions. We acquired the parent company of PDM Neptec Limited ("PDM Neptec") and BlueView Technologies, Inc. ("BlueView") in the third quarter.
In the third quarter of 2013, a subsidiary of Teledyne purchased the remaining 49% interest in Nova Research, Inc. ("Nova Sensors") that it did not already own for $4.9 million. Nova Sensors is part of the Digital Imaging segment. Teledyne funded the purchases from borrowings under its credit facility and cash on hand. The results of these acquisitions have been included in Teledyne's results since the dates of the respective acquisitions.
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").

Results of Operations
                                                Second Quarter              Six Months
(in millions)                                  2013        2012         2013          2012
Net Sales                                    $ 601.0     $ 518.5     $ 1,170.4     $ 1,012.5
Costs and expenses
Cost of sales                                  383.6       343.0         749.0         671.1
Selling, general and administrative expenses   152.5       115.8         297.6         226.2
Total costs and expenses                       536.1       458.8       1,046.6         897.3
Income before other expense and income taxes    64.9        59.7         123.8         115.2
Other income/(expense), net                        -         1.4          (0.5 )         1.0
Interest and debt expense, net                  (5.1 )      (4.1 )       (10.5 )        (8.1 )
Income before income taxes                      59.8        57.0         112.8         108.1
Provision for income taxes                      16.5        17.4          29.7          32.9
Net income                                      43.3        39.6          83.1          75.2
Noncontrolling interest                         (0.4 )      (0.1 )         0.2             -
Net income attributable to Teledyne          $  42.9     $  39.5     $    83.3     $    75.2

Second quarter of 2013 compared with the second quarter of 2012 Our second quarter 2013 sales were $601.0 million, compared with sales of $518.5 million for the same period of 2012, an increase of 15.9%. Net income attributable to Teledyne was $42.9 million ($1.13 per diluted share) for the second quarter of 2013, compared with $39.5 million ($1.06 per diluted share) for the second quarter of 2012, an increase of 8.6%.
The second quarter of 2013, compared with the same period in 2012, reflected higher sales in the Instrumentation and the Aerospace and Defense Electronics segments, partially offset by lower sales in the Digital Imaging and the Engineered Systems segments. The increase in sales included the impact of acquisitions as well as higher organic sales. Incremental revenue in the second quarter of 2013 from recent acquisitions was $67.3 million. The second quarter of 2013, compared with the same period in 2012, reflected higher operating profit in the Instrumentation and Digital Imaging segments, partially offset by lower operating profit in the Aerospace and Defense Electronics and the Engineered Systems segments.
Segment earnings increased to $75.3 million for the second quarter of 2013, from $67.4 million for the same period of 2012. Segment earnings reflected the impact of higher sales, partially offset by $0.5 million in higher intangible asset amortization, $2.1 million of severance and facility consolidation costs and higher net pension expense of $1.9 million. The incremental operating profit included in the results for the second quarter of 2013 from recent acquisitions was $2.2 million which included $2.1 million in additional intangible asset amortization. We expect approximately $9.1 million in severance and facility consolidation costs for fiscal year 2013, of which $4.2 million has been incurred through the second quarter of 2013.


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The second quarter of 2013 included pension expense of $4.4 million, compared with pension expense of $1.6 million in the second 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 second quarter of 2013, compared with $2.7 million in the second quarter of 2012. Pension expense determined allowable under CAS can generally be recovered through the pricing of products and services sold to the U.S. Government.
In the second quarter of 2013 and 2012, we recorded a total of $2.8 million and $2.0 million, respectively, in stock option compensation expense. Employee stock option grants are expensed evenly over the three year vesting period. The table below presents sales and cost of sales by segment and total company:

                                   Second Quarter     Second Quarter
(Dollars in millions)                   2013               2012
Instrumentation
Sales                             $       257.7      $       179.6
Cost of sales                     $       142.7      $       109.4
Cost of sales % of sales                   55.4 %             60.9 %
Digital Imaging
Sales                             $       104.3      $       110.9
Cost of sales                     $        64.6      $        71.6
Cost of sales % of sales                   61.9 %             64.5 %
Aerospace and Defense Electronics
Sales                             $       169.5      $       151.6
Cost of Sales                     $       118.2      $        99.9
Cost of sales % of sales                   69.7 %             65.9 %
Engineered Systems
Sales                             $        69.5      $        76.4
Costs of sales                    $        58.1      $        62.1
Cost of sales % of sales                   83.6 %             81.3 %
Total Company
Sales                             $       601.0      $       518.5
Costs of sales                    $       383.6      $       343.0
Cost of sales % of sales                   63.8 %             66.2 %

Cost of sales increased by $40.6 million in the second quarter of 2013, compared with the second quarter of 2012, which primarily reflected the impact of higher sales, as well as, severance and facility consolidation costs. Cost of sales as a percentage of sales for the second quarter of 2013 decreased to 63.8% from 66.2% in the second 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, partially offset by higher pension expense.
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 second quarter of 2013 and 2012, were $4.1 million and $5.9 million of favorable operating income and $5.1 million and $6.8 million of unfavorable operating income, respectively.
Selling, general and administrative expenses, including research and development and bid and proposal expense, increased by $36.7 million in the second quarter of 2013, compared with the second quarter of 2012, due to recent acquisitions which included $24.8 million at LeCroy and $0.5 million in higher intangible asset amortization expense. Selling, general and administrative expenses for the second quarter of 2013, as a percentage of sales, increased to 25.4%, compared with 22.3% in the second quarter of 2012 and reflected 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 $10.4 million for the second quarter of 2013, compared with $7.7 million for the second quarter of 2012 and reflected higher compensation and professional fees expense.


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Interest expense, net of interest income, was $5.1 million in the second quarter of 2013, compared with $4.1 million for the second quarter of 2012. The increase in interest expense primarily reflected the impact of higher outstanding debt levels. Other income and expense was less than $0.1 million for the second quarter of 2013, compared with income of $1.4 million. Other income and expense in the second quarter of 2012 included a $0.6 million gain on the purchase of the majority interest in the parent company of Optech.
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 second quarter of 2013 was 27.6% compared with 30.5% for the second quarter of 2012. The decrease in the effective tax rates in 2013 from 2012, reflected a change in the proportion of domestic and international income, as well as net tax benefits for discrete items of $0.9 million in the second quarter of 2013. Excluding the net tax benefits in 2013, the effective tax rate would have been 29.1% for the second quarter of 2013. The Company's effective tax rate for 2013 is expected to be 29.5%, based on the projected mix of earnings before tax by jurisdiction, excluding the impact of any matters that would be treated as discrete. The decrease in the effective tax rates primarily reflected a change in the proportion of domestic and foreign income.
First six months of 2013 compared with the first six months of 2012 Teledyne's first six months of 2013 sales were $1,170.4 million, compared with sales of $1,012.5 million for the same period of 2012, an increase of 15.6%. Net income attributable to Teledyne was $83.3 million ($2.20 per diluted share) for the first six months of 2013, compared with $75.2 million ($2.02 per diluted share) for the first six months of 2012, an increase of 10.8%.
The first six months of 2013, compared with the same period in 2012, reflected higher sales in each business segment except the Engineered Systems segment. Incremental revenue in the first six months of 2013 from recent acquisitions was $126.5 million.
Segment earnings increased to $143.7 million for the first six months of 2013, from $132.4 million for the same period of 2012, and reflected improved results in each business segment except the Engineered Systems segment. Segment earnings reflected the impact of higher sales, partially offset by $1.3 million in higher intangible asset amortization, $4.2 million of severance and facility consolidation costs and higher net pension expense of $4.1 million. The incremental operating profit included in the results for the first six months of 2013 from recent acquisitions was $3.9 million which included $3.6 million in additional intangible asset amortization.
The first six months of 2013 included pension expense of $8.7 million, compared with $3.3 million in the first six months of 2012. Pension expense allocated to contracts pursuant to CAS was $7.2 million in the first six months of 2013, compared with $5.9 million in the first six months of 2012. The increase in 2013 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.
In the first six months of 2013 and 2012, we recorded a total of $4.6 million and $3.6 million, respectively, in stock option compensation expense.


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

                                   Six Months     Six Months
(Dollars in millions)                 2013           2012
Instrumentation
Sales                             $    490.4     $    354.8
Cost of sales                     $    269.1     $    213.3
Cost of sales % of sales                54.9 %         60.1 %
Digital Imaging
Sales                             $    206.7     $    205.1
Cost of sales                     $    131.7     $    134.2
Cost of sales % of sales                63.7 %         65.4 %
Aerospace and Defense Electronics
Sales                             $    332.6     $    301.8
Cost of sales                     $    230.9     $    200.4
Cost of sales % of sales                69.4 %         66.4 %
Engineered Systems
Sales                             $    140.7     $    150.8
Cost of sales                     $    117.3     $    123.2
Cost of sales % of sales                83.4 %         81.7 %
Total Company
Sales                             $  1,170.4     $  1,012.5
Cost of sales                     $    749.0     $    671.1
Cost of sales % of sales                64.0 %         66.3 %

Cost of sales increased by $77.9 million in the first six months of 2013, compared with the first six months of 2012, which primarily reflected the impact of higher sales and $3.8 million of severance and facility consolidation costs. Cost of sales as a percentage of sales for the first six months of 2013, was 64.0%, compared 66.3% for the first six months 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 and also reflected higher pension expense. Certain contracts are accounted for under the POC method and related contract cost and revenue estimates for significant contracts are generally reviewed and reassessed quarterly. The aggregate effects of changes in estimates on contracts accounted for under the percentage-of-completion accounting method, in the first six months of 2013 and 2012 were $9.2 million and $6.6 million of favorable operating income and $11.2 million and $8.1 million of unfavorable operating income, respectively.
Selling, general and administrative expenses, including research and development and bid and proposal expense, in total dollars were higher by $71.4 million in the first six months of 2013, compared with the first six months of 2012, and reflected the impact of higher sales, due to recent acquisitions which included $50.0 million at LeCroy and $1.3 million in higher intangible asset amortization expense. Selling, general and administrative expenses for the first six months of 2013, as a percentage of sales, increased to 25.4%, compared with 22.3% in the first six months of 2012 and reflected the impact of 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 $19.9 million for the first six months of 2013, compared with $17.2 million for the first six months of 2011, and reflected higher professional fees and compensation expense.


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Interest expense, net of interest income, was $10.5 million in the first six months of 2013, compared with $8.1 million for the first six months of 2012. The increase in interest expense primarily reflected the impact of higher outstanding debt levels. Other income and expense in the first six months of 2012 also included a $0.6 million gain on the purchase of the majority interest in the parent company of Optech.
The Company's effective income tax rate for the first six months of 2013 was 26.3%, compared with 30.4% for the first six months of 2012. The first six months of 2013 included net tax benefits for discrete items of $3.6 million compared with net tax benefits for discrete items of $1.2 million for the first six months 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 net tax benefits in both periods, the effective tax rates would have been 29.5% for the first six months of 2013 and 31.6% for the first six months of 2012. The decrease in the effective tax rates primarily reflected a change in the proportion of domestic and foreign income.

Segment Results
In the second quarter of 2013, the Company changed the reporting structure of two of its interconnect business units. The two interconnect business units were formerly reported as part of the Aerospace and Defense Electronics segment and are now reported as part of the Instrumentation segment. These business units primarily serve energy production markets and are now managed by and integrated with our other interconnect businesses within Teledyne Oil & Gas, which is part of the marine instrumentation product line. Previously reported segment data has been restated to reflect this change. Total sales for the two business units transferred to the Instrumentation segment from the Aerospace and Defense Electronics segment were $55.3 million and $31.6 million for fiscal year 2012 and 2011, respectively. The following table sets forth the sales and operating profit for each segment (amounts in millions):

                                                                                    Six           Six
                              Second Quarter     Second Quarter        %          Months        Months          %
                                   2013               2012           Change        2013          2012         Change
Net sales:
Instrumentation              $       257.7      $       179.6         43.5  %   $   490.4     $   354.8        38.2  %
Digital Imaging                      104.3              110.9         (6.0 )%       206.7         205.1         0.8  %
Aerospace and Defense
Electronics                          169.5              151.6         11.8  %       332.6         301.8        10.2  %
Engineered Systems                    69.5               76.4         (9.0 )%       140.7         150.8        (6.7 )%
Total net sales              $       601.0      $       518.5         15.9  %   $ 1,170.4     $ 1,012.5        15.6  %
Segment operating profit:
Instrumentation              $        41.1      $        30.7         33.9  %   $    77.7     $    66.3        17.2  %
Digital Imaging                        7.9                7.5          5.3  %        13.1          11.8        11.0  %
Aerospace and Defense
Electronics                           20.6               21.8         (5.5 )%        40.8          40.7         0.2  %
Engineered Systems                     5.7                7.4        (23.0 )%        12.1          13.6       (11.0 )%
Total segment operating
profit                                75.3               67.4         11.7  %       143.7         132.4         8.5  %
Corporate expense                    (10.4 )             (7.7 )       35.1  %       (19.9 )       (17.2 )      15.7  %
Other income/(expense), net              -                1.4       (100.0 )%        (0.5 )         1.0           *
Interest expense, net                 (5.1 )             (4.1 )       24.4  %       (10.5 )        (8.1 )      29.6  %
Income before income taxes            59.8               57.0          4.9  %       112.8         108.1         4.3  %
Provision for income taxes            16.5               17.4         (5.2 )%        29.7          32.9        (9.7 )%
Net income                            43.3               39.6          9.3  %        83.1          75.2        10.5  %
Noncontrolling interest               (0.4 )             (0.1 )      300.0  %         0.2             -           *
Net income attributable to
Teledyne                     $        42.9      $        39.5          8.6  %   $    83.3     $    75.2        10.8  %

* not meaningful


Table of Contents

Instrumentation
                                                           Second          Six            Six
                                      Second Quarter      Quarter         Months         Months
(Dollars in millions)                      2013             2012           2013           2012
Sales                                $       257.7      $    179.6     $    490.4     $    354.8
Cost of sales                        $       142.7      $    109.4     $    269.1     $    213.3
Selling, general and administrative
expenses                             $        73.9      $     39.5     $    143.6     $     75.2
Operating profit                     $        41.1      $     30.7     $     77.7     $     66.3
Cost of sales % of sales                      55.4 %          60.9 %         54.9 %         60.1 %
Selling, general and administrative
expenses % of sales                           28.7 %          22.0 %         29.3 %         21.2 %
Operating profit % of sales                   15.9 %          17.1 %         15.8 %         18.7 %

Second quarter of 2013 compared with the second quarter of 2012 The Instrumentation segment's second quarter 2013 sales were $257.7 million, compared with $179.6 million in the second quarter of 2012, an increase of 43.5%. Second quarter 2013 operating profit was $41.1 million, compared with operating profit of $30.7 million in the second quarter of 2012, an increase of 33.9%.
The second quarter 2013 sales increase resulted from higher sales of both marine and electronic test and measurement instrumentation. The higher sales of $31.7 million for marine instrumentation reflected increased sales of marine acoustic sensors and systems, as well as interconnect systems used in offshore energy production, and also included a total of $20.7 million in incremental revenue from recent acquisitions including the March 2013 acquisition of RESON. Increased sales of $46.4 million for electronic test and measurement instrumentation resulted from the August 2012 acquisition of LeCroy. Sales for environmental instrumentation were $65.7 million for both quarters. The increase in operating profit reflected the impact of higher sales, partially offset by $1.2 million in higher intangible asset amortization. The incremental operating profit included in the results for the second quarter of 2013 from recent acquisitions was $2.6 million, which included $2.1 million in additional intangible asset amortization.
Second quarter cost of sales increased by $33.3 million, compared with the . . .

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