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TDY > SEC Filings for TDY > Form 10-Q on 4-Nov-2013All Recent SEC Filings

Show all filings for TELEDYNE TECHNOLOGIES INC

Form 10-Q for TELEDYNE TECHNOLOGIES INC


4-Nov-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.
During 2013, in an effort to reduce ongoing costs and improve operating performance we took actions to consolidate and relocate certain facilities and reduce headcount across various businesses, reducing our exposure to weak end markets and high cost locations. In connection with these efforts, for the first nine months of 2013, we incurred pretax charges totaling $18.7 million for severance and facility consolidation expense and environmental reserves. The charges were comprised of $7.0 million in severance related costs and $11.7 million in facility closure and relocation costs, which included $5.3 million of environmental reserves. The actions we have taken should be substantially complete by year end 2013. Total costs for these actions are expected to be $22.4 million for fiscal year 2013. At September 29, 2013, we have $11.1 million in short-term reserves related to these actions, which includes the $5.3 million of environmental reserves.
Our third quarter 2013 sales were $571.6 million, compared with sales of $547.4 million for the same period of 2012, an increase of 4.4%. Net income attributable to Teledyne was $46.8 million ($1.23 per diluted share) for the third quarter of 2013, compared with $42.7 million ($1.14 per diluted share) for the third quarter of 2012, an increase of 9.6%.

Our Recent Acquisitions
On August 30, 2013, a subsidiary of Teledyne acquired the assets of SD Acquisition, Inc. d/b/a CETAC Technologies ("CETAC") for $26.4 million. Teledyne expects to pay a $0.4 million purchase price adjustment in the fourth quarter. CETAC, headquartered in Omaha, Nebraska is a designer and manufacturer of automated sample handling and sample introduction equipment for laboratory instrumentation. CETAC had sales of $24.0 million for its fiscal year ended December 31, 2012, and is part of the Instrumentation segment.
On July 5, 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. In the third quarter of 2013, the Company spent $1.4 million on certain assets..

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 located in the Netherlands and is a fabless semiconductor company that develops high-performance CMOS mixed-signal integrated circuits and is part of the Digital Imaging segment.


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On March 1, 2013, a subsidiary of Teledyne acquired all the outstanding shares of RESON A/S ("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.
Also on August 3, 2012, a subsidiary of Teledyne acquired the parent company of PDM Neptec Limited ("PDM Neptec") for $7.4 million in cash, net of cash acquired. PDM Neptec, located in Hampshire, United Kingdom, is part of the Instrumentation segment and operates as Teledyne Impulse-PDM Ltd. On July 2, 2012, a subsidiary of Teledyne acquired BlueView Technologies Inc. ("BlueView") for $16.3 million in cash, net of cash acquired. BlueView, located in Seattle, Washington, is part of the Instrumentation segment and operates as Teledyne BlueView, Inc.
On April 2, 2012, a subsidiary of 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 $49.2 million at September 29, 2013 and December 30, 2012, respectively. Optech is part of the Digital Imaging segment.
On February 25, 2012, a subsidiary of Teledyne acquired VariSystems Inc. ("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.
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
                                              Third Quarter                  Nine Months
(in millions)                              2013           2012           2013           2012
Net Sales                              $    571.6     $    547.4     $  1,742.0     $  1,559.9
Costs and expenses
Cost of sales                               369.0          349.0        1,118.0        1,020.1
Selling, general and administrative
expenses                                    149.6          138.1          447.2          364.3
Total costs and expenses                    518.6          487.1        1,565.2        1,384.4
Income before other income/(expense)
and income taxes                             53.0           60.3          176.8          175.5
Other income/(expense), net                  (0.7 )          1.2           (1.2 )          2.2
Interest and debt expense, net               (5.1 )         (4.5 )        (15.6 )        (12.6 )
Income before income taxes                   47.2           57.0          160.0          165.1
Provision for income taxes                    0.3           13.9           30.0           46.8
Net income                                   46.9           43.1          130.0          118.3
Noncontrolling interest                      (0.1 )         (0.4 )          0.1           (0.4 )
Net income attributable to Teledyne    $     46.8     $     42.7     $    130.1     $    117.9


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Third quarter of 2013 compared with the third quarter of 2012 Our third quarter 2013 sales were $571.6 million, compared with sales of $547.4 million for the third quarter of 2012, an increase of 4.4%. Net income attributable to Teledyne was $46.8 million ($1.23 per diluted share) for the third quarter of 2013, compared with $42.7 million ($1.14 per diluted share) for the third quarter of 2012, an increase of 9.6%.
The third quarter of 2013, compared with the third quarter of 2012, reflected higher sales in the Instrumentation segment, partially offset by lower sales in the Aerospace and Defense Electronics, Digital Imaging and the Engineered Systems segments. The increase in sales included the impact of acquisitions, as well as higher organic sales in the Instrumentation segment. Incremental revenue in the third quarter of 2013 from recent acquisitions was $28.9 million. The third quarter of 2013, compared with the third quarter of 2012, reflected higher operating profit in the Instrumentation and Digital Imaging segments, offset by lower operating profit in the Aerospace and Defense Electronics and the Engineered Systems segments.
The third quarter of 2013 reflected pretax charges totaling $14.3 million for severance and facility consolidation expense. The charges were comprised of $5.3 million in severance related costs and $9.0 million in facility closure and relocation costs, which included $5.3 million of environmental reserves. Of these costs, $10.9 million have been recorded as part of cost of sales and $3.4 million have been recorded as part of selling, general and administrative expenses. The charges impacted each business segment as follows: Aerospace and Defense Electronics, $8.7 million; Engineered Systems, $2.7 million; Digital Imaging, $1.9 million; and Instrumentation, $1.0 million.

Segment earnings decreased to $63.4 million for the third quarter of 2013, from $69.9 million for the third quarter of 2012. Segment earnings reflected the impact of the pretax charges totaling $14.3 million for severance and facility consolidation expense and environmental reserves and higher pension expense of $2.6 million, partially offset by the impact of higher sales. The incremental operating profit included in the results for the third quarter of 2013 from recent acquisitions was $0.9 million which included $0.6 million in additional intangible asset amortization expense.
The third quarter of 2013 included pension expense of $4.3 million, compared with pension expense of $1.7 million in the third 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 third quarter of 2013, compared with $3.1 million in the third 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 third quarter of 2013 and 2012, we recorded a total of $3.0 million and $2.3 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:

                                   Third Quarter     Third Quarter
(Dollars in millions)                  2013              2012
Instrumentation
Sales                             $       256.6     $       206.3
Cost of sales                     $       144.9     $       113.5
Cost of sales % of sales                   56.5 %            55.0 %
Digital Imaging
Sales                             $       105.2     $       108.1
Cost of sales                     $        64.3     $        69.3
Cost of sales % of sales                   61.2 %            64.1 %
Aerospace and Defense Electronics
Sales                             $       143.1     $       151.7
Cost of Sales                     $       102.0     $       100.6
Cost of sales % of sales                   71.3 %            66.3 %
Engineered Systems
Sales                             $        66.7     $        81.3
Costs of sales                    $        57.8     $        65.6
Cost of sales % of sales                   86.7 %            80.7 %
Total Company
Sales                             $       571.6     $       547.4
Costs of sales                    $       369.0     $       349.0
Cost of sales % of sales                   64.5 %            63.8 %

Cost of sales increased by $20.0 million in the third quarter of 2013, compared with the third quarter of 2012, which primarily reflected the impact of higher sales, as well as severance and facility consolidation expense and environmental reserves. Cost of sales as a percentage of sales for the third quarter of 2013 increased to 64.5% from 63.8% in the third quarter of 2012 and reflected the severance and facility consolidation expense and environmental reserves and higher pension expense, partially offset by the impact of the LeCroy and RESON acquisitions which carry 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 third quarter of 2013 and 2012, were $5.3 million and $5.4 million of favorable operating income and $5.2 million and $6.0 million of unfavorable operating income, respectively.
Selling, general and administrative expenses, including research and development and bid and proposal expense, increased by $11.5 million in the third quarter of 2013, compared with the third quarter of 2012, due to recent acquisitions which included $5.9 million at LeCroy. Selling, general and administrative expenses for the third quarter of 2013, as a percentage of sales, increased to 26.2%, compared with 25.2% in the third quarter of 2012 and reflected the impact of $3.4 million in severance and facility consolidation expense, 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 third quarter of 2013, compared with $9.6 million for the third quarter of 2012 and reflected higher compensation and professional fees expense. Interest expense, net of interest income, was $5.1 million for the third quarter of 2013, compared with $4.5 million for the third quarter of 2012. The increase in interest expense primarily reflected the impact of higher outstanding debt levels. Other income and expense was expense of $0.7 million for the third quarter of 2013, compared with income of $1.2 million for the third quarter of 2012.


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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 third quarter of 2013 was 0.6% compared with 24.5% for the third quarter of 2012.
The third quarter of 2013 reflected net discrete tax benefits totaling $11.6 million. The net discrete tax benefits for the third quarter of 2013, primarily related to the remeasurement of uncertain tax positions, including an expiration of the statute of limitations and a favorable resolution of a tax matter. Excluding the net discrete tax benefits, the effective tax rate would have been 25.2% for the third quarter of 2013. The third quarter of 2012 reflected $3.1 million in net tax benefits for discrete items due to the expiration of the statute of limitations. Excluding the net discrete tax benefits the effective tax rate would have been 30.0% for the third quarter of 2012. The lower 2013 tax rate, excluding the net discrete tax benefits in both quarters, primarily reflected a change in the proportion of domestic and foreign income and increased federal tax credits for research and development. The Company's effective tax rate for 2013 is expected to be 28.3%, based on the projected mix of earnings before tax by jurisdiction, excluding the impact of any matters that would be treated as discrete.
First nine months of 2013 compared with the first nine months of 2012 Teledyne's first nine months of 2013 sales were $1,742 million, compared with sales of $1,559.9 million for the first nine months of 2012, an increase of 11.7%. Net income attributable to Teledyne was $130.1 million ($3.42 per diluted share) for the first nine months of 2013, compared with $117.9 million ($3.16 per diluted share) for the first nine months of 2012, an increase of 10.3%. The first nine months of 2013, compared with the first nine months of 2012, reflected higher sales in the Instrumentation and Aerospace and Defense Electronics segments, partially offset by lower sales for the Digital Imaging and Engineered Systems segments. Incremental revenue in the first nine months of 2013 from recent acquisitions was $148.9 million.
Segment earnings increased to $207.1 million for the first nine months of 2013, from $202.3 million for the first nine months of 2012, and reflected improved results in the Instrumentation and Digital Imaging segments, partially offset by lower operating profit in the Aerospace and Defense Electronics and Digital Imaging segments. Segment earnings reflected the impact of higher sales, partially offset by the impact of the pretax charges totaling $18.7 million for severance and facility consolidation expense and environmental reserves and higher pension expense of $8.0 million. The incremental operating profit included in the results for the first nine months of 2013 from recent acquisitions was $5.5 million which included $3.9 million in additional intangible asset amortization expense.
The first nine months of 2013 reflected pretax charges totaling $18.7 million for severance and facility consolidation expense and environmental reserves. The charges were comprised of $7.0 million in severance related costs and $11.7 million in facility closure and relocation costs, which included $5.3 million of environmental reserves. Of these costs, $14.5 million have been recorded as part of cost of sales and $4.2 million have been recorded as part of selling, general and administrative expenses. The charges impacted each business segment as follows: Aerospace and Defense Electronics, $12.2 million; Engineered Systems, $2.9 million; Digital Imaging, $2.3 million; and Instrumentation, $1.3 million.

The first nine months of 2013 included pension expense of $13.0 million, compared with $5.0 million in the first nine months of 2012. Pension expense allocated to contracts pursuant to CAS was $10.8 million in the first nine months of 2013, compared with $9.0 million in the first nine 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 nine months of 2013 and 2012, we recorded a total of $7.6 million and $5.9 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:

                                   Nine Months      Nine Months
(Dollars in millions)                  2013             2012
Instrumentation
Sales                             $      747.0     $      561.1
Cost of sales                     $      414.0     $      326.8
Cost of sales % of sales                  55.5 %           58.2 %
Digital Imaging
Sales                             $      311.9     $      313.2
Cost of sales                     $      196.0     $      203.5
Cost of sales % of sales                  62.8 %           65.0 %
Aerospace and Defense Electronics
Sales                             $      475.7     $      453.5
Cost of sales                     $      332.9     $      301.0
Cost of sales % of sales                  70.0 %           66.4 %
Engineered Systems
Sales                             $      207.4     $      232.1
Cost of sales                     $      175.1     $      188.8
Cost of sales % of sales                  84.4 %           81.4 %
Total Company
Sales                             $    1,742.0     $    1,559.9
Cost of sales                     $    1,118.0     $    1,020.1
Cost of sales % of sales                  64.2 %           65.4 %

Cost of sales increased by $97.9 million in the first nine months of 2013, compared with the first nine months of 2012, which primarily reflected the impact of higher sales and $14.5 million of severance and facility consolidation expense and environmental reserves. Cost of sales as a percentage of sales for the first nine months of 2013, was 64.2%, compared with 65.4% for the first nine months of 2012 and reflected the impact of recent acquisitions which carry a lower cost of sales percentage than the average for our other businesses, partially offset by the impact of severance and facility consolidation expense and environmental reserves and 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 nine months of 2013 and 2012 were $14.5 million and $12.0 million of favorable operating income and $16.4 million and $14.1 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 $82.9 million in the first nine months of 2013, compared with the first nine months of 2012, and reflected the impact of higher sales and $4.2 million in severance and facility consolidation expense. Selling, general and administrative expenses for the first nine months of 2013, as a percentage of sales, increased to 25.7%, compared with 23.4% for the first nine months of 2012 and reflected the impact of higher research and development expense, severance and facility consolidation expense and also reflected the impact of the recent acquisitions which carry a higher selling, general and administrative expense percentage than the average for our other businesses. Corporate expense was $30.3 million for the first nine months of 2013, compared with $26.8 million for the first nine months of 2012, and reflected higher professional fees and compensation expense.


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Interest expense, net of interest income, was $15.6 million in the first nine months of 2013, compared with $12.6 million for the first nine months of 2012. The increase in interest expense primarily reflected the impact of higher outstanding debt levels. Other income and expense was an expense of $1.2 million for the first nine months of 2013, compared with $2.2 million of income for the first nine months of 2012. Other income and expense in 2013 reflected higher asset write offs and higher expenses related to our deferred compensation plan, compared to the first nine months of 2012. Other income and expense in the first nine months of 2012 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 nine months of 2013 was 18.8%, compared with 28.4% for the first nine months of 2012. The first nine months of 2013 included net tax benefits for discrete items of $15.2 million compared with net tax benefits for discrete items of $4.3 million for the first nine months of 2012. The tax benefits for the first nine months of 2013, related to the remeasurement of uncertain tax positions, including an expiration of the statute of limitations and a favorable resolution of a tax matter. The tax benefits for the first nine months of 2012 related to an expiration of the statute of limitations. Excluding net discrete tax benefits in both periods, the effective tax rates would have been 28.3% for the first nine months of 2013 and 31.0% for the first nine months of 2012. The lower 2013 tax rate, excluding the net discrete tax benefits in both periods, 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 for fiscal year 2012. The following table sets forth the sales and operating profit for each segment (dollars in millions):

                                                                                 Nine          Nine
                              Third Quarter     Third Quarter        %          Months        Months          %
                                  2013              2012           Change        2013          2012         Change
Net sales:
Instrumentation              $       256.6     $       206.3        24.4  %   $   747.0     $   561.1        33.1  %
Digital Imaging                      105.2             108.1        (2.7 )%       311.9         313.2        (0.4 )%
. . .
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