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TDY > SEC Filings for TDY > Form 10-K on 25-Feb-2014All Recent SEC Filings

Show all filings for TELEDYNE TECHNOLOGIES INC

Form 10-K for TELEDYNE TECHNOLOGIES INC


25-Feb-2014

Annual Report


Item 7. 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. At Teledyne, 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.
Consistent with this strategy, we made four acquisitions in 2013, five acquisitions in 2012 and three acquisitions in 2011, as well as one significant divestiture in 2011. In addition, in 2013 a subsidiary of Teledyne purchased the remaining 49% interest in Nova Research, Inc. ("Nova Sensors"). We acquired RESON A/S ("RESON") to increase our capabilities related to multibeam sonar systems and specialty acoustic sensors for hydrography, global marine infrastructure and offshore energy operations. We acquired C.D. Limited ("CDL") to obtain additional inertial sensing and navigation products, and to accelerate the development of real-time motion sensing and communication systems for our subsea oil and gas customers. We acquired SD Acquisition, Inc. d/b/a CETAC Technologies ("CETAC") to expand our automated sample handling and sample introduction equipment for laboratory instrumentation capabilities. These three acquisitions are part of the Instrumentation


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segment. We acquired Axiom IC B.V. ("Axiom") to add high-performance CMOS mixed-signal integrated circuits to our portfolio. Axiom is part of the Digital Imaging segment.
Our largest acquisition in 2012, LeCroy Corporation ("LeCroy"), broadened our portfolio of analytical instrumentation with the addition of electronic test and measurement solutions. We acquired VariSystems Inc. ("VariSystems") to expand our portfolio of rugged interconnect solutions. We acquired BlueView Technologies, Inc. ("BlueView") principally to increase our instrumentation content on AUVs and ROVs used in oil and gas and marine survey applications. Through the acquisition of a majority interest in the parent company of Optech Incorporated ("Optech"), we added 3D imaging capability to our portfolio of visible, X-ray and ultraviolet sensors, cameras. Optech's bathymetric LIDAR systems are used for coastal mapping and shallow water profiling also complement our marine survey sensors and systems. The acquisition of the parent company of PDM Neptec Limited ("PDM Neptec") expanded our line of harsh environmental marine connectors. In 2011, we focused on the expansion of our digital imaging capabilities first with the acquisition of DALSA Corporation ("DALSA"), followed by the acquisitions of a majority interest in Nova Sensors and a minority interest investment in Optech. In April 2011, we completed the sale of our general aviation piston engine businesses and consequently classified our Aerospace Engines and Components segment as a discontinued operation. 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, in 2013, we incurred pretax charges totaling $24.0 million for severance and facility consolidation expense and environmental reserves. The charges were comprised of $10.4 million in severance related costs and $13.6 million in facility closure and relocation costs, which included $5.3 million of environmental reserves. The actions have been substantially completed by year end 2013. We expect to incur approximately $0.4 million in expense related to the completion of the actions in the first quarter of 2014. At December 29, 2013, we had $11.4 million in reserves related to these actions, of which $9.7 million are classified as short-term reserves.
Given the strength of our commercial businesses, as well as our strategic acquisitions, we were able to achieve record sales and earnings in 2013. In 2013, sales and net income from continuing operations increased by 9.9% and 12.7%, respectively over 2012 results. Earnings per share from continuing operations in 2013 increased 12.5% over 2012. In 2013, sales totaled $2,338.6 million, compared with sales of $2,127.3 million in 2012. Net income from continuing operations for 2013, was $185.0 million or $4.87 per diluted share, compared with $161.8 million or $4.33 per diluted share in 2012. The increase in revenue included incremental sales from acquisitions of $172.0 million, as well as organic growth. Our 2013 net income attributable to Teledyne was $185.0 million or $4.87 per diluted share, compared with $164.1 million or $4.39 per diluted share in 2012. Net income for 2013 and 2012 also included net discrete tax benefits of $21.3 million and $5.4 million, respectively.
With the recent acquisitions in 2013 and the 2012 acquisition of LeCroy and the 2011 acquisition of DALSA, as well as growth in our commercial markets, our business mix has continued to evolve. For 2013, Teledyne's sales were approximately 73% to commercial customers and 27% to the U.S. Government. This has changed from about 68% commercial and 32% government in 2012. Our international sales also increased to 44% of total sales in 2013, compared with 39% in 2012. We have worked to transform our product portfolio into that of a high technology industrial company that is less dependent on U.S. Government business.
Recent Acquisitions
The Company spent $128.2 million, $389.2 million and $366.7 million on acquisitions in 2013, 2012 and 2011, respectively.
On October 22, 2013, a subsidiary of Teledyne acquired CDL for $21.8 million in cash, net of cash acquired. CDL is headquartered in Aberdeen, Scotland, is a leading supplier of subsea inertial navigation systems and motion sensors for a variety of marine applications. CDL had sales of 9.9 million for its fiscal year ended December 31, 2012 and is part of the Instrumentation segment. On August 30, 2013, a subsidiary of Teledyne acquired CETAC for $26.4 million. Teledyne paid 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 8, 2013, a subsidiary of Teledyne purchased the remaining 49% interest in Nova Sensors that it did not already own for $4.9 million. Nova Sensors produces compact short-wave and mid-wave infrared cameras and operates within the Digital Imaging segment.


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On May 8, 2013, a subsidiary of Teledyne acquired 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.
On March 1, 2013, a subsidiary of 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. Also in 2013, the Company spent $1.4 million on the purchase of a product line.
On August 3, 2012, Teledyne acquired the stock of 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 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. PDM Neptec had sales of 5.5 million for its fiscal year ended March 31, 2012.
On July 2, 2012, a subsidiary of Teledyne acquired 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. BlueView had sales of $7.1 million for its fiscal year ended December 31, 2011.
On April 2, 2012, Teledyne acquired a majority interest in the parent company of Optech for $27.9 million, net of cash acquired. The purchase increased Teledyne's ownership percentage to 51% from the original 19% 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% of Optech's total equity and was equal to $49.8 million. The minority ownership of Optech was $47.3 million and $49.8 million at December 29, 2013 and December 30, 2012, respectively. Optech had sales of CAD $54.7 million for its fiscal year ended March 30, 2012 and is reported as part of the Digital Imaging 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, is a leading supplier of custom harsh environment interconnects used in energy exploration and production. VariSystems had sales of CAD $27.5 million for its fiscal year ended May 31, 2011 and is part of the Instrumentation segment. In 2011, the Company acquired the stock of DALSA for an aggregate purchase price of $339.5 million in cash. DALSA designs and manufactures digital imaging products, primarily consisting of high performance sensors, cameras and software for use in industrial, scientific, medical and professional applications products, as well as specialty semiconductors and micro electro mechanical systems ("MEMS"). In addition to the acquisition of DALSA in 2011, the Company completed the acquisition of a majority interest in Nova Sensors for total consideration of $5.1 million in cash and a 19% minority interest in Optech for $18.9 million. We also bought the remaining minority interest in Energy Systems for $3.2 million in 2011.
See Note 3 to our Consolidated Financial Statements for additional information about our recent acquisitions.


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Our fiscal year is determined based on a 52- or 53-week convention ending on the Sunday nearest to December 31. Fiscal years 2013, 2012 and 2011 each contained 52 weeks. The following is our financial information for 2013, 2012 and 2011 (in millions, except per-share amounts):

                                                              2013               2012            2011
Sales                                                   $     2,338.6       $     2,127.3     $ 1,941.9
Costs and Expenses
Cost of sales                                                 1,500.0             1,379.1       1,290.7
Selling, general and administrative expenses                    598.3               505.1         424.0
Total costs and expenses                                      2,098.3             1,884.2       1,714.7

Income before other income and expense and income
taxes                                                           240.3               243.1         227.2
Interest and debt expense, net                                  (20.4 )             (17.8 )       (16.2 )
Other income, net                                                 4.1                 2.9           0.6
Income from continuing operations before income
taxes                                                           224.0               228.2         211.6
Provision for income taxes(a)                                    39.5                65.4          69.5
Income from continuing operations including
noncontrolling interest                                         184.5               162.8         142.1
Discontinued operations, net of income taxes                        -                 2.3         113.1
Net income                                                      184.5               165.1         255.2
Noncontrolling interest                                           0.5                (1.0 )           -
Net income attributable to Teledyne                     $       185.0       $       164.1     $   255.2

Income from continuing operations including
noncontrolling interest                                 $       184.5       $       162.8     $   142.1
Noncontrolling interest                                           0.5                (1.0 )           -
Net income from continuing operations                           185.0               161.8         142.1
Discontinued operations, net of income taxes                        -                 2.3         113.1
Net income attributable to Teledyne                     $       185.0       $       164.1     $   255.2

Basic earnings per common share:
 Continuing operations                                  $        4.96       $        4.41     $    3.88
 Discontinued operations                                            -                0.06          3.09
Basic earnings per common share                         $        4.96       $        4.47     $    6.97

Diluted earnings per common share:
 Continuing operations                                  $        4.87       $        4.33     $    3.81
 Discontinued operations                                            -                0.06          3.03
Diluted earnings per common share                       $        4.87       $        4.39     $    6.84


(a) Fiscal years 2013, 2012 and 2011 include net discrete tax benefits of $21.3 million, $5.4 million and $2.4 million, respectively.

Our businesses are divided into four business segments: Instrumentation, Digital Imaging, Aerospace and Defense Electronics and Engineered Systems. Our four business segments and their respective percentage contributions to our total sales in 2013, 2012 and 2011 are summarized in the following table:

                                        Percentage of Sales
Segment                               2013       2012     2011
Instrumentation                        44 %        38 %    33 %
Digital Imaging                        18 %        20 %    18 %
Aerospace and Defense Electronics      26 %        28 %    33 %
Engineered Systems                     12 %        14 %    16 %
                                      100 %       100 %   100 %


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Results of Operations
2013 Compared with 2012
                                                                                               %
Sales                                                            2013           2012         Change
                                                                  (in millions)
Instrumentation                                             $    1,022.8     $   804.7       27.1  %
Digital Imaging                                                    414.8         415.9       (0.3 )%
Aerospace and Defense Electronics                                  625.1         605.3        3.3  %
Engineered Systems                                                 275.9         301.4       (8.5 )%
Total sales                                                 $    2,338.6     $ 2,127.3        9.9  %

                                                                                               %
Operating profit and other segment income                        2013           2012         Change
                                                                  (in millions)
Instrumentation                                             $      162.0     $   146.0       11.0  %
Digital Imaging                                                     28.2          24.8       13.7  %
Aerospace and Defense Electronics                                   65.7          80.5      (18.4 )%
Engineered Systems                                                  22.0          28.5      (22.8 )%
Segment operating profit and other segment income                  277.9         279.8       (0.7 )%
Corporate expense                                                  (37.6 )       (36.7 )      2.5  %
Interest and debt expense, net                                     (20.4 )       (17.8 )     14.6  %
Other income, net                                                    4.1           2.9       41.4  %
Income from continuing operations before income taxes              224.0         228.2       (1.8 )%
Provision for income taxes(a)                                       39.5          65.4      (39.6 )%
Income from continuing operations including
noncontrolling interest                                            184.5         162.8       13.3  %
Discontinued operations, net of income taxes                           -           2.3         *
Net income                                                         184.5         165.1       11.8  %
Noncontrolling interest                                              0.5          (1.0 )       *
Net income attributable to Teledyne                         $      185.0     $   164.1       12.7  %


* not meaningful
(a) Fiscal years 2013 and 2012 include net discrete tax benefits of $21.3 million and $5.4 million, respectively,

We reported 2013 sales of $2,338.6 million, compared with sales of $2,127.3 million for 2012, an increase of 9.9%. Net income from continuing operations was $185.0 million ($4.87 per diluted share) for 2013, compared with net income from continuing operations of $161.8 million ($4.33 per diluted share) for 2012, an increase of 14.3%. Net income for 2013 and 2012 also included net discrete tax benefits of $21.3 million and $5.4 million, respectively. Net income attributable to Teledyne, including discontinued operations, was $185.0 million ($4.87 per diluted share) for 2013, compared with $164.1 million ($4.39 per diluted share) for 2012.
The increase in sales in 2013, compared with 2012, reflected higher sales in both the Instrumentation and Aerospace and Defense Electronics segments, partially offset by lower sales in both the Engineered Systems and Digital Imaging segments. Sales in the Instrumentation segment reflected $178.4 million of incremental sales from recent acquisitions, as well as higher organic sales for marine products. Increased sales of test and measurement instrumentation of $103.6 million reflected the full year contribution from the LeCroy acquisition. Sales of marine products increased by $106.7 million and included incremental sales of $65.3 million from recent acquisitions. Sales in the Aerospace and Defense Electronics segment primarily reflected increased sales of $19.3 million from avionics products and electronic relays. Sales in the Digital Imaging segment decreased slightly. The decrease in the Engineered Systems segment revenue primarily reflected lower sales of $23.8 million from engineered products and services. The incremental increase in revenue in 2013 from businesses acquired in 2013 and in 2012 was $172.0 million.


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Sales under contracts with the U.S. Government were approximately 27% of sales in 2013 and 32% of sales in 2012, principally reflective of our recent acquisitions. Such decline has been consistent with our strategy to be less dependent on U.S. government business. Sales to international customers represented approximately 44% of sales in 2013 and 39% of sales in 2012. Segment operating profit and other segment income for 2013, compared with 2012, decreased by $1.9 million, or only 0.7%, despite $24.0 million in pretax charges for severance and facility consolidation expense and environmental reserves, compared with $1.7 million of similar charges in 2012. For 2013, the charges impacted each business segment as follows: Aerospace and Defense Electronics, $15.7 million; Digital Imaging, $3.9 million; Instrumentation, $2.5 million; and Engineered Systems, $1.9 million. In 2012, we incurred $1.7 million of similar charges which only impacted the Aerospace and Defense Electronics segment. Segment operating profit and other segment income for 2013 also reflected the impact of acquisitions as well as the impact of higher organic sales in each segment except the Engineered Systems segment. Operating profit included incremental operating profit from acquisitions of $11.7 million, which included intangible amortization of $5.0 million. LIFO income was $0.7 million in 2013 and was less than $0.1 million in 2012.
The table below presents sales and cost of sales by segment and total company:

(Dollars in millions)                2013          2012        Change
Instrumentation
Sales                             $ 1,022.8     $   804.7     $ 218.1
Cost of sales                     $   570.9     $   458.7     $ 112.2
Cost of sales % of sales               55.8 %        57.0 %

Digital Imaging
Sales                             $   414.8     $   415.9     $  (1.1 )
Cost of sales                     $   263.7     $   266.9     $  (3.2 )
Cost of sales % of sales               63.6 %        64.2 %

Aerospace and Defense Electronics
Sales                             $   625.1     $   605.3     $  19.8
Cost of sales                     $   434.6     $   406.2     $  28.4
Cost of sales % of sales               69.5 %        67.1 %

Engineered Systems
Sales                             $   275.9     $   301.4     $ (25.5 )
Cost of sales                     $   230.8     $   247.3     $ (16.5 )
Cost of sales % of sales               83.6 %        82.0 %

Total Company
Sales                             $ 2,338.6     $ 2,127.3     $ 211.3
Cost of sales                     $ 1,500.0     $ 1,379.1     $ 120.9
Cost of sales % of sales               64.1 %        64.8 %

Total company cost of sales increased by $120.9 million in 2013, compared with 2012, and reflected $79.4 million in cost of sales from recent acquisitions, $15.4 million in higher severance and facility consolidation expense and environmental reserves, higher pension expense as well as the impact of organic sales increases. The Instrumentation segment cost of sales increase of $112.2 million reflected the impact of recent acquisitions as well as the impact of organic sales increases. The Aerospace and Defense Electronics segment increase in cost of sales of $28.4 million reflected the impact of higher sales as well as $14.0 million in severance and facility consolidation expense and environmental reserves. The total company cost of sales as a percentage of sales for 2013 was 64.1%, compared with 64.8% for 2012. The lower cost of sales percentage reflected the impact of the LeCroy and Optech cost structures which have a lower cost of sales percentage than the overall Teledyne cost of sales percentage, partially offset by severance and facility consolidation expense and environmental reserves. Excluding the impact of recent acquisitions, cost of sales as a percentage of sales for 2013 would have been 66.8%, compared with 64.8% in 2012. The higher percentage in 2013 reflects the impact of severance and facility consolidation expense and environmental reserves, higher pension expense and product mix differences in 2013.


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Selling, general and administrative expenses, including research and development and bid and proposal expense, in total dollars were higher in 2013 compared with 2012. The increase reflected the impact of higher sales, higher acquired intangible asset amortization of $5.0 million and higher research and development costs of $37.8 million. Corporate administrative expense in 2013 was $37.6 million, compared with $36.7 million in 2012 an increase of 2.5%. For 2013, we recorded a total of $10.7 million in stock option expense, of which $3.4 million was recorded as corporate expense and $7.3 million was recorded in segment results. For 2012, we recorded a total of $8.0 million in stock option expense, of which $2.4 million was recorded as corporate expense and $5.6 million was recorded in segment results. Selling, general and administrative expenses for 2013, as a percentage of sales, increased to 25.6%, compared with 23.7% for 2012 and reflected the impact of higher research and development costs and the recently acquired LeCroy and Optech cost structures which have a higher selling, general and administrative expense percentage of sales than the overall Teledyne selling, general and administrative expense percentage of sales.
Included in operating profit in 2013 was domestic pension expense of $17.5 million. In accordance with U.S. Government Cost Accounting Standards ("CAS"), $14.5 million was recoverable from certain government contracts. Included in operating profit in 2012 was domestic pension expense of $6.6 million. In accordance with CAS, $12.7 million was recoverable from certain government contracts. The increase in pension expense primarily reflected the impact of using a 4.4% discount rate to determine the benefit obligation for the domestic plan in 2013 compared with a 5.5% discount rate used in 2012. For the Company's domestic pension plan, the discount rate for 2014 will increase to 5.4% from 4.4% which will decrease pension expense for 2014, compared with 2013. Pension expense determined under CAS can generally be recovered through the pricing of products and services sold to the U.S. Government.
The Company's effective tax rate for 2013 was 17.7%, compared with 28.7% for . . .

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