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TDY > SEC Filings for TDY > Form 10-Q on 31-Jul-2014All Recent SEC Filings

Show all filings for TELEDYNE TECHNOLOGIES INC

Form 10-Q for TELEDYNE TECHNOLOGIES INC


31-Jul-2014

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 2014 sales were $597.1 million, compared with sales of $601.0 million for the same period of 2013, a decrease of 0.6%. Net income attributable to Teledyne was $56.1 million ($1.47 per diluted share) for the second quarter of 2014, compared with $42.9 million ($1.13 per diluted share) for the second quarter of 2013, an increase of 30.8%.
Our Recent Acquisitions
On March 31, 2014, a subsidiary of Teledyne acquired Photon Machines, Inc. ("Photon") for an initial payment of $3.3 million. Teledyne expects to pay an additional $0.7 million in equal installments over the next three years. In October 2013, a subsidiary of Teledyne acquired C.D. Limited ("CDL") for $21.8 million in cash, net of cash acquired. In August 2013, a subsidiary of Teledyne acquired the assets of SD Acquisition, Inc. d/b/a CETAC Technologies ("CETAC") for $26.4 million. Teledyne paid a $0.4 million purchase price adjustment in the fourth quarter. In July 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. In May 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. The first of the three installments was made in May 2014. In March 2013, a subsidiary of Teledyne acquired all the outstanding shares of RESON A/S ("RESON") for $69.7 million, net of cash acquired. CDL, CETAC and RESON are part of the Instrumentation segment and Nova Sensors and Axiom are 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 29, 2013, please refer to Note 3 of our 2013 Form 10-K ("2013 Form 10-K").


Table of Contents

Results of Operations
                                                Second Quarter              Six Months
(in millions)                                  2014        2013         2014          2013
Net Sales                                    $ 597.1     $ 601.0     $ 1,170.6     $ 1,170.4
Costs and expenses
Cost of sales                                  368.4       383.6         720.1         749.0
Selling, general and administrative expenses   154.4       152.5         310.2         297.6
Total costs and expenses                       522.8       536.1       1,030.3       1,046.6
Operating income                                74.3        64.9         140.3         123.8
Other income/(expense), net                      8.2           -           8.8          (0.5 )
Interest and debt expense, net                  (4.6 )      (5.1 )        (9.3 )       (10.5 )
Income before income taxes                      77.9        59.8         139.8         112.8
Provision for income taxes                      22.1        16.5          38.0          29.7
Net income                                      55.8        43.3         101.8          83.1
Noncontrolling interest                          0.3        (0.4 )         0.1           0.2
Net income attributable to Teledyne          $  56.1     $  42.9     $   101.9     $    83.3

Second quarter of 2014 compared with the second quarter of 2013 Our second quarter 2014 sales were $597.1 million, compared with sales of $601.0 million for the second quarter of 2013, a decrease of 0.6%. Net income attributable to Teledyne was $56.1 million ($1.47 per diluted share) for the second quarter of 2014, compared with $42.9 million ($1.13 per diluted share) for the second quarter of 2013, an increase of 30.8%.
The second quarter of 2014, compared with the second quarter of 2013, reflected higher sales in the Instrumentation segment, offset by lower sales in the Aerospace and Defense Electronics, Digital Imaging and the Engineered Systems segments. Second quarter 2014 sales included the impact of acquisitions, as well as higher organic sales in the Instrumentation segment. Incremental revenue in the second quarter of 2014 from recent acquisitions was $10.7 million. The second quarter of 2014, compared with the second quarter of 2013, reflected higher operating profit in each business segment, despite lower sales in three of the segments.
Operating income increased to $74.3 million for the second quarter of 2014, from $64.9 million for the second quarter of 2013, an increase of 14.5%. Operating income reflected lower costs as a result of the cost reduction actions taken in 2013 and the impact of pension income. Operating income in the second quarter of 2014 included $0.6 million in severance and facility consolidation costs, compared with $2.2 million of similar costs in the second quarter of 2013. The incremental operating profit included in the results for the second quarter of 2014 from recent acquisitions was $0.1 million which included $0.4 million in additional intangible asset amortization expense.
The second quarter of 2014 included pension income of $0.4 million, compared with pension expense of $4.4 million in the second quarter of 2013. The change to pension income in 2014 from pension expense in 2013, primarily reflected the impact of using a 5.4 percent discount rate to determine the benefit obligation for the domestic plan in 2014 compared with a 4.4 percent discount rate used in 2013. Pension expense allocated to contracts pursuant to U.S. Government Cost Accounting Standards ("CAS") was $3.4 million in the second quarter of 2014, compared with $3.6 million in the second quarter of 2013. 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 2014 and 2013, we recorded a total of $3.6 million and $2.8 million, respectively, in stock option compensation expense. Employee stock option grants are expensed evenly over the three year vesting period.


Table of Contents

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

                                     Second Quarter
(Dollars in millions)               2014        2013
Instrumentation
Sales                             $ 276.6     $ 257.7
Cost of sales                     $ 155.1     $ 142.7
Cost of sales % of sales             56.1 %      55.4 %
Digital Imaging
Sales                             $ 103.7     $ 104.3
Cost of sales                     $  64.2     $  64.6
Cost of sales % of sales             61.9 %      61.9 %
Aerospace and Defense Electronics
Sales                             $ 152.2     $ 169.5
Cost of Sales                     $  96.6     $ 118.2
Cost of sales % of sales             63.5 %      69.7 %
Engineered Systems
Sales                             $  64.6     $  69.5
Costs of sales                    $  52.5     $  58.1
Cost of sales % of sales             81.3 %      83.6 %
Total Company
Sales                             $ 597.1     $ 601.0
Costs of sales                    $ 368.4     $ 383.6
Cost of sales % of sales             61.7 %      63.8 %

Cost of sales decreased by $15.2 million in the second quarter of 2014, compared with the second quarter of 2013, which primarily reflected lower costs as a result of the cost reduction actions taken in 2013 and pension income in 2014 compared with pension expense in 2013. Cost of sales as a percentage of sales for the second quarter of 2014 decreased to 61.7% from 63.8% in the second quarter of 2013 and reflected lower costs as a result of the cost reduction actions taken in 2013 and also reflected pension income in 2014 compared with pension expense in 2013.
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 2014 and 2013, were $5.8 million and $4.1 million of favorable operating income and $5.7 million and $5.1 million of unfavorable operating income, respectively.
Selling, general and administrative expenses, including research and development and bid and proposal expense, increased by $1.9 million in the second quarter of 2014, compared with the second quarter of 2013, and primarily included higher research and development expenses. Selling, general and administrative expenses for the second quarter of 2014, as a percentage of sales, increased slightly to 25.9%, compared with 25.4% in the second quarter of 2013 and primarily reflected the impact of higher research and development expenses. Corporate expense was $10.9 million for the second quarter of 2014, compared with $10.4 million for the second quarter of 2013 and primarily reflected higher compensation expense. Interest expense, net of interest income, was $4.6 million for the second quarter of 2014, compared with $5.1 million for the second quarter of 2013. The decrease in interest expense primarily reflected the impact of lower outstanding debt levels. Other income and expense was income of $8.2 million for the second quarter of 2014, compared with income of less than $0.1 million for the second quarter of 2013. The 2014 amount included a net gain on legal settlements of $8.6 million.
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 2014 was 28.3% compared with 27.6% for the second quarter of 2013.


Table of Contents

The second quarter of 2014 reflected net tax expense for discrete items of $0.2 million. Excluding the net discrete tax expense, the effective tax rate would have been 28.1% for the second quarter of 2014. The second quarter of 2013 reflected $0.9 million in net discrete tax benefits primarily related to an expiration of the statute of limitations. Excluding the net discrete tax benefits the effective tax rate would have been 29.1% for the second quarter of 2013. The Company's effective tax rate for 2014 is expected to be 28.7%, 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, excluding discrete items, primarily reflected a change in the proportion of domestic and foreign income.
First six months of 2014 compared with the first six months of 2013 Teledyne's first six months of 2014 sales increased slightly to $1,170.6 million, compared with sales of $1,170.4 million for the same period of 2013. Net income attributable to Teledyne was $101.9 million ($2.67 per diluted share) for the first six months of 2014, compared with $83.3 million ($2.20 per diluted share) for the first six months of 2013, an increase of 22.3%.
The first six months of 2014, compared with the same period in 2013, reflected higher sales in the Instrumentation segment, mostly offset by lower sales in the Aerospace and Defense Electronics, Digital Imaging and the Engineered Systems segments. Incremental revenue in the first six months of 2014 from recent acquisitions was $30.1 million.
Operating profit increased to $140.3 million for the first six months of 2014, from $123.8 million for the same period of 2013, and reflected improved results in each business segment, despite lower sales in three business segments. Operating profit reflected lower costs as a result of the cost reduction actions taken in 2013 and the impact of pension income. Operating income in the first six months of 2014 included $0.8 million in severance and facility consolidation costs, compared with $4.4 million of similar costs in the first six month of 2013. The incremental operating profit included in the results for the first six months of 2014 from recent acquisitions was $0.6 million which included $0.8 million in additional intangible asset amortization.
The first six months of 2014 included pension income of $0.7 million, compared with pension expense of $8.7 million in the first six months of 2013. Pension expense allocated to contracts pursuant to CAS was $6.9 million in the first six months of 2014, compared with $7.2 million in the first six months of 2013. The change to pension income in 2014 from pension expense in 2013 primarily reflected the impact of using a 5.4 percent discount rate to determine the benefit obligation for the domestic plan in 2014 compared with a 4.4 percent discount rate used in 2013.
In the first six months of 2014 and 2013, we recorded a total of $6.2 million and $4.6 million, respectively, in stock option compensation expense. The table below presents sales and cost of sales by segment and total company:

                                         Six Months
(Dollars in millions)                2014          2013
Instrumentation
Sales                             $   535.5     $   490.4
Cost of sales                     $   299.7     $   269.1
Cost of sales % of sales               55.9 %        54.9 %
Digital Imaging
Sales                             $   205.6     $   206.7
Cost of sales                     $   127.7     $   131.7
Cost of sales % of sales               62.1 %        63.7 %
Aerospace and Defense Electronics
Sales                             $   305.5     $   332.6
Cost of Sales                     $   192.2     $   230.9
Cost of sales % of sales               62.9 %        69.4 %
Engineered Systems
Sales                             $   124.0     $   140.7
Costs of sales                    $   100.5     $   117.3
Cost of sales % of sales               81.1 %        83.4 %
Total Company
Sales                             $ 1,170.6     $ 1,170.4
Costs of sales                    $   720.1     $   749.0
Cost of sales % of sales               61.5 %        64.0 %


Table of Contents

Cost of sales decreased by $28.9 million in the first six months of 2014, compared with the first six months of 2013, which primarily reflected lower costs as a result of the cost reduction actions taken in 2013 and the impact of pension income. Cost of sales as a percentage of sales for the first six months of 2014, was 61.5%, compared with 64.0% for the first six months of 2013 and reflected lower costs as a result of the cost reduction actions taken in 2013, the impact of pension income and product mix differences.
The aggregate effects of changes in estimates on contracts accounted for under the POC accounting method, in the first six months of 2014 and 2013 were $11.3 million and $9.2 million of favorable operating income and $12.8 million and $11.2 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 $12.6 million in the first six months of 2014, compared with the first six months of 2013, and primarily included higher research and development expenses. Selling, general and administrative expenses for the first six months of 2014, as a percentage of sales, increased to 26.5%, compared with 25.4% in the first six months of 2013 and primarily reflected the impact of higher research and development expenses. Corporate expense was $22.0 million for the first six months of 2014, compared with $19.9 million for the first six months of 2013, and reflected higher compensation expense.
Interest expense, net of interest income, was $9.3 million in the first six months of 2014, compared with $10.5 million for the first six months of 2013. The decrease in interest expense primarily reflected the impact of lower outstanding debt levels. Other income and expense was income of $8.8 million for the first six months of 2014, compared with expense of $0.5 million for the first six months of 2013. The 2014 amount included a net gain on legal settlements of $8.6 million.
The Company's effective income tax rate for the first six months of 2014 was 27.2%, compared with 26.3% for the first six months of 2013. The first six months of 2014 included net tax benefits for discrete items of $2.1 million compared with net tax benefits for discrete items of $3.6 million for the first six months of 2013. The net tax benefits in 2014 included the remeasurement of uncertain tax positions due to a favorable resolution of a tax matter. The net tax benefits in 2013 primarily related 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 28.7% for the first six months of 2014 and 29.5% for the first six months of 2013. The decrease in the effective tax rates, excluding discrete items, primarily reflected a change in the proportion of domestic and foreign income. Segment Results
The following table sets forth the sales and operating profit for each segment (dollars in millions):

                                 Second Quarter            %               Six Months               %
                                2014         2013        Change        2014          2013         Change
Net sales:
Instrumentation              $  276.6     $  257.7         7.3  %   $   535.5     $   490.4         9.2  %
Digital Imaging                 103.7        104.3        (0.6 )%       205.6         206.7        (0.5 )%
Aerospace and Defense
Electronics                     152.2        169.5       (10.2 )%       305.5         332.6        (8.1 )%
Engineered Systems               64.6         69.5        (7.1 )%       124.0         140.7       (11.9 )%
Total net sales              $  597.1     $  601.0        (0.6 )%   $ 1,170.6     $ 1,170.4           -  %
Segment operating profit:
Instrumentation              $   43.8     $   41.1         6.6  %   $    81.3     $    77.7         4.6  %
Digital Imaging                  11.7          7.9        48.1  %        21.4          13.1        63.4  %
Aerospace and Defense
Electronics                      22.9         20.6        11.2  %        46.7          40.8        14.5  %
Engineered Systems                6.8          5.7        19.3  %        12.9          12.1         6.6  %
Segment operating profit         85.2         75.3        13.1  %       162.3         143.7        12.9  %
Corporate expense               (10.9 )      (10.4 )       4.8  %       (22.0 )       (19.9 )      10.6  %
Operating income                 74.3         64.9        14.5  %       140.3         123.8        13.3  %
Other income/(expense), net       8.2            -         *              8.8          (0.5 )       *
Interest expense, net            (4.6 )       (5.1 )      (9.8 )%        (9.3 )       (10.5 )     (11.4 )%
Income before income taxes       77.9         59.8        30.3  %       139.8         112.8        23.9  %
Provision for income taxes       22.1         16.5        33.9  %        38.0          29.7        27.9  %
Net income                       55.8         43.3        28.9  %       101.8          83.1        22.5  %
Noncontrolling interest           0.3         (0.4 )       *              0.1           0.2       (50.0 )%
Net income attributable to
Teledyne                     $   56.1     $   42.9        30.8  %   $   101.9     $    83.3        22.3  %

* not meaningful


Table of Contents

Instrumentation
                                            Second Quarter                  Six Months
(Dollars in millions)                     2014           2013           2014           2013
Sales                                 $    276.6     $    257.7     $    535.5     $    490.4
Cost of sales                         $    155.1     $    142.7     $    299.7     $    269.1
Selling, general and administrative
expenses                              $     77.7     $     73.9     $    154.5     $    143.6
Operating profit                      $     43.8     $     41.1     $     81.3     $     77.7
Cost of sales % of sales                    56.1 %         55.4 %         55.9 %         54.9 %
Selling, general and administrative
expenses % of sales                         28.1 %         28.7 %         28.9 %         29.3 %
Operating profit % of sales                 15.8 %         15.9 %         15.2 %         15.8 %

Second quarter of 2014 compared with the second quarter of 2013 The Instrumentation segment's second quarter 2014 sales were $276.6 million, compared with $257.7 million in the second quarter of 2013, an increase of 7.3%. Second quarter 2014 operating profit was $43.8 million, compared with operating profit of $41.1 million in the second quarter of 2013, an increase of 6.6%. The second quarter 2014 sales increase resulted from higher sales in the marine instrumentation and environmental instrumentation product lines, partially offset by lower sales of electronic test and measurement instrumentation. The higher sales of $14.5 million for marine instrumentation primarily reflected increased sales of interconnect systems used in offshore energy production, and also included $3.6 million in sales from the acquisition of C.D. Limited. Sales for environmental instrumentation increased $6.4 million and included $7.1 million in sales from recent acquisitions. Sales of electronic test and measurement instrumentation decreased $2.0 million. The increase in operating profit reflected the impact of higher sales and a $0.7 million bad debt recovery. The incremental operating profit included in the results for the second quarter of 2014 from recent acquisitions was breakeven, which included $0.4 million in additional intangible asset amortization expense.
Second quarter 2014 cost of sales increased by $12.4 million, compared with the second quarter of 2013, and primarily reflected the impact of higher sales. The increase in the cost of sales percentage to 56.1% from 55.4% reflected the impact of product mix differences. Second quarter 2014 selling, general and administrative expenses, including research and development and bid and proposal expense, increased by $3.8 million, compared with the second quarter of 2013, and primarily reflected the impact of higher sales. The selling, general and administrative expense percentage decreased slightly to 28.1% in the second quarter of 2014 from 28.7% in the second quarter of 2013. First six months of 2014 compared with the first six months of 2013 The Instrumentation segment's first six months of 2014 sales were $535.5 million, compared with $490.4 million for the first six months of 2013, an increase of 9.2%. First six months of 2014 operating profit was $81.3 million, compared with operating profit of $77.7 million for the first six months of 2013, an increase of 4.6%.
The first six months of 2014 sales increased $45.1 million, which resulted from higher sales in the marine instrumentation and environmental instrumentation product lines. The higher sales of $38.0 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 $16.2 million in incremental revenue from recent acquisitions. Sales for environmental instrumentation increased $7.6 million and included $13.6 million from recent acquisitions. Sales for electronic test and measurement instrumentation decreased by $0.5 million. The increase in operating profit reflected the impact of higher sales, partially offset by $0.6 million in higher intangible asset amortization. The incremental operating profit included in the results for the first six months of 2014 from recent acquisitions was $0.9 million, which included $0.8 million in additional intangible asset amortization.
The first six months of 2014 cost of sales increased by $30.6 million, compared with the first six months of 2013, and reflected the impact of higher sales and product mix differences. The increase in the cost of sales percentage primarily reflected product mix differences. The first six months of 2014, selling, general and administrative expenses, including research and development and bid and proposal expense, increased by $10.9 million, compared with the first six months of 2013, and primarily reflected the impact of higher sales. The selling, general and administrative expense percentage decreased slightly to 28.9 percent in the first six months of 2014 from 29.3 percent in the first six months of 2013.


Table of Contents

Digital Imaging
                                           Second Quarter                  Six Months
(Dollars in millions)                    2014           2013           2014           2013
Sales                                $    103.7     $    104.3     $    205.6     $    206.7
Cost of sales                        $     64.2     $     64.6     $    127.7     $    131.7
Selling, general and administrative
expenses                             $     27.8     $     31.8     $     56.5     $     61.9
Operating profit                     $     11.7     $      7.9     $     21.4     $     13.1
. . .
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