TELEDYNE TECHNOLOGIES INCORPORATED Teledyne Technologies Incorporated provides enabling technologies for industrial growth markets that require advanced technology and high reliability. These markets include aerospace and defense, factory automation, air and water quality environmental monitoring, electronics design and development, oceanographic research, deepwater oil and gas exploration and production, medical imaging and pharmaceutical research. Our products include digital imaging sensors, cameras and systems within the visible, infrared and X-ray spectra, monitoring and control instrumentation for marine and environmental applications, harsh environment interconnects, electronic test and measurement equipment, aircraft information management systems, and defense electronics 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 continue to focus on balanced and disciplined capital deployment among capital expenditures, product development, acquisitions and share repurchases. We aggressively pursue operational excellence to continually improve our margins and earnings by emphasizing cost containment and cost reductions in all aspects of our business. 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. COVID-19 and other matters With regard to the COVID-19 pandemic, our first priority remains the health and safety of our employees and their families. Up to 30% of our total personnel are working from home. Our manufacturing sites remain operational, and we are practicing social distancing, enhanced cleaning protocols, usage of personal protective equipment and other preventative measures. While no company is immune to global economic challenges, Teledyne's business portfolio is well-balanced across end markets and geographies, and includes a high degree of businesses serving critical infrastructure sectors such as the defense industrial base, water and wastewater, and healthcare and public health. Teledyne's balance sheet is strong, with$382.8 million of cash and cash equivalents and$614.5 million available under our credit facility maturing in 2024. However, given the continuing dynamic nature of this situation, the Company may not fully estimate the impacts of COVID-19 on its financial condition, results of operations or cash flows. We are currently monitoring an exposure of approximately$40.0 million related to certain receivables, inventories and additional AOS-related expenses as a result of theMarch 27, 2020 bankruptcy ofOneWeb Global Limited and its subsidiaries ("OneWeb"). Teledyne's customer,Airbus OneWeb Satellites, LLC ("AOS"), a joint venture of OneWeb andAirbus Defense and Space , has not declared bankruptcy. Although it is reasonably possible that we may recognize a loss, given the uncertainty of the situation at this time, a loss, if any, will depend on the outcome of future events that could impact AOS. Recent Acquisitions Acquisition of theOakGate Technology, Inc. OnJanuary 5, 2020 , we acquiredOakGate Technology, Inc. ("OakGate") for$28.5 million in cash, net of cash acquired. Based inLoomis, California ,OakGate provides software and hardware designed to test electronic data storage devices from development through manufacturing and end-use applications. The acquired business is part of the Test and Measurement product line within the Instrumentation segment. Acquisition ofMicralyne, Inc. OnAugust 30, 2019 , we acquiredMicralyne Inc. for$26.2 million in cash, net of cash acquired and including a$0.5 million purchase price adjustment paid inJanuary 2020 . Based inEdmonton, Alberta, Canada , Micralyne is a privately-owned foundry providing Micro Electro Mechanical Systems or MEMS devices. In particular, Micralyne possesses unique microfluidic technology for biotech applications, as well as capabilities in non-silicon-based MEMS (e.g. gold, polymers) often required for human body compatibility. The acquired business is part of the Digital Imaging segment. Acquisition of the gas and flame detection business of 3M Company OnAugust 1, 2019 , we acquired the gas and flame detection business of 3M Company for$233.5 million in cash, net of cash acquired. The gas and flame detection business includesOldham , Simtronics,Gas Measurement Instruments , Detcon and select Scott Safety products. The gas and flame detection business provides a portfolio of fixed and portable industrial gas and flame detection instruments used in a variety of industries including petrochemical, power generation, oil and gas, food and beverage, 20 -------------------------------------------------------------------------------- Table of Contents mining and waste water treatment. Principally located inFrance , theUnited Kingdom andthe United States , the acquired business is part of the Environmental product line within of the Instrumentation segment. Acquisition of the scientific imaging businesses of Roper Technologies, Inc. OnFebruary 5, 2019 , we acquired the scientific imaging businesses of Roper Technologies, Inc. for$224.8 million in cash, net of cash acquired and including a purchase price adjustment. Principally located inthe United States andCanada , the acquired businesses are part of the Digital Imaging segment. The acquired businesses include Princeton Instruments, Photometrics and Lumenera. The acquired businesses provide a range of imaging solutions, primarily for life sciences, academic research and customized OEM industrial imaging solutions. Princeton Instruments and Photometrics manufacture state-of-the-art cameras, spectrographs and optics for advanced research in physical sciences, life sciences research and spectroscopy imaging. Applications and markets include materials analysis, quantum technology and cell biology imaging using fluorescence and chemiluminescence. Lumenera primarily provides rugged USB-based customized cameras for markets such as traffic management, as well as life sciences applications. Teledyne funded the acquisitions with borrowings under its credit facility and cash on hand. The results of each acquisition have been included in Teledyne's results since the date of each respective acquisition. Results of Operations Second Quarter Six Months (in millions) 2020 2019 2020 2019 Net sales$ 743.3 $ 782.0 $ 1,527.9 $ 1,527.2 Costs and expenses Cost of sales 460.6 463.6 953.2 927.5 Selling, general and administrative expenses 172.9 186.5 360.9 370.5 Total costs and expenses 633.5 650.1 1,314.1 1,298.0 Operating income 109.8 131.9 213.8 229.2 Interest expense, net (3.7) (5.4) (7.8) (10.8) Non-service retirement benefit income 3.2 2.0 5.7 4.2 Other expense, net (1.4) (0.6) (2.8) (1.8) Income before income taxes 107.9 127.9 208.9 220.8 Provision for income taxes 14.2 23.3 33.0 40.9 Net income$ 93.7 $ 104.6 $ 175.9 $ 179.9 Second Quarter % Six Months % (dollars in millions) 2020 2019
Change 2020 2019 Change
Net sales(a):
Instrumentation $ 263.1 $ 264.1 (0.4) % $ 548.2 $ 520.6 5.3 %
Digital Imaging 237.6 248.4 (4.3) % 484.3 480.8 0.7 %
Aerospace and Defense Electronics 143.1 176.0 (18.7) % 299.4 342.6 (12.6) %
Engineered Systems 99.5 93.5 6.4 % 196.0 183.2 7.0 %
Total net sales $ 743.3 $ 782.0 (4.9) % $ 1,527.9 $ 1,527.2 - %
Operating income:
Instrumentation $ 48.5 $ 49.0 (1.0) % $ 99.3 $ 88.9 11.7 %
Digital Imaging 46.8 51.6 (9.3) % 90.6 88.2 2.7 %
Aerospace and Defense Electronics 17.5 38.6 (54.7) % 30.9 71.1 (56.5) %
Engineered Systems 10.8 9.0 20.0 % 22.2 15.4 44.2 %
Corporate expense (13.8) (16.3) (15.3) % (29.2) (34.4) (15.1) %
Total operating income $ 109.8 $ 131.9 (16.8) % $ 213.8 $ 229.2 (6.7) %
(a) Net sales excludes inter-segment sales of
quarter and first six months of 2020 respectively, and
for the second quarter and first six months of 2019.
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The table below presents net sales and cost of sales by segment and total
company:
Second Quarter Six Months
(dollars in millions) 2020 2019 2020 2019
Instrumentation
Net sales $ 263.1 $ 264.1 $ 548.2 $ 520.6
Cost of sales $ 147.5 $ 146.6 $ 305.3 $ 293.6
Cost of sales as a % of net sales 56.1 % 55.5 % 55.7 % 56.4 %
Digital Imaging
Net sales $ 237.6 $ 248.4 $ 484.3 $ 480.8
Cost of sales $ 135.8 $ 137.0 $ 281.3 $ 276.6
Cost of sales as a % of net sales 57.2 % 55.2 % 58.1 % 57.6 %
Aerospace and Defense Electronics
Net sales $ 143.1 $ 176.0 $ 299.4 $ 342.6
Cost of sales $ 96.4 $ 102.8 $ 207.2 $ 203.4
Cost of sales as a % of net sales 67.4 % 58.4 % 69.2 % 59.4 %
Engineered Systems
Net sales $ 99.5 $ 93.5 $ 196.0 $ 183.2
Costs of sales $ 80.9 $ 77.2 $ 159.4 $ 153.9
Cost of sales as a % of net sales 81.3 % 82.6 % 81.3 % 84.0 %
Total Company
Net sales $ 743.3 $ 782.0 $ 1,527.9 $ 1,527.2
Costs of sales $ 460.6 $ 463.6 $ 953.2 $ 927.5
Cost of sales as a % of net sales 62.0 % 59.3 % 62.4 % 60.7 %
Second Quarter and First Six Months Results The following is a discussion of our 2020 second quarter and first six months results compared with the 2019 second quarter and first six months results. Comparisons are with the corresponding reporting period of 2019, unless noted otherwise. In the first quarter of 2020, we acquiredOakGate Technology, Inc. Second quarter of 2020 compared with the second quarter of 2019 Our second quarter of 2020 net sales decreased 4.9%. Net income for the second quarter of 2020 decreased 10.4%. Net income per diluted share was$2.48 for the second quarter of 2020, compared with net income per diluted share of$2.80 . The second quarter of 2020 included$8.6 million in severance, facility consolidation and acquisition costs compared with$1.3 million in severance, facility consolidation and acquisition costs for the second quarter of 2019. The second quarter of 2020 included net discrete income tax benefits of$10.4 million compared with$4.3 million for the second quarter of 2019.Net Sales The second quarter of 2020 net sales, compared with the second quarter of 2019 net sales, reflected lower net sales in each segment except the Engineered Systems segment. The second quarter of 2020 sales included$29.5 million in incremental net sales from recent acquisitions. Cost of Sales Cost of sales decreased$3.0 million in the second quarter of 2020 and reflected the impact of lower sales, partially offset by higher severance and facility costs. Cost of sales as a percentage of net sales increased for the second quarter of 2020 to 62.0%, from 59.3% and reflected the impact of higher severance and facility consolidation costs. Selling, General and Administrative Expenses Selling, general and administrative expenses, including research and development expense, decreased$13.6 million in the second quarter of 2020 and primarily reflected the impact of lower sales. Selling, general and administrative expenses for the second quarter of 2020, as a percentage of net sales decreased to 23.2% from 23.8% and reflected the impact of lower corporate expense. Corporate expense, which is included in selling, general and administrative expenses, was$13.8 million for the second quarter of 2020, compared with$16.3 million and reflected lower consulting and travel expense. In the second quarter of 2020 and 2019, we recorded a total of$5.7 million and$5.8 million , respectively, in stock option compensation expense. 22 -------------------------------------------------------------------------------- Table of Contents Pension Service Expense Pension service expense is included in both cost of sales and selling general and administrative expense. For the second quarter of 2020 pension service expense was$2.6 million compared with$2.3 million . For 2020, the weighted-average discount rate used to determine the benefit obligation for the domestic qualified pension plans was 3.41% compared with 4.59% in 2019. Operating Income Operating income for the second quarter of 2020 decreased 16.8%. The second quarter of 2020, compared with the second quarter of 2019, reflected lower operating income in each segment except the Engineered Systems segment. The second quarter of 2020 included$8.6 million in severance, facility consolidation and acquisition costs, compared with$1.3 million in severance, facility consolidation and acquisition costs for the second quarter of 2019. The incremental operating income included in the results for the second quarter of 2020 from recent acquisitions was$1.9 million . Interest Expense, Non-Service Retirement Benefit Income and Other Income/Expense Interest expense, net of interest income, was$3.7 million for the second quarter of 2020, compared with$5.4 million , and reflected the impact of lower average interest rates. Non-service retirement benefit income was$3.2 million for the second quarter of 2020, compared with$2.0 million . Other income and expense was expense of$1.4 million for the second quarter of 2020, compared with expense of$0.6 million . Income Taxes 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 and share-based accounting income tax benefits, are treated separately. The Company's effective income tax rate for the second quarter of 2020 was 13.2%, compared with 18.2%. The second quarter of 2020 reflected net discrete income tax benefits of$10.4 million , which included a$9.8 million income tax benefit related to share-based accounting. The second quarter of 2019 included net discrete tax benefits of$4.3 million , which included a$4.8 million income tax benefit related to share-based accounting. Excluding the net discrete income tax benefits in both periods, the effective tax rates would have been 22.8% for the second quarter of 2020 and 21.6% for the second quarter of 2019. The Company's annual effective tax rate for fiscal year 2020 is expected to be 22.8% before discrete tax items. In addition, we currently expect significantly less discrete tax items in 2020 compared with 2019. First six months of 2020 compared with the first six months of 2019 Our first six months of 2020 net sales increased slightly. Net income for the first six months of 2020 decreased 2.2%. Net income per diluted share was$4.65 for the first six months of 2020 compared with net income per diluted share of$4.82 . The first six months of 2020 included net discrete income tax benefits of$14.6 million compared with$7.4 million . The first six months of 2020 included$19.0 million in severance, facility consolidation, acquisition and certain changes in contract cost estimates, compared with$3.7 million in severance and facility consolidation costs for the first six months of 2019.Net Sales The first six months of 2020 net sales, compared with the first six months of 2019 net sales, reflected higher net sales in each segment except the Aerospace and Defense segment. The first six months of 2020 included$60.2 million in incremental net sales from recent acquisitions. Cost of Sales Cost of sales increased$25.7 million in the first six months of 2020 and primarily reflected the impact of severance, facility consolidation, acquisition and certain changes in contract cost estimates. Cost of sales as a percentage of net sales for the six months of 2020 increased to 62.4%, compared with 60.7% and reflected the impact of severance, facility consolidation, acquisition and certain changes in contract cost estimates. Selling, General and Administrative Expenses Selling, general and administrative expenses, including research and development, decreased by$9.6 million in the first six months of 2020 and reflected lower research and development expense and lower corporate expense. Selling, general and administrative expenses for the first six months of 2020, as a percentage of net sales, decreased slightly to 23.6% compared with 24.3%. In the first six months of 2020 and 2019, we recorded a total of$13.1 million and$14.7 million , respectively, in stock option compensation expense. Pension Service Expense Pension service expense for the first six months of 2020 was$5.2 million compared with$4.7 million . 23 -------------------------------------------------------------------------------- Table of Contents Operating Income Operating income for the first six months of 2020 decreased 6.7%. The first six months of 2020 compared with the first six months of 2019, reflected higher operating income in each segment except the Aerospace and Defense segment. Corporate expense of$29.2 million in the first six months of 2020 compared with$34.4 million and reflected lower compensation and consulting expense. The incremental operating income included in the results for the first six months of 2020 from recent acquisitions was$3.0 million . Interest Expense, Non-Service Retirement Benefit Income and Other Income/Expense Interest expense, net of interest income, was$7.8 million for the first six months of 2020, compared with$10.8 million and primarily reflected lower average interest rates in 2020. Other income and expense was expense of$2.8 million for the first six months of 2020, compared with expense of$1.8 million . Income Taxes The Company's effective income tax rate for the first six months of 2020 was 15.8% compared with 18.5%. The first six months of 2020 reflected$14.6 million in net discrete income tax benefits, which included a$14.5 million income tax benefit related to share-based accounting. The first six months of 2019 reflected$7.4 million in net discrete income tax benefits, which included a$7.7 million income tax benefit related to share-based accounting. Excluding the net discrete income tax items in both periods, the effective tax rates would have been 22.8% for the first six months of 2020 and 21.9% for the first six months of 2019. Segment Results Segment results includes net sales and operating income by segment but excludes non-service retirement benefit income, equity income or loss, unusual non-recurring legal matter settlements, interest income and expense, gains and losses on the disposition of assets, sublease rental income and non-revenue licensing and royalty income, domestic and foreign income taxes and corporate office expenses. Corporate expense includes various administrative expenses relating to the corporate office and certain nonoperating expenses, including certain acquisition related transaction costs, not allocated to our segments. See Note 14 to these condensed consolidated financial statements for additional segment information. Instrumentation Second Quarter Six Months (dollars in millions) 2020 2019 2020 2019 Net sales$ 263.1 $ 264.1 $ 548.2 $ 520.6 Cost of sales$ 147.5 $ 146.6 $ 305.3 $ 293.6 Selling, general and administrative expenses$ 67.1 $ 68.5 $ 143.6 $ 138.1 Operating income$ 48.5 $ 49.0 $ 99.3 $ 88.9 Cost of sales as a % of net sales 56.1 % 55.5 % 55.7 % 56.4 % Selling, general and administrative expenses % of net sales 25.5 % 25.9 % 26.2 % 26.5 % Operating income as a % of net sales 18.4 % 18.6 % 18.1 % 17.1 % Second quarter of 2020 compared with the second quarter of 2019 The Instrumentation segment's second quarter of 2020 net sales decreased 0.4%. Operating income for the second quarter of 2020 decreased 1.0%. The second quarter of 2020 net sales decrease resulted from lower sales of marine instrumentation and test and measurement instrumentation, mostly offset by higher sales of environmental instrumentation. Sales of environmental instrumentation increased$6.9 million , sales of test and measurement instrumentation decreased$6.4 million and sales of marine instrumentation decreased$1.5 million . Environmental instrumentation included$21.7 million in sales from the 2019 acquisition of the gas and flame detection businesses. Test and measurement instrumentation included$4.8 million in sales from the 2020 acquisition ofOakGate . Operating income second quarter of 2020 included$2.8 million in higher severance and facility consolidation costs, partially offset by improved product line margins. The operating profit included in the results for the second quarter of 2020 from recent acquisitions was$1.8 million . The second quarter of 2020 cost of sales increased$0.9 million . Cost of sales as a percentage of net sales for the second quarter of 2020 increased slightly to 56.1% from 55.5%. Second quarter 2020 selling, general and administrative expenses decreased$1.4 million . The selling, general and administrative expense percentage decreased slightly to 25.5% in the second quarter of 2020 from 25.9%. 24 -------------------------------------------------------------------------------- Table of Contents First six months of 2020 compared with the first six months of 2019 The Instrumentation segment's first six months 2020 net sales increased 5.3%. Operating income for the first six months of 2020 increased of 11.7%. The first six months of 2020 net sales increase resulted from higher sales of environmental and marine instrumentation, partially offset by lower sales of test and measurement instrumentation. Sales of environmental instrumentation increased$29.8 million and sales of marine instrumentation increased$2.6 million . Sales of test and measurement instrumentation decreased$4.8 million . Environmental instrumentation included$47.6 million in sales from the 2019 acquisition of the gas and flame detection businesses. Test and measurement instrumentation included$6.9 million in sales from the 2020 acquisition ofOakGate . The increase in operating income the first six months of 2020 reflected the impact of higher sales and improved product line margins. The first six months of 2020 cost of sales increased by$11.7 million and primarily reflected the impact of higher sales. The cost of sales percentage decreased slightly to 55.7% from 56.4%. The first six months of 2020 selling, general and administrative expenses increased by$5.5 million and primarily reflected the impact higher sales. The selling, general and administrative expense percentage decreased slightly to 26.2% in the first six months of 2020 from 26.5%. Digital Imaging Second Quarter Six Months (dollars in millions) 2020 2019 2020 2019 Net sales$ 237.6 $ 248.4 $ 484.3 $ 480.8 Cost of sales$ 135.8 $ 137.0 $ 281.3 $ 276.6 Selling, general and administrative expenses$ 55.0 $ 59.8 $ 112.4 $ 116.0 Operating income$ 46.8 $ 51.6 $ 90.6 $ 88.2 Cost of sales as a % of net sales 57.2 % 55.2 % 58.1 % 57.6 % Selling, general and administrative expenses % of net sales 23.1 % 24.0 % 23.2 % 24.1 % Operating income as a % of net sales 19.7 % 20.8 % 18.7 % 18.3 % Second quarter of 2020 compared with the second quarter of 2019 The Digital Imaging segment's second quarter of 2020 net sales decreased 4.3%. Operating income for the second quarter of 2020 decreased 9.3%. The second quarter of 2020 net sales primarily reflected lower sales of X-ray products for dental and medical applications, due in part to deferred patient treatments, and geospatial imaging products, partially offset by greater sales of infrared detectors for defense applications and$3.0 million in incremental sales from a 2019 acquisition. The decrease in operating income in the second quarter of 2020 primarily reflected the impact of lower sales. The second quarter of 2020 cost of sales decreased$1.2 million and primarily reflected the impact of lower sales. Cost of sales as a percentage of net sales for the second quarter of 2020 increased to 57.2% from 55.2%. Second quarter 2020 selling, general and administrative expenses decreased$4.8 million reflecting the impact of lower sales and lower research and development expense. The selling, general and administrative expense percentage decreased to 23.1% in the second quarter of 2020 from 24.0% and reflected the impact lower research and development expense. First six months of 2020 compared with the first six months of 2019 The Digital Imaging segment's first six months of 2020 net sales increased 0.7%. Operating income for the first six months of 2020 increased 2.7%. The first six months of 2020 net sales primarily reflected higher sales of infrared detectors for defense applications and MEMS products, partially offset by lower sales of X-ray products for dental and medical applications, due in part to deferred patient treatments, as well as geospatial imaging products. The first six months of 2020 also included$5.7 million in sales from recent acquisitions. The increase in operating income in the first six months of 2020 primarily reflected the impact of higher sales and lower research and development expense. The first six months of 2020 cost of sales increased$4.7 million and reflected the impact of higher sales. The cost of sales percentage in 2020 increased slightly to 58.1% compared with 57.6%. Selling, general and administrative expenses, including research and development expense, increased to$90.6 million in the first six months of 2020, from$88.2 million and reflected the impact of higher net sales, partially offset by lower research and development expense. The selling, general and administrative expense percentage decreased to 23.2% in the first six months of 2020 from 24.1% and reflected the impact of lower research and development expense. 25 -------------------------------------------------------------------------------- Table of Contents Aerospace and Defense Electronics Second Quarter Six Months (dollars in millions) 2020 2019 2020 2019 Net sales$ 143.1 $ 176.0 $ 299.4 $ 342.6 Cost of sales$ 96.4 $ 102.8 $ 207.2 $ 203.4 Selling, general and administrative expenses$ 29.2 $ 34.6 $ 61.3 $ 68.1 Operating income$ 17.5 $ 38.6 $ 30.9 $ 71.1 Cost of sales as a % of net sales 67.4 % 58.4 % 69.2 % 59.4 % Selling, general and administrative expenses % of net sales 20.4 % 19.7 % 20.5 % 19.8 % Operating income as a % of net sales 12.2 % 21.9 % 10.3 % 20.8 % Second quarter of 2020 compared with the second quarter of 2019 The Aerospace and Defense Electronics segment's second quarter of 2020 net sales decreased 18.7%. Operating income for the second quarter of 2020 decreased 54.7%. The second quarter of 2020 net sales reflected$26.9 million of lower sales for aerospace electronics and lower sales of$6.0 million for defense and space electronics. The continued weakness in the commercial aerospace industry, due to COVID-19, has negatively affected sales of aerospace electronics. Reduced sales of defense and space electronics resulted from the OneWeb program. The decrease in operating income the second quarter of 2020 reflected impact of lower sales and$4.9 million in higher severance and facility consolidation costs. The second quarter of 2020 cost of sales decreased$6.4 million and reflected the impact of lower sales, partially offset by higher severance and facility consolidation costs. Cost of sales as a percentage of net sales for the second quarter of 2020 increased to 67.4% from 58.4% and reflected impact of higher severance and facility consolidation costs. Selling, general and administrative expenses, including research and development expense, decreased to$29.2 million in the second quarter of 2020 from$34.6 million and primarily reflected the impact of lower sales. The selling, general and administrative expense percentage increased slightly to 20.4% in the second quarter of 2020 from 19.7%. First six months of 2020 compared with the first six months of 2019 The Aerospace and Defense Electronics segment's first six months of 2020 net sales decreased 12.6%. Operating income for the first six months of 2020 decreased 56.5%. The first six months of 2020 net sales reflected$47.0 million of lower sales for aerospace electronics, partially offset by higher sales of$3.8 million for defense and space electronics. The continued weakness in the commercial aerospace industry, due to COVID-19, has negatively affected sales of aerospace electronics. The decrease in operating income in the first six months of 2020 primarily reflected the impact of lower sales and$12.9 million of higher severance, facility consolidation and certain changes in contract cost estimates. The first six months of 2020 cost of sales increased by$3.8 million and reflected the impact of higher severance and facility consolidation costs, partially offset by lower sales. Cost of sales as a percentage of sales for the first six months of 2020 increased to 69.2% from 59.4% in the first six months of 2019 and reflected impact of higher severance and facility consolidation costs. Selling, general and administrative expenses, including research and development expense, decreased to$61.3 million in the first six months of 2020, compared with$68.1 million for the first six months of 2019 and primarily reflected the impact of lower sales. The selling, general and administrative expense percentage increased slightly to 20.5% in the first six months of 2020, compared with 19.8%. 26
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Engineered Systems
Second Quarter Six Months
(dollars in millions) 2020 2019 2020 2019
Net sales $ 99.5 $ 93.5 $ 196.0 $ 183.2
Cost of sales $ 80.9 $ 77.2 $ 159.4 $ 153.9
Selling, general and administrative expenses $ 7.8 $ 7.3 $ 14.4 $ 13.9
Operating income $ 10.8 $ 9.0 $ 22.2 $ 15.4
Cost of sales as a % of net sales 81.3 % 82.6 % 81.3 % 84.0 %
Selling, general and administrative expenses %
of net sales 7.8 % 7.8 % 7.4 % 7.6 %
Operating income as a % of net sales 10.9 % 9.6 % 11.3 % 8.4 %
Second quarter of 2020 compared with the second quarter of 2019
The Engineered Systems segment's second quarter of 2020 net sales increased
6.4%. Operating income increased 20.0%.
The second quarter of 2020 net sales reflected higher sales of $5.8 million of
engineered products and $1.5 million for turbine engines, partially offset by
lower sales of $1.3 million of energy systems. The higher sales of engineered
products and services primarily reflected increased sales from marine, nuclear
and other manufacturing programs, as well as electronic manufacturing services
products. Turbine engine sales reflected greater sales of Harpoon missile
engines. Operating income in the second quarter of 2020 reflected the impact of
higher sales and greater mix of manufacturing programs.
The second quarter of 2020 cost of sales increased $3.7 million and reflected
the impact of higher sales. Cost of sales as a percentage of net sales for the
second quarter of 2020 decreased to 81.3% from 82.6%. Selling, general and
administrative expenses was $7.8 million for the second quarter of 2020 compared
with $7.3 million in 2019. The selling, general and administrative expense
percentage was 7.8% for the both the second quarter of 2020 and 2019.
First six months of 2020 compared with the first six months of 2019
The Engineered Systems segment's first six months of 2020 net sales increased
7.0%. Operating income for the first six months of 2020 increased 44.2%.
The first six months of 2020 net sales reflected higher sales of $8.6 million of
engineered products and services and $5.2 for turbine engines, partially offset
by $1.0 million of lower sales of energy systems products. The higher sales of
engineered products and services, primarily reflected increased sales from
marine, nuclear and other manufacturing programs, as well as electronic
manufacturing services products, partially offset by lower sales related to
missile defense. The higher sales of turbine engines reflected increased sales
for the Harpoon missile program. Operating income in the first six months of
2020 reflected the impact of higher sales.
The first six months of 2020 cost of sales increased by $5.5 million and
primarily reflected the impact of higher sales. Cost of sales as a percentage of
sales for the first six months of 2020 decreased to 81.3% from 84.0%. Selling,
general and administrative expenses, including research and development expense,
increased to $14.4 million for the first six months of 2020, compared with $13.9
million for the first six months of 2019 and primarily reflected the impact of
higher sales. The selling, general and administrative expense percentage
decreased slightly to 7.4% for the first six months of 2020 compared with 7.6%.
Financial Condition, Liquidity and Capital Resources
Our net cash provided by operating activities was $232.2 million for the first
six months of 2020, compared with net cash provided by operating activities of
$163.3 million . The higher cash provided by operating activities in the first
six months of 2020 reflected improved accounts receivable collections and $33.4
million of deferred tax payments, as well as, cash flow from recent
acquisitions.
Our net cash used by investing activities was $65.7 million for the first six
months of 2020, compared with net cash used by investing activities of $261.6
million . The 2020 and 2019 first six months included $29.0 million and $222.5
million , respectively, for recent acquisitions. On January 5, 2020 , we acquired
OakGate for $28.5 million in cash. In February 2019 , we acquired the scientific
imaging businesses of Roper Technologies, Inc. for $224.8 million in cash.
Capital expenditures for the first six months of 2020 and 2019 were $36.8
million and $39.4 million , respectively. Our goodwill was $2,061.3 million at
June 28, 2020 and $2,050.5 million at December 29, 2019 . Goodwill resulting from
the acquisition of OakGate will not be deductible for tax purposes. Teledyne's
net acquired intangible assets were $409.2 million at June 28, 2020 and $430.8
million at December 29, 2019 . The decrease in the balance of net acquired
intangible assets primarily reflected amortization of acquired intangible
assets. The Company is in the process of specifically identifying the amount to
be assigned to certain assets, including acquired intangible assets, and
liabilities and the related impact on taxes and goodwill for the OakGate
acquisition and the gas and flame detection business and the Micralyne
acquisitions since there was insufficient time between the acquisition dates and
the end of the period to finalize the analysis.
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Financing activities provided cash of $27.8 million for the first six months of
2020, compared with cash provided by financing activities of $64.6 million .
Proceeds from the exercise of stock options were $28.2 million for the first six
months of 2020 compared with $20.7 million for the first six months of 2019.
Total debt at June 28, 2020 was $851.4 million . At June 28, 2020 , $125.0 million
was outstanding under the $750.0 million credit facility. At June 28, 2020 ,
Teledyne had $25.8 million in outstanding letters of credit. Available borrowing
capacity under the $750.0 million credit facility, which is reduced by
borrowings and certain outstanding letters of credit, was $614.5 million at June
28, 2020 . The credit agreements require the Company to comply with various
financial and operating covenants and at June 28, 2020 , the Company was in
compliance with these covenants.
Our principal cash and capital requirements are to fund working capital needs,
capital expenditures, income tax payments, pension contributions, debt service
requirements and the stock repurchase program, as well as acquisitions. It is
anticipated that operating cash flow, together with available borrowings under
the credit facility described below, will be sufficient to meet these
requirements over the next twelve months. We may raise debt capital, depending
on financial, market and economic conditions. We may need to raise additional
capital to support acquisitions. We currently expect to spend approximately
$70.0 million for capital expenditures in 2020, of which $36.8 million has been
spent in the first six months of 2020. No cash pension contributions have been
made since 2013 or are planned for the remainder of 2020 for the domestic
qualified pension plan.
As of June 28, 2020 , the Company had an adequate amount of margin between
required financial covenant ratios (as required by applicable credit agreements)
and our actual ratios. At June 28, 2020 , the required financial ratios and the
actual ratios were as follows:
$750.0 million Credit Facility expires March 2024 and $150.0 million term loan due October 2024 (issued October 2019 )
Financial Covenants Requirement Actual Measure
Consolidated Leverage Ratio (Net Debt/EBITDA) (a) No more than 3.25 to 1
1.46 to 1
Consolidated Interest Coverage Ratio (EBITDA/Interest) (b) No less than 3.0 to 1
32.9 to 1
Requirement Actual Measure
Consolidated Leverage Ratio (Net Debt/EBITDA) (a) No more than 3.25 to 1
1.46 to 1
Consolidated Interest Coverage Ratio (EBITDA/Interest) (b) No less than 3.0 to 1
32.9 to 1
a) The Consolidated Leverage Ratio is equal to Net Debt/EBITDA as defined in our
private placement note purchase agreement and our $750.0 million credit
agreement.
b) The Consolidated Interest Coverage Ratio is equal to EBITDA/Interest as
defined in our private placement note purchase agreement and our $750.0 million
credit agreement.
Our liquidity is not dependent upon the use of off-balance sheet financial
arrangements. We have no off-balance sheet financing arrangements that
incorporate the use of special purpose entities or unconsolidated entities.
Critical Accounting Policies
Our critical accounting policies are those that are reflective of significant
judgments and uncertainties, and may potentially result in materially different
results under different assumptions and conditions. Our critical accounting
policies are the following: revenue recognition; accounting for pension plans;
accounting for business combinations, goodwill, acquired intangible assets and
other long-lived assets; and accounting for income taxes.
For additional discussion of the application of the critical accounting policies
and other accounting policies, see Note 1 to these condensed consolidated
financial statements and also Management's Discussion and Analysis of Financial
Condition and Results of Operations - Critical Accounting Policies and Note 2 of
the Notes to Consolidated Financial Statements included in Teledyne's 2019 Form
10-K.
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Table of Contents
Safe Harbor Cautionary Statement Regarding Forward-Looking Information
From time to time we make, and this report contains, forward looking statements,
as defined in the Private Securities Litigation Reform Act of 1995, directly or
indirectly relating to sales, earnings, operating margin, growth opportunities,
acquisitions, product sales, capital expenditures, pension matters, stock option
compensation expense, the credit facility, interest expense, severance,
relocation and facility consolidation costs, environmental remediation costs,
stock repurchases, taxes, exchange rate fluctuations and strategic plans.
Forward-looking statements are generally accompanied by words such as
"estimate", "project", "predict", "believes" or "expect", that convey the
uncertainty of future events or outcomes. All statements made in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations and in other sections of this Form 10-Q that are not historical in
nature should be considered forward-looking.
Actual results could differ materially from these forward-looking statements.
Many factors could change the anticipated results, including: disruptions in the
global economy caused by the spread of the COVID-19 pandemic resulting in
production, supply, contractual and other disruptions, including facility
closures and furloughs and travel restrictions; customer and supplier
bankruptcies; changes in demand for products sold to the defense electronics,
instrumentation, digital imaging, energy exploration and production, commercial
aviation, semiconductor and communications markets; funding, continuation and
award of government programs; cuts to defense spending resulting from existing
and future deficit reduction measures or changes to U.S. and foreign government
spending and budget priorities triggered by the COVID-19 pandemic; the outcome
of the OneWeb bankruptcy; impacts from the United Kingdom's exit from the
European Union ; uncertainties related to the policies of the U.S. Presidential
Administration and uncertainties related to the 2020 Presidential and
Congressional elections; the imposition and expansion of, and responses to,
trade sanctions and tariffs; escalating economic and diplomatic tension between
China and the United States ; and threats to the security of our confidential and
proprietary information, including cyber security threats. Lower oil and natural
gas prices, as well as instability in the Middle East or other oil producing
regions, and new regulations or restrictions relating to energy production,
could further negatively affect our businesses that supply the oil and gas
industry. Disruptions from the production delay of Boeing's 737 Max aircraft and
continued weakness in the commercial aerospace industry due to the COVID-19
pandemic will negatively affect our aerospace electronics businesses. In
addition, financial market fluctuations affect the value of the company's
pension assets.
Changes in the policies of U.S. and foreign governments, including economic
sanctions, could result, over time, in reductions or realignment in defense or
other government spending and further changes in programs in which the company
participates.
While the company's growth strategy includes possible acquisitions, we cannot
provide any assurance as to when, if or on what terms any acquisitions will be
made. Acquisitions involve various inherent risks, such as, among others, our
ability to integrate acquired businesses, retain customers and achieve
identified financial and operating synergies. There are additional risks
associated with acquiring, owning and operating businesses internationally,
including those arising from U.S. and foreign government policy changes or
actions and exchange rate fluctuations.
While we believe our internal and disclosure control systems are effective,
there are inherent limitations in all control systems, and misstatements due to
error or fraud may occur and not be detected.
Readers are urged to read our periodic reports filed with the Securities and
Exchange Commission for a more complete description of our Company, its
businesses, its strategies and the various risks that we face. Various risks are
identified in Teledyne's 2019 Form 10-K and subsequent Quarterly Reports on Form
10-Q.
We assume no duty to publicly update or revise any forward-looking statements,
whether as a result of new information or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Except as set forth below, there were no material changes to the information
provided under "Item 7A, Quantitative and Qualitative Disclosure About Market
Risk" included in our 2019 Form 10-K.
Market Risk
Teledyne transacts business in various foreign currencies and has international
sales and expenses denominated in foreign currencies, subjecting the Company to
foreign currency risk. The Company's primary objective is to protect the United
States dollar value of future cash flows and minimize the volatility of reported
earnings. The Company utilizes foreign currency forward contracts to reduce the
volatility of cash flows primarily related to forecasted revenue and expenses
denominated in Canadian dollars for our Canadian companies, and in British
pounds for our U.K. companies. These contracts are designated and qualify as
cash flow hedges. The Company has converted U.S. dollar denominated, variable
rate and fixed rate debt obligations of a European subsidiary, into euro fixed
rate obligations using a receive float, pay fixed cross currency swap, and a
receive fixed, pay fixed cross currency swap. These cross currency swaps are
designated as cash flow hedges. In addition, the Company has converted domestic
U.S. variable rate debt to fixed rate debt using a receive variable, pay fixed
interest rate swap. The interest rate swap is also designated as a cash flow
hedge.
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Table of Contents Foreign Currency Exchange Rate Risk Notwithstanding our efforts to mitigate portions of our foreign currency exchange rate risks, there can be no assurance that our hedging activities will adequately protect us against the risks associated with foreign currency fluctuations. A hypothetical 10 percent price change in theU.S. dollar from its value atJune 28, 2020 would result in a decrease or increase in the fair value of our foreign currency forward contracts designated as cash flow hedges to buy Canadian dollars and to sellU.S. dollars by approximately$9.3 million . A hypothetical 10 percent price change in theU.S. dollar from its value atJune 28, 2020 would result in a decrease or increase in the fair value of our foreign currency forward contracts designated as cash flow hedges to buy British Pounds and to sellU.S. dollars by approximately$0.6 million . For additional information, see Derivative Instruments discussed in Note 4 to these condensed consolidated financial statements. Market Risk Disclosure We are exposed to market risk through the interest rate on our borrowings under our$750.0 million credit facility and our$150.0 million term loan. As ofJune 28, 2020 , we had$125.0 million in outstanding under our credit facility and$150.0 million outstanding under our term loan for a total$275.0 million . A 100 basis point increase in interest rates would result in an increase in annual interest expense of approximately$2.75 million , assuming the$275.0 million in debt was outstanding for the full year. A hypothetical 10 percent price change in theU.S. dollar from its value atJune 28, 2020 would result in a decrease or increase in the fair value of our Euro/U.S. Dollar cross currency swap designated as a cash flow hedge by approximately$28.9 million . A hypothetical 10 percent increase in theU.S. interest rates atMarch 29, 2020 would result in an increase in the fair value of ourU.S. dollar interest rate swap designated as a cash flow hedge by approximately$3.0 million .
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