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 18% 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$454.5 million of cash and cash equivalents and$614.7 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. Over the last several weeks the exposure associated with theMarch 27, 2020 bankruptcy ofOneWeb Global Limited and its subsidiaries ("OneWeb") has been substantially reduced. Teledyne's customer,Airbus OneWeb Satellites, LLC ("AOS"), is a joint venture of OneWeb andAirbus Defense and Space . OneWeb has secured financing and we received an advance payment inOctober 2020 . Additionally, we recently entered into modified contract terms and inOctober 2020 , we resumed limited production. While some risk remains, including a successful exit by OneWeb from bankruptcy, the exposure is substantially mitigated. As part of a continuing effort to reduce costs and improve operating performance, as well as to respond to the impact of COVID-19, the Company has taken actions to reduce headcount across various businesses, reducing our exposure to weak end markets, such as commercial aerospace. 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. ("Micralyne") 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 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 20 -------------------------------------------------------------------------------- Table of Contents 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, 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$224.8 million in cash, net of cash acquired and including a purchase price adjustment. Principally located inthe United States andCanada , the acquired businesses are part of the Digital Imaging segment. The acquired businesses include Princeton Instruments, Photometrics and Lumenera. The acquired businesses provide a range of imaging solutions, primarily for life sciences, academic research and customized OEM industrial imaging solutions. Princeton Instruments and Photometrics manufacture state-of-the-art cameras, spectrographs and optics for advanced research in physical sciences, life sciences research and spectroscopy imaging. Applications and markets include materials analysis, quantum technology and cell biology imaging using fluorescence and chemiluminescence. Lumenera primarily provides rugged USB-based customized cameras for markets such as traffic management, as well as life sciences applications. Teledyne funded the acquisitions with borrowings under its credit facility and cash on hand. The results of each acquisition have been included in Teledyne's results since the date of each respective acquisition. Results of Operations Third Quarter Nine Months (in millions) 2020 2019 2020 2019 Net sales$ 749.0 $ 802.2 $ 2,276.9 $ 2,329.4 Costs and expenses Cost of sales 458.5 487.7 1,411.7 1,415.2
Selling, general and administrative expenses 168.0 185.8
528.9 556.3 Total costs and expenses 626.5 673.5 1,940.6 1,971.5 Operating income 122.5 128.7 336.3 357.9 Interest expense, net (4.1) (5.5) (11.9) (16.3) Non-service retirement benefit income 3.2 1.9 8.9 6.1 Other expense, net (1.9) (1.7) (4.7) (3.5) Income before income taxes 119.7 123.4 328.6 344.2 Provision for income taxes 25.8 16.7 58.8 57.6 Net income$ 93.9 $ 106.7 $ 269.8 $ 286.6 Third Quarter % Nine Months % (dollars in millions) 2020 2019 Change 2020 2019 Change Net sales(a): Instrumentation$ 263.5 $ 282.9 (6.9) %$ 811.7 $ 803.5 1.0 % Digital Imaging 239.7 244.0 (1.8) % 724.0 724.8 (0.1) % Aerospace and Defense Electronics 144.8 177.1 (18.2) % 444.2 519.7 (14.5) % Engineered Systems 101.0 98.2 2.9 % 297.0 281.4 5.5 % Total net sales$ 749.0 $ 802.2 (6.6) %$ 2,276.9 $ 2,329.4 (2.3) % Operating income: Instrumentation$ 50.7 $ 52.0 (2.5) %$ 150.0 $ 140.9 6.5 % Digital Imaging 45.5 41.2 10.4 % 136.1 129.4 5.2 % Aerospace and Defense Electronics 26.7 39.5 (32.4) % 57.6 110.6 (47.9) % Engineered Systems 12.5 10.6 17.9 % 34.7 26.0 33.5 % Corporate expense (12.9) (14.6) (11.6) % (42.1) (49.0) (14.1) % Total operating income$ 122.5 $ 128.7 (4.8) %$ 336.3 $ 357.9 (6.0) %
(a) Net sales excludes inter-segment sales of
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The table below presents net sales and cost of sales by segment and total
company:
Third Quarter Nine Months
(dollars in millions) 2020 2019 2020 2019
Instrumentation
Net sales $ 263.5 $ 282.9 $ 811.7 $ 803.5
Cost of sales $ 147.0 $ 156.6 $ 452.3 $ 450.2
Cost of sales as a % of net sales 55.8 % 55.4 % 55.7 % 56.0 %
Digital Imaging
Net sales $ 239.7 $ 244.0 $ 724.0 $ 724.8
Cost of sales $ 139.0 $ 144.7 $ 420.3 $ 421.3
Cost of sales as a % of net sales 58.0 % 59.3 % 58.1 % 58.1 %
Aerospace and Defense Electronics
Net sales $ 144.8 $ 177.1 $ 444.2 $ 519.7
Cost of sales $ 90.6 $ 105.2 $ 297.8 $ 308.6
Cost of sales as a % of net sales 62.6 % 59.4 % 67.0 % 59.4 %
Engineered Systems
Net sales $ 101.0 $ 98.2 $ 297.0 $ 281.4
Costs of sales $ 81.9 $ 81.2 $ 241.3 $ 235.1
Cost of sales as a % of net sales 81.1 % 82.7 % 81.2 % 83.5 %
Total Company
Net sales $ 749.0 $ 802.2 $ 2,276.9 $ 2,329.4
Costs of sales $ 458.5 $ 487.7 $ 1,411.7 $ 1,415.2
Cost of sales as a % of net sales 61.2 % 60.8 % 62.0 % 60.8 %
Third Quarter and First Nine Months Results The following is a discussion of our 2020 third quarter and first nine months results compared with the 2019 third quarter and first nine months results. Comparisons are with the corresponding reporting period of 2019, unless noted otherwise. Third quarter of 2020 compared with the third quarter of 2019 Our third quarter of 2020 net sales decreased 6.6%. Net income for the third quarter of 2020 decreased 12.0%. Net income per diluted share was$2.48 for the third quarter of 2020, compared with net income per diluted share of$2.84 . The third quarter of 2020 included$3.9 million in severance, facility consolidation, acquisition and other costs compared with$2.0 million in severance, facility consolidation, acquisition and other costs. The third quarter of 2020 included net discrete income tax benefits of$1.2 million compared with$10.4 million .Net Sales The third quarter of 2020 net sales, compared with the third quarter of 2019 net sales, reflected lower net sales in each segment except the Engineered Systems segment. The third quarter of 2020 sales included$11.7 million in incremental net sales from recent acquisitions. Cost of Sales Cost of sales decreased$29.2 million in the third quarter of 2020 and primarily reflected the impact of lower sales. Cost of sales as a percentage of net sales increased slightly for the third quarter of 2020 to 61.2%, from 60.8%. Selling, General and Administrative Expenses Selling, general and administrative expenses, including research and development expense, decreased$17.8 million in the third quarter of 2020 and primarily reflected the impact of lower sales. Selling, general and administrative expenses for the third quarter of 2020, as a percentage of net sales decreased to 22.4% from 23.2% and reflected the impact of lower corporate expense. Corporate expense, which is included in selling, general and administrative expenses, was$12.9 million for the third quarter of 2020, compared with$14.6 million and reflected lower compensation and travel expense. Stock option compensation expense was$5.7 million for both the third quarter of 2020 and 2019. 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 third quarter of 2020 pension service expense was$2.6 million compared with$2.4 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 third quarter of 2020 decreased 4.8%. The third quarter of 2020, compared with the third quarter of 2019, reflected lower operating income inInstrumentation and Aerospace and Defense Electronics segments, partially offset by higher operating income in the Digital Imaging and Engineered Systems segment. The third quarter of 2020 included$3.9 million in severance, facility consolidation, acquisition and other costs, compared with$2.0 million in severance, facility consolidation, acquisition and other costs for the third quarter of 2019. The incremental operating income included in the results for the third quarter of 2020 from recent acquisitions was$2.0 million . Interest Expense, Non-Service Retirement Benefit Income and Other Income/Expense Interest expense, net of interest income, was$4.1 million for the third quarter of 2020, compared with$5.5 million , and primarily reflected the impact of lower average interest rates. Non-service retirement benefit income was$3.2 million for the third quarter of 2020, compared with$1.9 million . Other income and expense was expense of$1.9 million for the third quarter of 2020, compared with expense of$1.7 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 third quarter of 2020 was 21.5%, compared with 13.5%. The third quarter of 2020 reflected net discrete income tax benefits of$1.2 million , which included a$0.7 million income tax benefit related to share-based accounting. The third quarter of 2019 included net discrete tax benefits of$10.4 million , which included a$3.5 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 22.5% for the third quarter of 2020 and 21.9% for the third quarter of 2019. The Company's annual effective tax rate for fiscal year 2020 is expected to be 22.7% before discrete tax items. In addition, we currently expect less discrete tax items in 2020 compared with 2019. First nine months of 2020 compared with the first nine months of 2019 Our first nine months of 2020 net sales decreased 2.3%. Net income for the first nine months of 2020 decreased 5.9%. Net income per diluted share was$7.14 for the first nine months of 2020 compared with net income per diluted share of$7.66 . The first nine months of 2020 included net discrete income tax benefits of$15.8 million compared with$17.8 million . The first nine months of 2020 included$22.9 million in severance, facility consolidation, acquisition and certain changes in contract cost estimates and other costs, compared with$5.7 million in severance, facility consolidation, acquisition and other costs for the first nine months of 2019. Net Sales The first nine months of 2020 net sales, compared with the first nine months of 2019 net sales, reflected lower net sales in the Aerospace and Defense Electronics and Digital Imaging segments, partially offset by higher net sales in Instrumentation and Engineered Systems segments. The first nine months of 2020 included$68.2 million in incremental net sales from recent acquisitions. Cost of Sales Cost of sales decreased$3.5 million in the first nine months of 2020 and primarily reflected of lower sales. Cost of sales as a percentage of net sales for the first nine months of 2020 increased to 62.0%, compared with 60.8% 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$27.4 million in the first nine months of 2020 and reflected the impact of lower sales, lower research and development expense and lower corporate expense. Selling, general and administrative expenses for the first nine months of 2020, as a percentage of net sales, decreased slightly to 23.2% compared with 23.9%. In the first nine months of 2020 and 2019, we recorded a total of$18.8 million and$20.4 million , respectively, in stock option compensation expense. 23 -------------------------------------------------------------------------------- Table of Contents Pension Service Expense Pension service expense for the first nine months of 2020 was$7.8 million compared with$7.1 million . Operating Income Operating income for the first nine months of 2020 decreased 6.0%. The first nine months of 2020 compared with the first nine months of 2019, reflected higher operating income in each segment except the Aerospace and Defense segment. The first nine months of 2020 included$22.9 million in severance, facility consolidation, acquisition and other costs, compared with$5.7 million in severance, facility consolidation, acquisition and other costs for the first nine months of 2019. Corporate expense of$42.1 million in the first nine months of 2020 compared with$49.0 million and reflected lower compensation, and consulting expense. The incremental operating income included in the results for the first nine months of 2020 from recent acquisitions was$3.7 million . Interest Expense, Non-Service Retirement Benefit Income and Other Income/Expense Interest expense, net of interest income, was$11.9 million for the first nine months of 2020, compared with$16.3 million and primarily reflected lower average interest rates. Other income and expense was expense of$4.7 million for the first nine months of 2020, compared with expense of$3.5 million . Income Taxes The Company's effective income tax rate for the first nine months of 2020 was 17.9% compared with 16.7%. The first nine months of 2020 reflected$15.8 million in net discrete income tax benefits, which included a$15.2 million income tax benefit related to share-based accounting. The first nine months of 2019 reflected$17.8 million in net discrete income tax benefits, which included a$11.2 million income tax benefit related to share-based accounting. Excluding the net discrete income tax items in both periods, the effective tax rates would have been 22.7% for the first nine months of 2020 and 21.9% for the first nine months of 2019. Segment Results Segment results includes net sales and operating income by segment but excludes non-service retirement benefit income, equity income or loss, unusual non-recurring legal matter settlements, interest income and expense, gains and losses on the disposition of assets, sublease rental income and non-revenue licensing and royalty income, domestic and foreign income taxes and corporate office expenses. Corporate expense includes various administrative expenses relating to the corporate office and certain nonoperating expenses, including certain acquisition related transaction costs, not allocated to our segments. See Note 14 to these condensed consolidated financial statements for additional segment information. Instrumentation Third Quarter Nine Months (dollars in millions) 2020 2019 2020 2019 Net sales$ 263.5 $ 282.9 $ 811.7 $ 803.5 Cost of sales$ 147.0 $ 156.6 $ 452.3 $ 450.2 Selling, general and administrative expenses$ 65.8 $ 74.3 $ 209.4 $ 212.4 Operating income$ 50.7 $ 52.0 $ 150.0 $ 140.9 Cost of sales as a % of net sales 55.8 % 55.4 % 55.7 % 56.0 % Selling, general and administrative expenses % of net sales 25.0 % 26.2 % 25.8 % 26.5 % Operating income as a % of net sales 19.2 % 18.4 % 18.5 % 17.5 % Third quarter of 2020 compared with the third quarter of 2019 The Instrumentation segment's third quarter of 2020 net sales decreased 6.9%. Operating income for the third quarter of 2020 decreased 2.5%. The third quarter of 2020 net sales decrease resulted from lower sales of marine instrumentation, test and measurement instrumentation and environmental instrumentation. Sales of marine instrumentation decreased$12.9 million , sales of test and measurement instrumentation decreased$4.3 million and sales of environmental instrumentation decreased$2.2 million . Environmental instrumentation included$6.3 million in incremental sales from the 2019 acquisition of the gas and flame detection businesses. Test and measurement instrumentation included$3.1 million in sales from the 2020 acquisition ofOakGate . Operating income reflected the impact of lower sales, partially offset by improved product line margins. The operating income included in the results for the third quarter of 2020 from recent acquisitions was$1.2 million . The third quarter of 2020 cost of sales decreased$9.6 million , primarily as a result of lower sales. Cost of sales as a percentage of net sales for the third quarter of 2020 increased slightly to 55.8% from 55.4%. Third quarter 2020 selling, general and administrative expenses decreased$8.5 million , primarily as a result of lower sales. The selling, general and administrative expense percentage decreased to 25.0% in the third quarter of 2020 from 26.2%. 24
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First nine months of 2020 compared with the first nine months of 2019 The Instrumentation segment's first nine months 2020 net sales increased 1.0%. Operating income for the first nine months of 2020 increased of 6.5%. The first nine months of 2020 net sales increase resulted from higher sales of environmental instrumentation, partially offset by lower sales of marine instrumentation and test and measurement instrumentation. Sales of environmental instrumentation increased$27.6 million and sales of marine instrumentation decreased$10.3 million and sales of test and measurement instrumentation decreased$9.1 million . Environmental instrumentation included$53.9 million in incremental sales from the 2019 acquisition of the gas and flame detection businesses. Test and measurement instrumentation included$10.0 million in sales from the 2020 acquisition ofOakGate . The increase in operating income the first nine months of 2020 reflected the impact of higher sales and improved product line margins. The operating income included in the results for the first nine months of 2020 from recent acquisitions was$5.4 million . The first nine months of 2020 cost of sales increased by$2.1 million and primarily reflected the impact of higher sales. The cost of sales percentage decreased slightly to 55.7% from 56.0%. The first nine months of 2020 selling, general and administrative expenses decreased by$3.0 million and primarily reflected the impact lower research and development costs. The selling, general and administrative expense percentage decreased to 25.8% in the first nine months of 2020 from 26.5% and primarily reflected the impact lower research and development costs. Digital Imaging Third Quarter Nine Months (dollars in millions) 2020 2019 2020 2019 Net sales$ 239.7 $ 244.0 $ 724.0 $ 724.8 Cost of sales$ 139.0 $ 144.7 $ 420.3 $ 421.3 Selling, general and administrative expenses$ 55.2 $ 58.1 $ 167.6 $ 174.1 Operating income$ 45.5 $ 41.2 $ 136.1 $ 129.4 Cost of sales as a % of net sales 58.0 % 59.3 % 58.1 % 58.1 % Selling, general and administrative expenses % of net sales 23.0 % 23.8 % 23.1 % 24.0 % Operating income as a % of net sales 19.0 % 16.9 % 18.8 % 17.9 % Third quarter of 2020 compared with the third quarter of 2019 The Digital Imaging segment's third quarter of 2020 net sales decreased 1.8%. Operating income for the third quarter of 2020 increased 10.4%. The third 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, partially offset by greater sales of infrared detectors for defense applications, geospatial imaging systems and$2.3 million in incremental sales from a 2019 acquisition. The increase in operating income in the third quarter of 2020 primarily reflected favorable product mix. The third quarter of 2020 cost of sales decreased$5.7 million and primarily reflected the impact of lower sales. Cost of sales as a percentage of net sales for the third quarter of 2020 decreased to 58.0% from 59.3%. Third quarter 2020 selling, general and administrative expenses decreased$2.9 million and primarily reflected the impact of lower sales. The selling, general and administrative expense percentage decreased slightly to 23.0% in the third quarter of 2020 from 23.8%. First nine months of 2020 compared with the first nine months of 2019 The Digital Imaging segment's first nine months of 2020 net sales decreased 0.1%. Operating income for the first nine months of 2020 increased 5.2%. The first nine months of 2020 net sales primarily reflected of lower sales of X-ray products for dental and medical applications, due in part to deferred patient treatments, partially offset by greater sales of infrared detectors for defense applications, MEMS products, and$4.3 million in incremental sales from recent acquisitions. The increase in operating income in the first nine months of 2020 primarily reflected the impact of lower selling, general and administrative expenses. The first nine months of 2020 cost of sales decreased$1.0 million and reflected the impact of lower sales. The cost of sales percentage in 2020 remained at 58.1%. Selling, general and administrative expenses, including research and development expense, decreased to$167.6 million in the first nine months of 2020, from$174.1 million and reflected lower costs across most major selling, general and administrative expense categories. The selling, general and administrative expense percentage decreased slightly to 23.1% in the first nine months of 2020 from 24.0%. 25
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Aerospace and Defense Electronics
Third Quarter Nine Months
(dollars in millions) 2020 2019 2020 2019
Net sales $ 144.8 $ 177.1 $ 444.2 $ 519.7
Cost of sales $ 90.6 $ 105.2 $ 297.8 $ 308.6
Selling, general and administrative expenses $ 27.5 $ 32.4 $ 88.8 $ 100.5
Operating income $ 26.7 $ 39.5 $ 57.6 $ 110.6
Cost of sales as a % of net sales 62.6 % 59.4 % 67.0 % 59.4 %
Selling, general and administrative expenses
% of net sales 19.0 % 18.3 % 20.0 % 19.3 %
Operating income as a % of net sales 18.4 % 22.3 % 13.0 % 21.3 %
Third quarter of 2020 compared with the third quarter of 2019
The Aerospace and Defense Electronics segment's third quarter of 2020 net sales
decreased 18.2%. Operating income for the third quarter of 2020 decreased 32.4%.
The third quarter of 2020 net sales reflected $25.6 million of lower sales for
aerospace electronics and lower sales of $6.7 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 lower commercial space sales. The
decrease in operating income the third quarter of 2020 reflected impact of lower
sales.
The third quarter of 2020 cost of sales decreased $14.6 million and primarily
reflected the impact of lower sales. Cost of sales as a percentage of net sales
for the third quarter of 2020 increased to 62.6% from 59.4% and reflected impact
of product mix differences. Selling, general and administrative expenses,
including research and development expense, decreased to $27.5 million in the
third quarter of 2020 from $32.4 million and primarily reflected the impact of
lower sales. The selling, general and administrative expense percentage
increased slightly to 19.0% in the third quarter of 2020 from 18.3%.
First nine months of 2020 compared with the first nine months of 2019
The Aerospace and Defense Electronics segment's first nine months of 2020 net
sales decreased 14.5%. Operating income for the first nine months of 2020
decreased 47.9%.
The first nine months of 2020 net sales reflected $72.6 million of lower sales
for aerospace electronics and lower sales of $2.9 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 nine months of 2020 primarily reflected the
impact of lower sales and $12.6 million of higher severance, facility
consolidation and certain unfavorable changes in contract cost estimates.
The first nine months of 2020 cost of sales decreased by $10.8 million and
reflected the impact of lower sales. Cost of sales as a percentage of sales for
the first nine months of 2020 increased to 67.0% from 59.4% and reflected impact
of higher severance and facility consolidation costs. Selling, general and
administrative expenses, including research and development expense, decreased
to $88.8 million in the first nine months of 2020, compared with $100.5 million
for the first nine months of 2019 and primarily reflected the impact of lower
sales. The selling, general and administrative expense percentage increased
slightly to 20.0% in the first nine months of 2020, compared with 19.3%.
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Engineered Systems
Third Quarter Nine Months
(dollars in millions) 2020 2019 2020 2019
Net sales $ 101.0 $ 98.2 $ 297.0 $ 281.4
Cost of sales $ 81.9 $ 81.2 $ 241.3 $ 235.1
Selling, general and administrative expenses $ 6.6 $ 6.4 $ 21.0 $ 20.3
Operating income $ 12.5 $ 10.6 $ 34.7 $ 26.0
Cost of sales as a % of net sales 81.1 % 82.7 % 81.2 % 83.5 %
Selling, general and administrative expenses %
of net sales 6.5 % 6.5 % 7.1 % 7.3 %
Operating income as a % of net sales 12.4 % 10.8 % 11.7 % 9.2 %
Third quarter of 2020 compared with the third quarter of 2019
The Engineered Systems segment's third quarter of 2020 net sales increased 2.9%.
Operating income for the third quarter of 2020 increased 17.9%.
The third quarter of 2020 net sales reflected higher sales of $2.0 million of
engineered products and $1.5 million for turbine engines, partially offset by
lower sales of $0.7 million of energy systems. The higher sales of engineered
products and services primarily reflected increased sales from space, nuclear
and other manufacturing programs, as well as electronic manufacturing services
products. The increase in operating income in the third quarter of 2020
reflected the impact of higher sales and a greater mix of higher margin
fixed-price manufacturing programs.
The third quarter of 2020 cost of sales increased $0.7 million and reflected the
impact of higher sales. Cost of sales as a percentage of net sales for the third
quarter of 2020 decreased to 81.1% from 82.7%. Selling, general and
administrative expenses was $6.6 million for the third quarter of 2020 compared
with $6.4 million in 2019. The selling, general and administrative expense
percentage was 6.5% for the both the third quarter of 2020 and 2019.
First nine months of 2020 compared with the first nine months of 2019
The Engineered Systems segment's first nine months of 2020 net sales increased
5.5%. Operating income for the first nine months of 2020 increased 33.5%.
The first nine months of 2020 net sales reflected higher sales of $10.6 million
of engineered products and services and $6.7 for turbine engines, partially
offset by $1.7 million of lower sales of energy systems products. The higher
sales of engineered products and services primarily reflected increased sales
from marine, space, 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
nine months of 2020 reflected the impact of higher sales.
The first nine months of 2020 cost of sales increased by $6.2 million and
primarily reflected the impact of higher sales. Cost of sales as a percentage of
sales for the first nine months of 2020 decreased to 81.2% from 83.5%. Selling,
general and administrative expenses, including research and development expense,
increased to $21.0 million for the first nine months of 2020, compared with
$20.3 million for the first nine months of 2019 and primarily reflected the
impact of higher sales. The selling, general and administrative expense
percentage decreased slightly to 7.1% for the first nine months of 2020 compared
with 7.3%.
Financial Condition, Liquidity and Capital Resources
Our net cash provided by operating activities was $382.5 million for the first
nine months of 2020, compared with net cash provided by operating activities of
$314.2 million . The higher cash provided by operating activities in the first
nine months of 2020 reflected lower tax payments, improved accounts receivable
collections and cash flow from recent acquisitions, partially offset by higher
accounts payable and severance payments.
Our net cash used by investing activities was $80.9 million for the first nine
months of 2020, compared with net cash used by investing activities of $547.8
million . The 2020 and 2019 first nine months included $29.0 million and $483.7
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. On
August 1, 2019 , we acquired the gas and flame detection business for $230.0
million in cash. On August 30, 2019 , we acquired Micralyne Inc. for $25.0
million . Capital expenditures for the first nine months of 2020 and 2019 were
$52.0 million and $64.5 million , respectively. Our goodwill was $2,091.3 million
at September 27, 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 $408.8 million at
September 27, 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 completed 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 acquisitions made in 2019. The Company is in the process of specifically
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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 since there was insufficient time between the
acquisition dates and the end of the period to finalize the analysis. Financing
activities used cash of $45.9 million for the first nine months of 2020,
compared with cash provided by financing activities of $216.7 million . Proceeds
from the exercise of stock options were $29.5 million for the first nine months
of 2020 compared with $29.2 million for the first nine months of 2019.
Total debt at September 27, 2020 was $786.7 million . At September 27, 2020 ,
$125.0 million was outstanding under the $750.0 million credit facility. At
September 27, 2020 , Teledyne had $26.4 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 $614.7
million at September 27, 2020 . The credit agreements require the Company to
comply with various financial and operating covenants and at September 27, 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 $52.0 million has been
spent in the first nine 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 September 27, 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 September 27, 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
1.38 to 1
Consolidated Interest Coverage Ratio (EBITDA/Interest) (b) No less than 3.0 to 1
36.4 to 1
Requirement Actual Measure
Consolidated Leverage Ratio (Net Debt/EBITDA) (a) No more than 3.25 to 1
1.38 to 1
Consolidated Interest Coverage Ratio (EBITDA/Interest) (b) No less than 3.0 to 1
36.4 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 atSeptember 27, 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$14.8 million . A hypothetical 10 percent price change in theU.S. dollar from its value atSeptember 27, 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$0.3 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 ofSeptember 27, 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 atSeptember 27, 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$29.9 million . A hypothetical 10 percent increase in theU.S. interest rates atSeptember 27, 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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