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TELEDYNE TECHNOLOGIES INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
Teledyne Technologies Incorporated provides enabling technologies for industrial
growth markets. We have evolved from a company that was primarily focused on
aerospace and defense to one that serves multiple markets that require advanced
technology and high reliability. These markets include deepwater oil and gas
exploration and production, oceanographic research, air and water quality
environmental monitoring, factory automation and medical imaging. Our products
include monitoring instrumentation for marine and environmental applications,
harsh environment interconnects, electronic test and measurement equipment,
digital imaging sensors and cameras, aircraft information management systems,
and defense electronic and satellite communication subsystems. We also supply
engineered systems for defense, space, environmental and energy applications. We
differentiate ourselves from many of our direct competitors by having a customer
and company sponsored applied research center that augments our product
development expertise.
Strategy/Overview
Our strategy continues to emphasize growth in our core markets of
instrumentation, digital imaging, aerospace and defense electronics and
engineered systems. Our core markets are characterized by high barriers to entry
and include specialized products and services not likely to be commoditized. We
intend to strengthen and expand our core businesses with targeted acquisitions
and through product development. We aggressively pursue operational excellence
to continually improve our margins and earnings. At Teledyne, operational
excellence includes the rapid integration of the businesses we acquire. Using
complementary technology across our businesses and internal research and
development, we seek to create new products to grow our company and expand our
addressable markets. We continue to evaluate our businesses to ensure that they
are aligned with our strategy.
Consistent with this strategy, we made five acquisitions in 2012 and three
acquisitions in 2011, as well as one significant divestiture in 2011. Our
largest acquisition in 2012, LeCroy Corporation ("LeCroy"), broadened our
portfolio of analytical instrumentation with the addition of electronic test and
measurement solutions. We acquired VariSystems Inc. ("VariSystems") to expand
our portfolio of rugged interconnect solutions. We acquired BlueView
Technologies, Inc. ("BlueView") principally to increase our instrumentation
content on AUVs and ROVs used in oil and gas and marine survey applications.
Through the acquisition of a majority interest in the parent company of Optech
Incorporated ("Optech"), we added 3D imaging capability to our portfolio of
visible, X-ray and ultraviolet sensors, cameras, Optech's bathymetric LIDAR
systems used for coastal mapping and shallow water profiling also complement our
marine survey sensors and systems. The acquisition of the parent company of PDM
Neptec Limited ("PDM Neptec") expanded our line of harsh environmental marine
connectors. In 2011, we focused on the expansion of our digital imaging
capabilities first with the acquisition of DALSA Corporation ("DALSA"), followed
by the acquisitions of a majority interest in Nova Sensors, Inc. ("Nova
Sensors") and a minority interest investment in Optech. In
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April 2011, we completed the sale of our general aviation piston engine
businesses and consequently classified our Aerospace Engines and Components
segment as a discontinued operation.
Given the strength of our commercial businesses, as well as our strategic
acquisitions, we were able to achieve record sales and earnings in 2012. In
2012, sales and net income from continuing operations increased by 9.5% and
13.9%, respectively over 2011 results. Earnings per share from continuing
operations in 2012 increased 13.6% over 2011. In 2012, sales totaled
$2,127.3 million, compared with sales of $1,941.9 million in 2011. Net income
for 2012, excluding our discontinued operations, was $161.8 million or $4.33 per
diluted share, compared with $142.1 million or $3.81 per diluted share in 2011.
The increase in revenue included incremental sales from acquisitions of $180.7
million. Our 2012 net income including discontinued operations totaled
$164.1 million or $4.39 per diluted share, compared to $255.2 million or $6.84
per diluted share in 2011. In addition, each business segment experienced higher
operating profit growth except for the Aerospace and Defense Electronics
segment. The operating profit decrease for the Aerospace and Defense Electronics
segment primarily reflected the impact of lower sales, as well as $1.7 million
of severance and relocation costs, within certain electronic manufacturing
service products businesses.
With the recent acquisition of LeCroy in 2012 and DALSA in 2011, as well as
growth in our commercial markets, our business mix has continued to change, and
for 2012, Teledyne's sales were approximately 68% to commercial customers and
32% to the U.S. Government. This has changed from about 56% commercial and 44%
government in 2010. Our international sales also increased to 39% of total sales
in 2012, compared to 29% in 2010. We have worked to transform our product
portfolio into that of a high technology industrial company that is less
dependent on U.S. Government business.
Recent Acquisitions
The Company spent $389.2 million, $366.7 million and $67.9 million on
acquisitions in 2012, 2011 and 2010, respectively.
On August 3, 2012, Teledyne acquired the stock of LeCroy for $301.3 million, net
of cash acquired. LeCroy, headquartered in Chestnut Ridge, New York is a leading
supplier of oscilloscopes, protocol analyzers and signal integrity test
solutions. LeCroy had sales of $178.1 million for its fiscal year ended June 30,
2011 and is part of the Instrumentation segment.
Also on August 3, 2012, a subsidiary of Teledyne acquired the parent company of
PDM Neptec for $7.4 million in cash, net of cash acquired. PDM Neptec, located
in Hampshire, United Kingdom, is part of the Instrumentation segment and
operates as Teledyne Impulse-PDM Ltd. PDM Neptec had sales of GBP 5.5 million
for its fiscal year ended March 31, 2012.
On July 2, 2012, a subsidiary of Teledyne acquired BlueView for $16.3 million in
cash, net of cash acquired. BlueView, located in Seattle, Washington, is part of
the Instrumentation segment and operates as Teledyne BlueView, Inc. BlueView had
sales of $7.1 million for its fiscal year ended December 31, 2011.
On April 2, 2012, Teledyne acquired a majority interest in the parent company of
Optech for $27.9 million, net of cash acquired. The purchase increased
Teledyne's ownership percentage to 51 percent from the original 19 percent
interest purchased in the first quarter of 2011. With the April 2012 purchase,
we now consolidate Optech's financial results into Teledyne's results with an
appropriate adjustment for the minority ownership. Optech had sales of CAD $54.7
million for its fiscal year ended March 30, 2012 and is reported as part of the
Digital Imaging segment.
On February 25, 2012, Teledyne acquired VariSystems for $34.9 million, net of
cash acquired. Teledyne paid a $1.4 million purchase price adjustment in the
second quarter of 2012. VariSystems, headquartered in Calgary, Alberta, Canada,
is a leading supplier of custom harsh environment interconnects used in energy
exploration and production. VariSystems had sales of CAD $27.5 million for its
fiscal year ended May 31, 2011 and is part of the Aerospace and Defense
Electronics segment.
In 2011, the Company acquired the stock of DALSA for an aggregate purchase price
of $339.5 million in cash. DALSA designs and manufactures digital imaging
products, primarily consisting of high performance sensors, cameras and software
for use in industrial, scientific, medical and professional applications
products, as well as specialty semiconductors and micro electro mechanical
systems ("MEMS"). In addition to the acquisition of DALSA in 2011, the Company
completed the acquisition of a majority interest in Nova Sensors for total
consideration of $5.1 million in cash and a minority interest in Optech for
$18.9 million. Nova Sensors produces compact short-wave and mid-wave infrared
cameras and operates within the Digital Imaging segment. Optech is a laser-based
survey and digital imaging company. We also bought the remaining minority
interest in Energy Systems for $3.2 million in 2011.
In 2010, Teledyne acquired Intelek plc ("Intelek") for $43.5 million in cash.
Intelek primarily designs and manufactures electronic systems for satellite and
microwave communications and aerospace manufacturing. In 2010, Teledyne also
acquired Optimum Optical Systems Inc. ("Optimum"), a designer and manufacturer
of custom optics and optomechanical assemblies and Hafmynd ehf. ("Gavia"), a
designer and manufacturer of the Gavia™ autonomous underwater vehicle. See Note
3 to our Consolidated Financial Statements for additional information about our
recent acquisitions. See also Note 17 to our Consolidated Financial Statements
for information about our fiscal year 2013 pending acquisition of RESON A/S
("RESON").
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Our fiscal year is determined based on a 52- or 53-week convention ending on the
Sunday nearest to December 31. Fiscal years 2012, 2011 and 2010 each contained
52 weeks. The following is our financial information for 2012, 2011 and 2010 (in
millions, except per-share amounts):
2012 2011 2010
Sales $ 2,127.3 $ 1,941.9 $ 1,644.2
Costs and Expenses
Cost of sales 1,379.1 1,290.7 1,148.1
Selling, general and administrative expenses 505.1 424.0 317.6
Total costs and expenses 1,884.2 1,714.7 1,465.7
Income before other income and expense and income
taxes 243.1 227.2 178.5
Interest and debt expense, net (17.8 ) (16.2 ) (6.5 )
Other income, net 2.9 0.6 1.6
Income from continuing operations before income
taxes 228.2 211.6 173.6
Provision for income taxes(a) 65.4 69.5 53.6
Net income from continuing operations including
noncontrolling interest 162.8 142.1 120.0
Discontinued operations, net of income taxes 2.3 113.1 0.6
Net income 165.1 255.2 120.6
Less: net income attributable to noncontrolling
interest (1.0 ) - (0.1 )
Net income attributable to Teledyne $ 164.1 $ 255.2 $ 120.5
Net income from continuing operations including
noncontrolling interest $ 162.8 $ 142.1 $ 120.0
Less: net income attributable to noncontrolling
interest (1.0 ) - (0.1 )
Net income from continuing operations 161.8 142.1 119.9
Discontinued operations, net of income taxes 2.3 113.1 0.6
Net income attributable to Teledyne $ 164.1 $ 255.2 $ 120.5
Basic earnings per common share:
Continuing operations $ 4.41 $ 3.88 $ 3.31
Discontinued operations 0.06 3.09 0.02
Basic earnings per common share: $ 4.47 $ 6.97 $ 3.33
Diluted earnings per common share:
Continuing operations $ 4.33 $ 3.81 $ 3.25
Discontinued operations 0.06 3.03 0.02
Diluted earnings per common share $ 4.39 $ 6.84 $ 3.27
(a) Fiscal years 2012, 2011 and 2010 include net tax benefits of $5.4 million, $2.4 million and
$12.5 million, respectively.
Our businesses are divided into four business segments: Instrumentation, Digital
Imaging, Aerospace and Defense Electronics and Engineered Systems. Our four
business segments and their respective percentage contributions to our total
sales in 2012, 2011 and 2010 are summarized in the following table:
Percentage of Sales
Segment 2012 2011 2010
Instrumentation 35 % 32 % 35 %
Digital Imaging 20 18 8
Aerospace and Defense Electronics 31 34 37
Engineered Systems 14 16 20
100 % 100 % 100 %
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Results of Operations
2012 Compared with 2011
%
Sales 2012 2011 Change
(in millions)
Instrumentation $ 749.4 $ 616.6 21.5 %
Digital Imaging 415.9 349.9 18.9 %
Aerospace and Defense Electronics 660.6 670.8 (1.5 )%
Engineered Systems 301.4 304.6 (1.1 )%
Total sales $ 2,127.3 $ 1,941.9 9.5 %
%
Operating profit and other segment income 2012 2011 Change
(in millions)
Instrumentation $ 136.2 $ 122.8 10.9 %
Digital Imaging 24.8 16.1 54.0 %
Aerospace and Defense Electronics 90.3 93.9 (3.8 )%
Engineered Systems 28.5 28.1 1.4 %
Segment operating profit and other segment income 279.8 260.9 7.2 %
Corporate expense (36.7 ) (33.7 ) 8.9 %
Interest and debt expense, net (17.8 ) (16.2 ) 9.9 %
Other income, net 2.9 0.6 *
Income from continuing operations before income taxes 228.2
211.6 7.8 %
Provision for income taxes(a) 65.4 69.5 (5.9 )%
Net income from continuing operations including
noncontrolling interest 162.8 142.1 14.6 %
Discontinued operations, net of income taxes 2.3 113.1 *
Net income 165.1 255.2 (35.3 )%
Less: net income attributable to noncontrolling interest (1.0 ) - *
Net income attributable to Teledyne $ 164.1 $ 255.2 (35.7 )%
* not meaningful
(a) Fiscal years 2012 and 2011 include net tax benefits of $5.4 million and $2.4 million,
respectively, primarily related to the remeasurement of uncertain tax positions and an
expiration of the statute of limitations in the United States.
We reported 2012 sales of $2,127.3 million, compared with sales of $1,941.9
million for 2011, an increase of 9.5%. Net income from continuing operations was
$161.8 million ($4.33 per diluted share) for 2012, compared with net income from
continuing operations of $142.1 million ($3.81 per diluted share) for 2011, an
increase of 13.9%. Net income for 2012 and 2011 also included net tax credits
of $5.4 million and $2.4 million, respectively. Net income attributable to
Teledyne, including discontinued operations, was $164.1 million ($4.39 per
diluted share) for 2012, compared with $255.2 million ($6.84 per diluted share)
for 2011. On April 19, 2011, Teledyne completed the sale of its piston engines
businesses and recorded a gain on the sale of $113.8 million.
The increase in sales in 2012, compared with 2011, reflected substantially
higher sales in both the Instrumentation and Digital Imaging segments, partially
offset by slightly lower sales in both the Engineered Systems and Aerospace and
Defense Electronics segments. Sales in the Instrumentation segment reflected
$80.8 million from the acquisition of LeCroy, as well as, higher sales of both
marine and environmental instrumentation products. Sales of marine products
increased by $45.6 million or 12.2% and included incremental sales of
$8.0 million from the acquisitions of PDM and BlueView. The increase in the
Digital Imaging segment reflected $66.9 million in incremental revenue from
recent acquisitions, primarily Optech, Nova Sensors and DALSA. Sales in the
Aerospace and Defense Electronics segment reflected lower sales for electronic
manufacturing service products partially offset by higher sales of $12.4 million
from avionics products and electronic relays, as well as greater sales of $15.3
million from microwave devices and interconnects. Microwave devices and
interconnects sales in 2012 included $25.0 million in revenue from the February
2012 acquisition of VariSystems. The decrease in the Engineered Systems segment
revenue reflected lower sales of space and defense programs as well as nuclear
programs, partially offset by higher sales of energy systems and turbine
engines.
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The incremental increase in revenue in 2012 from businesses acquired in 2012 and
in 2011 was $180.7 million.
The increase in segment operating profit and other segment income for 2012,
compared with 2011, reflected improved results in each operating segment except
for the Aerospace and Defense Electronics segment. The increase in operating
profit primarily reflected the impact of acquisitions. The increase in operating
profit also reflected the impact of higher sales for the Instrumentation
segment. The decrease in operating profit in the Aerospace and Defense
Electronics segment reflected the impact of lower sales, reduced margins, as
well as $1.7 million of severance and relocation costs, within certain
electronic manufacturing service products businesses. Operating profit included
incremental operating profit from acquisitions of $9.4 million, which included
acquisition expenses of $7.1 million and intangible amortization of
$5.3 million. LIFO income was less than $0.1 million in 2012 compared with LIFO
expense of $0.9 million in 2011.
The table below presents sales and cost of sales by segment and total company:
(Dollars in millions) 2012 2011 Change
Instrumentation
Sales $ 749.4 $ 616.6 $ 132.8
Cost of sales $ 422.3 $ 354.2 $ 68.1
Cost of sales % of sales 56.4 % 57.4 %
Digital Imaging
Sales $ 415.9 $ 349.9 $ 66.0
Cost of sales $ 266.9 $ 231.5 $ 35.4
Cost of sales % of sales 64.2 % 66.2 %
Aerospace and Defense Electronics
Sales $ 660.6 $ 670.8 $ (10.2 )
Cost of sales $ 442.6 $ 458.0 $ (15.4 )
Cost of sales % of sales 67.0 % 68.3 %
Engineered Systems
Sales $ 301.4 $ 304.6 $ (3.2 )
Cost of sales $ 247.3 $ 247.0 $ 0.3
Cost of sales % of sales 82.1 % 81.1 %
Total Company
Sales $ 2,127.3 $ 1,941.9 $ 185.4
Cost of sales $ 1,379.1 $ 1,290.7 $ 88.4
Cost of sales % of sales 64.8 % 66.5 %
Consolidated cost of sales in total dollars increased by $88.4 million in 2012,
compared with 2011, and primarily reflected $94.2 million in cost of sales from
recent acquisitions and organic sales increases, partially offset by sales mix
differences. Cost of sales from recent acquisitions totaled $37.7 million for
the Instrumentation segment, $39.9 million for the Digital Imaging segment and
$16.6 million for the Aerospace and Defense Electronics segment. The
Instrumentation segment cost of sales increase reflected the impact of higher
organic sales. The Aerospace and Defense Electronics segment reflected the
impact of lower organic sales. Cost of sales as a percentage of sales for 2012
was 64.8%, compared with 66.5% for 2011. The lower cost of sales percentage
reflected the impact of the LeCroy and DALSA cost structure which has a lower
cost of sales percentage than the overall Teledyne cost of sales percentage.
Excluding the impact of recent acquisitions, cost of sales as a percentage of
sales for 2012 would have been 66.7%.
Selling, general and administrative expenses, including research and development
and bid and proposal expense, in total dollars were higher in 2012 compared with
2011. The increase reflected the impact of higher sales, higher acquired
intangible asset amortization of $3.7 million and higher research and
development costs of $28.8 million. Corporate administrative expense in 2012 was
higher by $3.0 million compared with 2011 and reflected higher employee
compensation and professional fee expenses. For 2012, we recorded a total of
$8.0 million in stock option expense, of which $2.4 million was recorded as
corporate expense and $5.6 million was recorded in segment results. For 2011, we
recorded a total of $5.8 million in stock option expense, of which $2.1 million
was recorded as corporate expense and $3.7 million was recorded in segment
results. Selling, general and administrative expenses for 2012, as a percentage
of sales, increased to 23.7%, compared with 21.8% for 2011 and reflected the
impact of acquisition related expenses, higher research and development costs
and the LeCroy and DALSA cost structures which have a higher selling, general
and
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administrative expense percentage than the overall Teledyne selling, general and
administrative expense percentage.
Included in operating profit in 2012 was domestic pension expense of
$6.6 million. In accordance with U.S. Government Cost Accounting Standards
("CAS"), $12.7 million was recoverable from certain government contracts.
Included in operating profit in 2011 was domestic pension expense of
$6.7 million. In accordance with CAS, $12.6 million was recoverable from certain
government contracts. Pension expense determined under CAS can generally be
recovered through the pricing of products and services sold to the
U.S. Government.
The Company's effective tax rate for 2012 was 28.7%, compared with 32.9% for
2011. The decrease reflected a remeasurement of uncertain tax positions in 2012,
as well as a change in the proportion of domestic and international income.
Fiscal year 2012 included tax benefits of $5.4 million primarily related to the
remeasurement of uncertain tax positions and an expiration of the statute of
limitations in the United States. Fiscal year 2011 included tax benefits of $2.4
million related to research and development tax credits. Excluding the impact of
the $5.4 million for 2012 and $2.4 million for 2011 the effective tax rates
would have been 31.0% for 2012, compared with 34.0% for 2011.
During the next twelve months, it is reasonably possible that tax audit
resolutions and expirations of the statutes of limitations could reduce
unrecognized tax benefits by $13.7 million, either because our tax positions are
sustained on audit, because the Company agrees to their disallowance, or because
of the expiration of the statutes of limitations. Of the $13.7 million, $0.4
million would not impact tax expense as it would be offset by the reversal of
deferred tax assets.
Sales under contracts with the U.S. Government were approximately 32% of sales
in 2012 and 36% of sales in 2011. Sales to international customers represented
approximately 39% of sales in 2012 and 36% of sales in 2011.
Total interest expense, including credit facility fees and other bank charges,
was $18.2 million in 2012 and $16.7 million in 2011. Interest income was
$0.4 million in 2012 and $0.5 million in 2011. The increase in interest expense
primarily reflected the impact of higher outstanding debt levels partially
offset by lower overall average interest rates.
Other income and expense in 2012 included foreign currency translation gains of
$0.8 million, compared with $2.0 million for 2011 and a $0.6 million gain on the
purchase of the majority interest in Optech. Other income and expense in 2011
also included $2.3 million related to the reduction of an environmental reserve
determined to be no longer needed and a $4.5 million pretax charge to write off
a minority investment in a private company.
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2011 Compared with 2010
%
Sales 2011 2010 Change
(in millions)
Instrumentation $ 616.6 $ 573.2 7.6 %
Digital Imaging 349.9 122.5 185.6 %
Aerospace and Defense Electronics 670.8 614.7 9.1 %
Engineered Systems 304.6 333.8 (8.7 )%
Total sales $ 1,941.9 $ 1,644.2 18.1 %
%
Operating profit and other segment income 2011 2010 Change
(in millions)
Instrumentation $ 122.8 $ 113.9 7.8 %
Digital Imaging 16.1 5.2 209.6 %
Aerospace and Defense Electronics 93.9 57.8 62.5 %
Engineered Systems 28.1 30.4 (7.6 )%
Segment operating profit and other segment income 260.9 207.3 25.9 %
Corporate expense (33.7 ) (28.8 ) 17.0 %
Interest and debt expense, net (16.2 ) (6.5 ) 149.2 %
Other income, net 0.6 1.6 (62.5 )%
Income from continuing operations before income taxes 211.6 173.6 21.9 %
Provision for income taxes(a) 69.5 53.6 29.7 %
Net income from continuing operations including
noncontrolling interest 142.1 120.0 18.4 %
Discontinued operations, net of income taxes 113.1 0.6 *
Net income 255.2 120.6 111.6 %
Less: Net income attributable to noncontrolling interest - (0.1 ) *
Net income attributable to Teledyne $ 255.2 $ 120.5 111.8 %
* not meaningful
(a) Fiscal years 2011 and 2010 include net tax benefits of $2.4 million and $12.5 million,
respectively.
We reported 2011 sales of $1,941.9 million, compared with sales of
$1,644.2 million for 2010, an increase of 18.1%. Net income attributable to
Teledyne was $255.2 million ($6.84 per diluted share) for 2011, compared with
$120.5 million ($3.27 per diluted share) for 2010, an increase of 111.8%. Net
income attributable to Teledyne, excluding discontinued operations, was
$142.1 million ($3.81 per diluted share) for 2011, compared with $119.9 million
($3.25 per diluted share) for 2010, an increase of 18.4%.
The increase in sales in 2011, compared with 2010, reflected higher sales in
each business segment except the Engineered Systems segment. Sales in the
Instrumentation segment reflected higher sales of marine and environmental
instrumentation products by over 5% and 10%, respectively. Sales of marine
products included incremental sales of $3.7 million from the 2010 acquisition of
Gavia. Sales in the Aerospace and Defense Electronics segment reflected higher
sales of microwave devices and interconnects, as well as, incremental sales of
$25.7 million from the 2010 acquisition of Intelek. The increase in the Digital
Imaging segment included $214.0 million in revenue from recent acquisitions,
primarily the February 2011 acquisition of DALSA, as well as higher organic
sales. The decrease in the Engineered Systems segment revenue reflected lower
sales of missile defense engineering services, lower sales from NASA programs,
lower sales of gas centrifuge service modules and lower sales related to the
Joint Air-to-Surface Standoff Missile ("JASSM") turbine engine program partially
offset by incremental sales of $6.2 million from a recent acquisition. The
incremental increase in revenue in 2011 from businesses acquired in 2011 and in
2010 was $249.6 million.
The increase in segment operating profit and other segment income for 2011,
compared with 2010, reflected improved results in each operating segment except
for the Engineered Systems segment. The increase in operating profit reflected
the impact of acquisitions as well as improved margins in each operating
segment. The increase in operating profit in the Instrumentation segment,
Aerospace and Defense Electronics segment and the Digital Imaging segment
reflected the impact of higher sales. Operating profit in the Aerospace and
Defense Electronics segment in 2010 reflected charges of $8.2 million, primarily
to correct inventory valuations incorrectly recorded in previous periods at a
business
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unit. The decrease in operating profit in the Engineered Systems segment
reflected the impact of lower sales, partially offset by lower pension expense
and higher margins. Operating profit included incremental operating profit from
acquisitions of $18.6 million, which included acquisition expenses of
$2.0 million and intangible amortization of $10.3 million. Segment operating
profit in 2011 also reflected LIFO expense of $0.9 million compared with LIFO
expense of $0.8 million in 2010.
The table below presents sales and cost of sales by segment and total company:
(Dollars in millions) 2011 2010 Change
Instrumentation
Sales $ 616.6 $ 573.2 $ 43.4
Cost of sales $ 354.2 $ 332.4 $ 21.8
Cost of sales % of sales 57.4 % 58.0 %
Digital Imaging
Sales $ 349.9 $ 122.5 $ 227.4
Cost of sales $ 231.5 $ 91.3 $ 140.2
Cost of sales % of sales 66.2 % 74.5 %
Aerospace and Defense Electronics
Sales $ 670.8 $ 614.7 $ 56.1
Cost of sales $ 458.0 $ 451.9 $ 6.1
Cost of sales % of sales 68.3 % 73.5 %
Engineered Systems
Sales $ 304.6 $ 333.8 $ (29.2 )
Cost of sales $ 247.0 $ 272.5 $ (25.5 )
Cost of sales % of sales 81.1 % 81.6 %
Total Company
Sales $ 1,941.9 $ 1,644.2 $ 297.7
Cost of sales $ 1,290.7 $ 1,148.1 $ 142.6
Cost of sales % of sales 66.5 % 69.8 %
Consolidated cost of sales in total dollars increased by $142.6 million in 2011,
compared with 2010, and primarily reflected $123.5 million in cost of sales from
the DALSA acquisition which is included in the Digital Imaging segment and the
impact of higher sales primarily in the Instrumentation and Aerospace and
Defense Electronics segments and lower sales in the Engineered Systems segment.
Also, cost of sales in 2010 included an $8.2 million inventory write-down in the
Aerospace and Defense Electronics segment. Cost of sales as a percentage of
sales for 2011 was 66.5%, compared with 69.8% for 2010. The lower cost of sales
percentage reflected the impact of the DALSA cost structure which has a lower
cost of sales percentage than the overall Teledyne cost of sales percentage and
other sales mix changes as well as cost reductions partially offset by the
impact of the $8.2 million inventory write-down. Excluding the impact of the
DALSA acquisition, cost of sales as a percentage of sales for 2011 would have
been 67.3%. The remaining 2.5% decrease in the cost of sales percentage was
primarily the result of a lower cost of sales percentage for the Aerospace and
Defense Electronics segment due to cost reductions, product mix and lower
pension expense.
Selling, general and administrative expenses, including research and development
and bid and proposal expense, in total dollars were higher in 2011 compared with
2010. The increase reflected the impact of higher sales, higher acquired
intangible asset amortization of $9.7 million and higher research and
development costs of $41.4 million. Corporate administrative expense in 2011 was
higher by $4.9 million compared with 2010 and reflected higher employee
compensation and professional fee expenses. For 2011, we recorded a total of
$5.8 million in stock option expense, of which $2.1 million was recorded as
corporate expense and $3.7 million was recorded in segment results. For 2010, we
recorded a total of $4.7 million in stock option expense, of which $1.7 million
was recorded as corporate expense and $3.0 million was recorded in segment
results. Selling, general and administrative expenses for 2011, as a percentage
of sales, increased to 21.8%, compared with 19.3% for 2010 and reflected the
impact of acquisition related expenses, higher research and development costs
and the DALSA cost structure which has a higher selling, general and
administrative expense percentage than the overall Teledyne selling, general and
administrative expense percentage.
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Included in operating profit in 2011 was domestic pension expense of
$6.7 million. In accordance with CAS, $12.6 million was recoverable from certain
government contracts. Included in operating profit in 2010 was domestic pension
expense of $4.8 million. In accordance with CAS, $9.6 million was recoverable
from certain government contracts.
The Company's effective tax rate for 2011 was 32.9%, compared with 30.9% for
2010. Fiscal years 2011 and 2010 included net tax credits of $2.4 million and
$12.5 million, respectively, which were primarily research and development tax
credits. Excluding the net tax credits, the effective tax rates for 2011 and
2010, would have been 34.0% and 38.1%, respectively.
Sales under contracts with the U.S. Government were approximately 36% of sales
in 2011 and 44% of sales in 2010. Sales to international customers represented
approximately 36% of sales in 2011 and 29% of sales in 2010.
Total interest expense, including credit facility fees and other bank charges,
was $16.7 million in 2011 and $6.9 million in 2010. Interest income was
$0.5 million in 2011 and $0.4 million in 2010. The increase in interest expense
primarily reflected the impact of higher outstanding debt levels and higher
overall average interest rates from our new credit facility and our senior
notes.
Other income in 2011 included income of $2.3 million related to the reduction of
an environmental reserve determined to be no longer needed and a $4.5 million
pretax charge to write off the Company's minority investment in a private
company. Other income in 2011 and in 2010 each included an insurance benefit of
$1.0 million.
Segments
The following discussion of our four segments should be read in conjunction with
Note 13 to the Notes to Consolidated Financial Statements.
Instrumentation
(Dollars in millions) 2012 2011 2010
Sales $ 749.4 $ 616.6 $ 573.2
Cost of sales $ 422.3 $ 354.2 $ 332.4
Selling, general and administrative expenses $ 190.9 $ 139.6 $ 126.9
Operating profit $ 136.2 $ 122.8 $ 113.9
Cost of sales % of sales 56.4 % 57.4 % 58.0 %
Selling, general and administrative expenses % of sales 25.4 % 22.7 % 22.1 %
Operating profit % of sales 18.2 % 19.9 % 19.9 %
International sales % of sales 56.0 % 52.4 % 52.3 %
Governmental sales % of sales 5.3 % 6.3 % 6.2 %
Capital expenditures $ 13.2 $ 8.9 $ 6.4
Our Instrumentation segment provides monitoring and control instruments for
marine, environmental, industrial and other applications, as well as electronic
test and measurement equipment. We also provide power and communications
connectivity devices for distributed instrumentation systems and sensor networks
deployed in mission critical, harsh environments.
2012 compared with 2011
Our Instrumentation segment sales were $749.4 million in 2012, compared with
sales of $616.6 million in 2011, an increase of 21.5%. Operating profit was
$136.2 million in 2012, compared with $122.8 million in 2011, an increase of
10.9%.
The 2012 sales change resulted primarily from higher sales of marine
instrumentation, test and measurement instrumentation, and environmental
instrumentation. The higher sales of $45.6 million for marine instrumentation
products reflected increased sales of interconnect systems used in offshore
energy production and also included a total of $8.0 million in revenue from the
acquisitions of PDM Neptec and BlueView. Increased sales of $80.8 million for
test and measurement instrumentation resulted from the acquisition of LeCroy.
The increase in sales of $6.4 million for environmental instrumentation
primarily reflected higher domestic sales of air quality monitoring
instrumentation products. The increase in operating profit reflected the impact
of higher sales, greater margins for marine instrumentation, partially offset by
$6.4 million in acquisition expenses and $2.8 million in additional intangible
asset amortization related to the LeCroy, PDM Neptec and BlueView transactions.
The incremental operating profit included in the results for 2012 from recent
acquisitions was $1.4 million. Cost of sales in total dollars increased by $68.1
million in 2012, compared with 2011, and reflected the impact of higher sales
and product mix differences. The decrease in the cost of sales percentage
primarily reflected the impact of the LeCroy acquisition products which carry a
lower cost of sales percentage than the average for other products, partially
offset by product mix differences. Segment operating profit in 2012 also
reflected LIFO income of $0.3 million compared with LIFO expense of $0.5 million
in 2011. Selling, general and administrative expenses for 2012, as a percentage
of sales, increased to 25.4%, compared with
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22.6% for 2011 and reflected the impact of acquisition related expenses, higher
research and development costs and the LeCroy cost structure which has a higher
selling, general and administrative expense percentage than other
instrumentation businesses.
2011 compared with 2010
Our Instrumentation segment sales were $616.6 million in 2011, compared with
sales of $573.2 million in 2010, an increase of 7.6%. Operating profit was
$122.8 million in 2011, compared with $113.9 million in 2010, an increase of
7.8%.
The 2011 sales change resulted primarily from $24.0 million in higher sales of
environmental instrumentation products and $19.4 million in higher sales of
marine instrumentation products. The higher sales for environmental
instrumentation reflected improvement for substantially all product offerings.
The higher sales for marine instrumentation reflected increased sales of marine
interconnect systems, partially offset by reduced sales of geophysical sensors
for the energy exploration market. The higher sales for marine instrumentation
also included $3.7 million from a recent acquisition. The increase in operating
profit reflected the impact of higher sales. Segment operating profit in 2011
also reflected LIFO expense of $0.5 million compared with LIFO expense of
$0.2 million in 2010. Cost of sales in total dollars increased by $21.8 million
in 2011, compared with 2010, and primarily reflected the increase in sales.
Operating profit as a percentage of sales was 19.9% for both 2011 and 2010 and
reflected a slightly lower cost of sales percentage due to mix, offset by a
slightly higher selling, general and administrative percentage due to increased
research and development expenses.
Digital Imaging
(Dollars in millions) 2012 2011 2010
Sales $ 415.9 $ 349.9 $ 122.5
Cost of sales $ 266.9 $ 231.5 $ 91.3
Selling, general and administrative expenses $ 124.2 $ 102.3 $ 26.0
Operating profit $ 24.8 $ 16.1 $ 5.2
Cost of sales % of sales 64.2 % 66.2 % 74.5 %
Selling, general and administrative expenses % of sales 29.8 % 29.2 % 21.3 %
Operating profit % of sales 6.0 % 4.6 % 4.2 %
International sales % of sales 46.1 % 47.1 % 7.1 %
Governmental sales % of sales 31.0 % 31.5 % 76.2 %
Capital expenditures $ 23.5 $ 13.8 $ 11.3
Our Digital Imaging segment includes high performance sensors, cameras and
systems, within the visible, infrared and X-ray spectra for use in industrial,
government and medical applications, as well as MEMS. It also includes our
sponsored and centralized research laboratories benefiting government programs
and businesses.
2012 compared with 2011
Our Digital Imaging segment sales were $415.9 million in 2012, compared with
sales of $349.9 million in 2011, an increase of 18.9%. Operating profit was
$24.8 million in 2012, compared with $16.1 million in 2011, an increase of
54.0%. The 2012 sales increase included $66.9 million in incremental revenue
from the acquisitions of DALSA, Nova Sensors and Optech. The 2012 sales also
reflected increased sales of infrared imaging sensors and optics, offset by
lower sales of funded research activities. The increase in operating profit was
impacted by the absence of purchase accounting adjustments that were incurred in
2011 for the DALSA acquisition and product mix differences. The incremental
operating profit for 2012 from recent acquisitions was $6.2 million. Operating
profit in 2011 included $2.6 million of inventory purchase accounting charges
resulting from the February 2011 acquisition of DALSA.
Cost of sales in total dollars increased by $35.4 million, compared with 2011,
and primarily reflected the impact of higher sales, offset by the absence in
2012 of the inventory purchase accounting charges for DALSA made in 2011. The
lower cost of sales percentage in 2012 reflected the results of the Optech
acquisition, which carries a lower cost of sales percentage, as well as the
absence of inventory purchase accounting charges for DALSA in 2011.
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2011 compared with 2010
Our Digital Imaging segment sales were $349.9 million in 2011, compared with
sales of $122.5 million in 2010, an increase of 185.6%. Operating profit was
$16.1 million in 2011, compared with $5.2 million in 2010, an increase of
209.6%.
The 2011 sales increase included $214.0 million in revenue from recent
acquisitions, primarily the February 2011, acquisition of DALSA, as well as
higher organic sales. The increase in operating profit reflected the impact of
higher sales, partially offset by increased intangible asset amortization of
$9.9 million and $25.9 million in higher research and development and bid and
proposal spending, primarily from recent acquisitions. The incremental operating
profit from recent acquisitions was $10.7 million. Operating profit as a
percentage of sales was 4.6% for 2011 and 4.2% for 2010. Cost of sales in total
dollars increased by $140.2 million in 2011, compared with 2010, and reflected
$123.5 million in cost of sales from the DALSA acquisition, as well as cost of
sales on increased organic sales. The cost structure for this segment was
significantly impacted by the acquisition of DALSA. Excluding the impact of the
DALSA acquisition, cost of sales as a percentage of sales for 2011 would have
been 76.0% which reflects a slightly less profitable mix of contracts versus
2010. Excluding the impact of the DALSA acquisition, selling, general and
administrative expense as a percentage of sales for 2011 would have been 19.1%
versus 21.2% in 2010 which reflected leveraging fixed costs over higher sales.
Aerospace and Defense Electronics
(Dollars in millions) 2012 2011 2010
Sales $ 660.6 $ 670.8 $ 614.7
Cost of sales $ 442.6 $ 458.0 $ 451.9
Selling, general and administrative expenses $ 127.7 $ 118.9 $ 105.0
Operating profit $ 90.3 $ 93.9 $ 57.8
Cost of sales % of sales 67.0 % 68.3 % 73.5 %
Selling, general and administrative expenses % of sales 19.3 % 17.7 % 17.1 %
Operating profit % of sales 13.7 % 14.0 % 9.4 %
International sales % of sales 28.1 % 25.1 % 22.3 %
Governmental sales % of sales 40.9 % 45.3 % 49.2 %
Capital expenditures $ 13.8 $ 13.1 $ 9.7
Our Aerospace and Defense Electronics segment provides sophisticated electronic
components and subsystems and communications products, including defense
electronics, harsh environment interconnects, data acquisition and
communications equipment for aircraft, and components and subsystems for
wireless and satellite communications, as well as general aviation batteries.
2012 compared with 2011
Our Aerospace and Defense Electronics segment sales were $660.6 million in 2012,
compared with sales of $670.8 million in 2011, a decrease of 1.5%. Operating
profit was $90.3 million in 2012, compared with $93.9 million in 2010, a
decrease of 3.8%.
Sales for 2012 decreased by $10.2 million, which resulted from lower sales of
$37.9 million for electronic manufacturing service products, partially offset by
$12.4 million of higher sales from avionics products and electronic relays and
$15.3 million from microwave devices and interconnects. Microwave devices and
interconnects sales in 2012 included $25.0 million from the 2012 acquisition of
VariSystems. Operating profit in 2012 decreased due to the decrease in sales,
$1.1 million in amortization of acquisition related intangible assets and $0.4
million in other acquisition expenses related to the VariSystems acquisition.
Operating profit in 2012 also reflected reduced margins, as well as $1.7 million
of severance and relocation costs within certain electronic manufacturing
service products businesses. The incremental operating profit for 2012 from
recent acquisitions was $1.8 million. Cost of sales for 2012 in total dollars
decreased by $15.4 million, compared with 2011, and reflected the impact of
lower sales and product mix differences. Cost of sales as a percentage of sales
for 2012 decreased to 67.0% from 68.3% in 2011 and reflected increased sales of
higher gross margin avionics products, decreased sales of lower gross margin
electronic manufacturing service products, as well as the impact of higher gross
margin products from VariSystems. Operating profit included pension expense of
$2.7 million for 2012, compared with $3.9 million for 2011. Pension expense
allocated to contracts pursuant to CAS was $4.3 million for 2012, compared with
$3.9 million for 2011. In the first half of 2013, we expect additional severance
and relocation costs of approximately $4.0 million associated with certain
electronic manufacturing services businesses.
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2011 compared with 2010
Our Aerospace and Defense Electronics segment sales were $670.8 million in 2011,
compared with sales of $614.7 million in 2010, an increase of 9.1%. Operating
profit was $93.9 million in 2011, compared with $57.8 million in 2010, an
increase of 62.5%.
The 2011 sales increase resulted from $46.1 million of higher sales of microwave
devices and interconnects, as well as increased sales of $24.1 million from
avionics products and electronic relays, partially offset by a reduction of
$14.1 million in sales of electronic manufacturing services products. The
increased sales of microwave devices and interconnects included sales of $25.7
million from acquisitions as well as higher organic sales. The increase in
operating profit reflected the impact of higher sales and product mix
differences and the absence of the $8.2 million inventory write-down. The
incremental operating profit from recent acquisitions was $5.9 million. Segment
operating profit in 2011 also reflected LIFO expense of $0.3 million compared
with LIFO expense of $0.4 million in 2010. Operating profit included pension
expense of $3.9 million for 2011, compared with $1.7 million for 2010. Pension
expense allocated to contracts pursuant to CAS was $3.9 million for 2011,
compared with $2.5 million for 2010. Cost of sales in total dollars increased by
$6.1 million in 2011, compared with 2010, and reflected the increase in sales,
higher pension expense and product mix differences. The cost of sales percentage
improved due to the sales mix which had higher sales from our more profitable
avionics and interconnects products as well the absence of the $8.2 million
inventory write-down in 2010.
Engineered Systems
(Dollars in millions) 2012 2011 2010
Sales $ 301.4 $ 304.6 $ 333.8
Cost of sales $ 247.3 $ 247.0 $ 272.5
Selling, general and administrative expenses $ 25.6 $ 29.5 $ 30.9
Operating profit $ 28.5 $ 28.1 $ 30.4
Cost of sales % of sales 82.1 % 81.1 % 81.6 %
Selling, general and administrative expenses % of sales 8.5 % 9.7 % 9.3 %
Operating profit % of sales 9.5 % 9.2 % 9.1 %
International sales % of sales 11.6 % 11.1 % 7.6 %
Governmental sales % of sales 81.4 % 79.4 % 88.7 %
Capital expenditures $ 4.2 $ 5.9 $ 3.6
Our Engineered Systems segment provides innovative systems engineering and
integration, advanced technology development, and manufacturing solutions for
defense, space, environmental and energy applications. This segment also designs
and manufactures electrochemical energy systems and small turbine engines.
2012 compared with 2011
Our Engineered Systems segment sales were $301.4 million in 2012, compared with
sales of $304.6 million in 2011, a decrease of 1.1%. Operating profit was
$28.5 million in 2012, compared with $28.1 million in 2011, an increase of 1.4%.
The 2012 sales decrease of $3.2 million reflected lower sales of $4.9 million
from engineered products and services, partially offset by higher sales of $0.9
million for energy systems and $0.8 million for turbine engines. The sales
decrease from engineered products and services primarily reflected lower sales
of space and defense programs as well as nuclear programs. Operating profit in
2012 improved slightly despite the small decrease in sales. Cost of sales in
total dollars for 2012 increased by $0.3 million, compared with 2011, and
reflected product mix differences. Cost of sales as a percentage of sales for
2012 increased to 82.1%, compared with 81.1% in 2011 and reflected product mix
differences. Operating profit included pension expense of $2.7 million for 2012,
compared with $2.4 million for 2011. Pension expense allocated to contracts
pursuant to CAS was $8.4 million for 2012, compared with $8.7 million for 2011.
2011 compared with 2010
Our Engineered Systems segment sales were $304.6 million in 2011, compared with
sales of $333.8 million in 2010, a decrease of 8.7%. Operating profit was
$28.1 million in 2011, compared with $30.4 million in 2010, a decrease of 7.6%.
Sales for 2011 reflected lower sales of $33.7 million from engineered products
and services and lower energy systems sales of $2.3 million, partially offset by
higher sales of $6.8 million of turbine engines resulting from increased sales
for the JASSM program. The sales decrease from engineered products and services,
primarily reflected lower sales of space and defense programs, partially offset
by higher sales of $9.0 million for environmental systems and $6.2 million in
sales from acquisitions. The lower operating profit in 2011 primarily reflected
the impact of lower sales, partially offset by the impact of higher margins for
turbine engines. Operating profit included pension expense of $2.4 million for
2011, compared with $1.6 million for 2010. Pension expense allocated to
contracts pursuant to CAS was $8.7 million for 2011, compared with $7.1 million
for 2010. Cost of sales in total dollars decreased by $25.5 million in 2011,
compared with 2010, and primarily reflected
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the decrease in sales. Both cost of sales as a percentage of sales and selling,
general and administrative expense as a percentage of sales were comparable from
year to year.
Financial Condition, Liquidity and Capital Resources
Principal Capital Requirements
Our principal capital requirements are to fund working capital needs, capital
expenditures, voluntary and required pension contributions, debt service
requirements and acquisitions including the pending acquisition of RESON A/S. It
is anticipated that operating cash flow, together with available borrowings
under the credit facility described below, will be sufficient to meet these
requirements and could be used to fund some acquisitions in 2013. To support
acquisitions, we may need to raise additional capital. 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.
Revolving Credit Agreement and Senior Notes
On February 25, 2011, Teledyne refinanced the then existing $590.0 million
credit facility by terminating the facility and entering into a new facility
that has lender commitments totaling $550.0 million that has a termination date
of February 25, 2016. Excluding interest and fees, no payments are due under the
facility until it matures. Borrowings under our credit facility are at variable
rates which are, at our option, tied to a Eurocurrency rate equal to LIBOR
(London Interbank Offered Rate) plus an applicable rate or a base rate as
defined in our credit agreement. Eurocurrency rate loans may be denominated in
U.S. dollars or an alternative currency as defined in the agreement.
Eurocurrency or LIBOR based loans under the facility typically have terms of
one, two, three or six months and the interest rate for each such loan is
subject to change if the loan is continued or converted following the applicable
maturity date. Base rate loans have interest rates that primarily fluctuate with
changes in the prime rate. Interest rates are also subject to change based on
our consolidated leverage ratio as defined in the credit agreement. The credit
agreement also provides for facility fees that vary between 0.20% and 0.45% of
the credit line, depending on our consolidated leverage ratio as calculated from
time to time.
On October 22, 2012, Teledyne entered into $200.0 million of term loans that
mature in October 2015. The proceeds were applied against the $550.0 million
revolving credit facility. On September 15, 2010, the Company issued
$250.0 million in aggregate principal amount of private placement Senior Notes
at par. The Company used the proceeds of the private placement Senior Notes to
pay down amounts outstanding under the Company's then existing $590.0 million
credit facility.
Long-term debt consisted of the following (in millions):
Balance at
December 30, 2012 January 1, 2012
4.04% Senior Notes due September 2015 $ 75.0 $ 75.0
4.74% Senior Notes due September 2017 100.0 100.0
5.30% Senior Notes due September 2020 75.0 75.0
Term Loans due October 2015, weighted average
rate of 1.59% 200.0 -
Other debt at various rates due through 2018 14.3 -
$550.0 million revolving credit facility,
weighted average rate of 2.19% at December 30,
2012 and 2.48% at January 1, 2012 79.0 48.0
Total long-term debt $ 543.3 $ 298.0
The Company also has $14.3 million in capital leases, of which $1.5 million is
current. At December 30, 2012, Teledyne had $13.6 million in outstanding letters
of credit.
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The credit agreements require the Company to comply with various financial and
operating covenants, including maintaining certain consolidated leverage and
interest coverage ratios, as well as minimum net worth levels and limits on
acquired debt. At December 30, 2012, the Company was in compliance with these
covenants and we had a significant amount of margin between required financial
covenant ratios and our actual ratios. Currently, we do not believe our ability
to undertake additional debt financing, if needed, is reasonably likely to be
materially impacted by debt restrictions under our credit agreements subject to
our complying with required financial covenants listed in the table below. At
December 30, 2012, the required financial covenant ratios and the actual ratios
were as follows:
$550.0 million Credit Facility expires February 2016 and $200.0 million term loans
due October 2015
Financial Covenant Requirement Actual MeasureConsolidated Leverage Ratio (Net Debt/EBITDA) No more than
(a)
3.25 to 1 1.7 to 1
Consolidated Interest Coverage Ratio No less than 3.0
(EBITDA/Interest) (b) to 1 15.7 to 1
$250.0 million Private Placement Notes due 2015, 2017 and 2020
Financial Covenant Requirement Actual Measure
Consolidated Leverage Ratio (Net Debt/EBITDA) No more than
(a)
3.25 to 1 1.6 to 1
Consolidated Interest Coverage Ratio No less than 3.0
(EBITDA/Interest) (b) to 1 15.7 to 1
(a) The Consolidated Leverage Ratio is equal to Net Debt/EBITDA as defined in
our private placement note purchase agreement and our $550.0 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 $550.0
million credit agreement.
Available borrowing capacity under the $550.0 million credit facility, which is
reduced by borrowings and outstanding letters of credit, was $458.6 million at
December 30, 2012. Teledyne also has a $5.0 million uncommitted credit line
which permits credit extensions up to $5.0 million plus an incremental $2.0
million solely for standby letters of credit. This credit line is utilized, as
needed, for periodic cash needs. No amounts are outstanding under this facility
at December 30, 2012. The maximum amount that could be borrowed under our $550.0
million credit facility as of December 30, 2012 while still remaining in
compliance with our consolidated leverage ratio covenant was $458.6 million. The
Company may amend the $550.0 million credit facility in the first quarter of
2013 to extend the termination date and increase the amount of the facility.
Permanently Reinvested Earnings
We consider the earnings of non-U.S. subsidiaries to be indefinitely invested
outside the United States on the basis of estimates that future domestic cash
generation will be sufficient to meet future domestic cash requirements. At
December 30, 2012, the amount of undistributed foreign earnings was $87.5
million. We have not recorded a deferred tax liability of approximately $19.6
million related to the $87.5 million of undistributed foreign earnings. Should
we decide to repatriate the foreign earnings, we would need to adjust our income
tax provision in the period we determined that the earnings will no longer be
indefinitely invested outside the United States.
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Contractual Obligations
The following table summarizes our expected cash outflows resulting from
financial contracts and commitments at December 30, 2012. We have not included
information on our normal recurring purchases of materials for use in our
operations. These amounts are generally consistent from year to year, closely
reflect our levels of production and are not long-term in nature (in millions):
2018 and
Category 2013 2014 2015 2016 2017 beyond Total
Long-term debt obligations $ - $ 0.6 $ 275.5 $ 79.6 $ 100.5 $ 87.1 $ 543.3
Interest expense(a) 17.5 17.4 16.0 9.8 7.9 16.8 85.4
Operating lease obligations 22.3 17.2 14.9 10.9 7.7 14.6 87.6
Capital lease obligations(b) 2.1 1.8 1.7 1.7 1.7 9.1 18.1
Purchase obligations(c) 58.6 6.2 2.9 2.5 0.8 1.7 72.7
Total $ 100.5 $ 43.2 $ 311.0 $ 104.5 $ 118.6 $ 129.3 $ 807.1
(a) Interest expense related to the credit facility, including facility fees, is
assumed to accrue at the rates in effect at year-end 2012 and is assumed to
be paid at the end of each quarter with the final payment in February 2016
when the credit facility expires.
(b) Includes imputed interest and short-term portion.
(c) Purchase obligations generally include long-term contractual obligations for
the purchase of goods and services.
Unrecognized tax benefits of $42.6 million are not included in the table above
because $9.7 million is offset by deferred tax assets, and the remainder cannot
be reasonably estimated to be settled in cash due to a lack of prior settlement
history.
At December 30, 2012, we are not required to make any cash contributions to the
domestic qualified pension plan for 2012. Teledyne made a voluntary pretax
contribution to its domestic qualified pension plan of $83.0 million on
January 7, 2013. Teledyne has no required or scheduled contributions to its
foreign pension plans for 2013. Our minimum funding requirements after 2012, as
set forth by ERISA, are dependent on several factors as discussed under
"Accounting for Pension Plans" in the Critical Accounting Policies section of
this Management's Discussion and Analysis of Financial Condition and Results of
Operation. Estimates beyond 2013 have not been provided due to the significant
uncertainty of these amounts, which are subject to change until the Company's
pension assumptions can be updated at the appropriate times. In addition,
certain pension contributions are eligible for future recovery through the
pricing of products and services to the U.S. government under certain government
contracts, therefore, the amounts noted are not necessarily indicative of the
impact these contributions may have on our liquidity. We also have payments due
under our other postretirement benefit plans. These plans are not required to be
funded in advance, but are pay as you go. See further discussion in Note 12 of
the Notes to Consolidated Financial Statements. In addition, for covered active
salaried employees in the domestic pension plan, in 2011 the Company approved a
plan amendment to change the rate at which pension benefits will accrue after
February 29, 2012. The pension benefit formula was changed from a "final average
pay" calculation to a "career average pay" approach. This amendment reduced the
pension benefit obligation by $43.3 million in 2011. Teledyne intends to
continue to monitor and manage its defined pension benefit plans obligation and
may take additional actions in the future.
Operating Activities
In 2012, net cash provided by operating activities from continuing operations
was $189.5 million, compared with $219.5 million in 2011 and $127.1 million in
2010. The lower cash provided by operating activities from continuing operations
in 2012 reflected the impact of the timing of accounts receivable collections
and higher cash contributions to the domestic pension plan, partially offset by
lower income tax payments. The 2012 net cash provided by operating activities
from continuing operations amount includes voluntary cash contributions of $92.8
million to the domestic pension plan, compared with $69.0 million in voluntary
cash contributions to the domestic pension plan for 2011. The higher net cash
provided by operating activities from continuing operations for 2011, compared
with 2010, reflected the impact of higher net income, lower income tax payments
of $33.5 million and lower deferred accounts receivable, partially offset by
higher pretax pension contributions of $24.2 million.
Free cash flow (cash from operating activities from continuing operations less
capital expenditures) was $124.2 million in 2012, compared with $177.8 million
in 2011 and $96.1 million in 2010. Adjusted free cash flow eliminates the impact
of pension contributions on a net of tax basis and was $184.5 million, compared
with $221.8 million in 2011 and $124.2 million in 2010.
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Free Cash Flow(a)
(in millions, brackets indicate use of funds) 2012 2011 2010
Cash provided by operating activities, continuing operations $ 189.5 $ 219.5 $ 127.1
Capital expenditures for property, plant and equipment (65.3 ) (41.7 ) (31.0 )
Free cash flow 124.2 177.8 96.1
Pension contributions, net of tax(b) 60.3 44.0 28.1
Adjusted free cash flow $ 184.5 $ 221.8 $ 124.2
a) We define free cash flow as cash provided by operating activities from
continuing operations (a measure prescribed by generally accepted accounting
principles) less capital expenditures for property, plant and equipment.
Adjusted free cash flow eliminates the impact of pension contributions on a
net of tax basis. We believe that this supplemental non-GAAP information is
useful to assist management and the investment community in analyzing our
ability to generate cash flow, including the impact of voluntary and required
pension contributions.
b) All domestic pension cash contributions were voluntary.
Working Capital
Working capital increased to $337.5 million at year-end 2012, compared with
$268.5 million at year-end 2011. The increase primarily reflected working
capital from recent acquisitions as well as higher accounts receivable due to
higher sales late in 2012 compared with the same period of 2011.
Balance Sheet Changes
The changes in the following selected components of Teledyne's balance sheet are
discussed below (in millions):
2012 2011
Accounts receivable, net $ 350.3 $ 270.0
Inventories, net $ 281.2 $ 219.4
Properly, plant and equipment, net $ 349.5 $ 254.6
Goodwill $ 990.2 $ 717.8
Acquired intangible assets, net $ 265.7 $ 181.4
Accounts payable $ 148.6 $ 102.0
Long-term debt and capital lease obligations, net of current portion $ 556.2 $ 311.4
Other long-term liabilities $ 169.7 $ 117.2
Accumulated other comprehensive loss $ 273.4 $ 241.1
Noncontrolling interest $ 55.6 $ 4.8
The higher balances in accounts receivable, inventories, goodwill, acquired
intangible assets, accounts payable and other long-term liabilities were
impacted by the acquisitions made in 2012. The higher balances in property,
plant and equipment also reflected the impact of 2012 acquisitions, as well as
capital spending, partially offset by depreciation. The higher balance in
account receivable also reflected the impact of higher sales late in 2012
compared with the same period of 2011. Long-term debt increased and reflected
the impact of funds used for acquisitions in 2012 and pension contributions. The
accumulated other comprehensive loss increase primarily reflects the non-cash
adjustment of $49.4 million related to the increase in the unfunded pension
liability in 2012, partially offset by $14.3 million of foreign currency
changes. The increase in noncontrolling interest primarily reflects the
noncontrolling interest related to the Optech purchase.
Investing Activities
Net cash used in investing activities included capital expenditures as presented
below (in millions):
Capital Expenditures
2012 2011 2010
Instrumentation $ 13.2 $ 8.9 $ 6.4
Digital Imaging 23.5 13.8 11.3
Aerospace and Defense Electronics 13.8 13.1 9.7
Engineered Systems 4.2 5.9 3.6
Corporate 10.6 - -
$ 65.3 $ 41.7 $ 31.0
During 2013 we plan to invest approximately $90.0 million in capital
expenditures, principally to upgrade capital equipment, reduce manufacturing
costs, to implement an enterprise resource planning software system and
introduce new
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products. Commitments at December 30, 2012, for capital expenditures were
approximately $17.1 million.
Investing activities from continuing operations used cash for acquisitions of
$389.2 million, $366.7 million and $67.9 million, in fiscal 2012, 2011 and 2010,
respectively (see "Recent Acquisitions"). The 2011 amount includes $18.9 million
for the minority interest in Optech and $3.2 million for the purchase of the
remaining minority interest in Energy Systems.
Teledyne funded the acquisitions primarily from borrowings under its credit
facility and cash on hand.
In all acquisitions, the results of operations and cash flows are included in
our consolidated financial statements from the date of each respective
acquisition. The DALSA, Nova Sensors and Optech acquisitions are part of the
Digital Imaging segment. The LeCroy, BlueView, and PDM acquisitions are part of
the Instrumentation segment and VariSystems is part of the Aerospace and Defense
Electronics segment.
The following table shows the purchase price (net of cash acquired), goodwill
acquired and intangible assets acquired for the acquisitions made in fiscal 2012
and 2011 (in millions):
Fiscal year 2012
Acquired
Purchase Goodwill Intangible
Acquisition Acquisition Date Price(a) Acquired Assets
VariSystems February 25, 2012 $ 36.3 $ 14.2 $ 11.9
Optech April 2, 2012 27.9 62.4 23.4
BlueView July 2, 2012 16.3 10.8 4.8
LeCroy August 3, 2012 301.3 174.4 67.6
PDM Neptec August 3, 2012 7.4 3.3 1.3
$ 389.2 $ 265.1 $ 109.0
Fiscal year 2011
Acquired
Acquisition Purchase Goodwill Intangible
Acquisition Date Price(a) Acquired Assets
February 11,
DALSA 2011 $ 339.5 $ 166.9 $ 91.5
March 17,
Nova Sensors 2011 5.1 8.3 2.0
$ 344.6 $ 175.2 $ 93.5
(a) includes transaction costs that are expensed under current accounting guidance.
Goodwill resulting from the acquisitions made in fiscal 2012 and 2011 will not
be deductible for tax purposes.
The following is a summary, at the acquisition date, of the estimated fair
values of the assets acquired and liabilities assumed for the acquisitions made
in fiscal 2012 and 2011 (in millions):
2012 2011
Current assets, excluding cash acquired $ 116.2 $ 98.7
Property, plant and equipment
79.1 53.3
Goodwill 265.1 175.2
Intangible assets 109.0 93.5
Other long-term assets 5.3 -
Total assets acquired 574.7 420.7
Current liabilities, including short-term debt (61.8 ) (37.7 )
Other long-term liabilities
(123.7 ) (38.4 )
Total liabilities assumed (185.5 ) (76.1 )
Purchase price, net of cash acquired $ 389.2 $ 344.6
Investing activities in 2011 also included the net of tax proceeds of $136.6
million received from the sale of our general aviation piston engine businesses.
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Financing Activities
Cash provided by financing activities for 2012 reflected net proceeds of
borrowings of $229.2 million. Cash provided by financing activities for 2011
reflected net proceeds of borrowings of $46.6 million. Cash provided by
financing activities for 2010 reflected the $250.0 million proceeds from the
issuance of Senior Notes and the net repayment of borrowings under our revolving
credit agreement of $246.4 million. Fiscal years 2012, 2011 and 2010 reflect
proceeds from the exercise of stock options of $19.9 million, $14.8 million and
$3.9 million, respectively. Fiscal years 2012, 2011 and 2010 included
$8.4 million, $7.2 million and $1.5 million, respectively, in excess tax
benefits related to stock-based compensation. Cash provided by financing
activities for 2011 also reflected the repurchase of common stock for
$34.9 million.
On October 22, 2012, Teledyne entered into $200.0 million of term loans that
mature in October 2015. The proceeds were applied against the $550.0 million
revolving credit facility.
On February 25, 2011, Teledyne refinanced the then existing $590.0 million
credit facility by terminating the facility and entering into a new facility
that has lender commitments totaling $550.0 million. At year-end 2012, we had
$458.6 million of available committed credit under the $550.0 million credit
facility, which can be utilized, as needed, for daily operating and periodic
cash needs, including acquisitions. Excluding interest and fees, no payments are
due under the amended and restated credit facility until it matures in
February 2016. As of February 22, 2013, we had $149.0 million outstanding under
the credit facility. This reflects cash flow used in operations, which includes
the impact of the $83.0 million pension contribution made in January 2013.
On September 15, 2010, the Company issued $250.0 million in aggregate principal
amount of private placement Senior Notes at par. The Company used the proceeds
of the private placement Senior Notes to pay down amounts outstanding under the
Company's then existing $590.0 million credit facility.
Teledyne also has a $5.0 million uncommitted credit line which permits credit
extensions up to $5.0 million plus an incremental $2.0 million solely for
standby letters of credit. This credit line is utilized, as needed, for periodic
cash needs. There were no outstanding funding advances under the uncommitted
credit line at December 30, 2012. Total debt at year-end 2012 includes
$250.0 million outstanding in Senior Notes, $200.0 million in term loans, $79.0
million outstanding under the $550.0 million credit facility and $14.3 million
in other debt. The Company also has $14.3 million outstanding under capital
leases, of which $1.5 million is current. At year-end 2012, Teledyne had $13.6
million in outstanding letters of credit.
In October 2011, our Board of Directors approved a stock repurchase program
authorizing the Company to repurchase up to 2,500,000 shares of its common
stock. Shares may be repurchased from time to time in open market transactions
at prevailing market prices or in privately negotiated transactions. Shares
could be repurchased in a plan pursuant to Rule 10b5-1 of the Securities
Exchange Act of 1934. The repurchase program is expected to remain open
continuously, and the number of shares purchased will depend on a variety of
factors, such as share price, levels of cash available, alternative investment
opportunities available immediately or longer-term, and other regulatory, market
or economic conditions. Repurchases would be funded with cash on hand and
borrowings under the company's credit facility. In 2011, Teledyne repurchased
658,562 shares of Teledyne common stock for $34.9 million under the program. No
repurchases were made in 2012.
Pension Plans
Teledyne has a domestic defined benefit pension plan covering substantially all
U.S. employees hired before January 1, 2004, or approximately 22% of Teledyne's
active employees. As of January 1, 2004, new hires participate in a defined
contribution plan. Teledyne made a voluntary pretax contribution to its domestic
qualified pension plan of $83.0 million on January 7, 2013. In 2012, Teledyne
made pretax cash contributions of approximately $92.8 million to its domestic
pension plan before recovery from the U.S. Government. In connection with the
2010 acquisition of Intelek, the Company assumed responsibility for a frozen
defined benefit pension plan based in the United Kingdom covering certain
employees of Intelek. In 2010, Teledyne made pretax cash contributions of
approximately $8.1 million to the Intelek pension plan. The plan was closed to
new members in January 2000 and ceased further service accruals to members in
September 2002. In connection with the 2012 acquisition of LeCroy, the Company
assumed the responsibility for a defined benefit plan based in Switzerland
covering certain employees of LeCroy.
Other Matters
Income Taxes
Our income tax expense, deferred tax assets and liabilities, and reserves for
unrecognized tax benefits reflect management's best assessment of estimated
current and future taxes to be paid. We are subject to income taxes in both the
United States and numerous foreign jurisdictions. Significant judgments and
estimates are required in determining the consolidated income tax expense.
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The Company's effective tax rate for 2012 was 28.7%, compared with 32.9% for
2011 and 30.9% for 2010. Fiscal years 2012, 2011 and 2010 included net tax
credits of $5.4 million, $2.4 million and $12.5 million, respectively. These
relate primarily to research and development tax credits and expiration of
statute of limitations on unrecognized tax benefits. Excluding these items the
company's effective tax rates for fiscal years 2012, 2011 and 2010 would have
been 31.0%, 34.0% and 38.1%, respectively. The lower 2012 effective tax rate,
compared with the 2011 effective tax rate, excluding tax credits, primarily
reflected a change in the proportion of domestic and international income and
foreign research and development tax credits. Based on the Company's history of
operating earnings, expectations of future operating earnings and potential tax
planning strategies, it is more likely than not that the deferred income tax
assets at December 30, 2012 will be realized. Deferred income taxes arise from
temporary differences between the tax basis of assets and liabilities and their
reported amount in the financial statements, which will result in taxable or
deductible amounts in the future. In evaluating our ability to recover our
deferred tax assets within the jurisdiction from which they arise, we consider
all available positive and negative evidence, including scheduled reversals of
deferred tax liabilities, projected future taxable income, tax-planning
strategies, and results of recent operations. In projecting future taxable
income, we begin with historical results adjusted for the results of
discontinued operations and incorporate assumptions about the amount of future
state, federal and foreign pretax operating income adjusted for items that do
not have tax consequences. The assumptions about future taxable income require
significant judgment and are consistent with the plans and estimates we are
using to manage the underlying businesses. In evaluating the objective evidence
that historical results provide, we consider three years of cumulative operating
income.
Changes in tax laws and rates may affect the recorded deferred tax assets and
liabilities and our effective tax rate. The American Taxpayer Relief Act of 2012
(the "Act") was signed into law on January 2, 2013. Because a change in tax law
is accounted for in the period of enactment, certain provisions of the Act
benefiting the Company's 2012 U.S. federal taxes, including the research and
development credit and the Subpart F controlled foreign corporation look through
exception cannot be recognized in the Company's 2012 financial results and
instead will be reflected in the Company's 2013 financial results. We estimate
that a benefit of approximately $2.9 million will be accounted for as a discrete
item in our tax provision for the first quarter of 2013. In addition, we expect
the Act's extension for these provisions through the end of 2013 will favorably
affect our estimated annual effective tax rate for 2013 by approximately 1.2
percentage points as compared with 2012.
Costs and Pricing
Inflationary trends in recent years have been moderate. Current inventory costs,
the increasing costs of equipment and other costs are considered in establishing
sales pricing policies. The Company emphasizes cost containment in all aspects
of its business.
Hedging Activities; Market Risk Disclosures
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. Due to the February 2011 acquisition of DALSA, the Company began to
utilize foreign currency forward contracts to reduce the volatility of cash
flows primarily related to forecasted revenue and expenses denominated in
Canadian dollars. These contracts are designated and qualify as cash flow
hedges.
The effectiveness of the cash flow hedge contracts, excluding time value, is
assessed prospectively and retrospectively on a monthly basis using regression
analysis, as well as using other timing and probability criteria. To receive
hedge accounting treatment, all hedging relationships are formally documented at
the inception of the hedges and must be highly effective in offsetting changes
to future cash flows on hedged transactions. The effective portion of the cash
flow hedge contracts' gains or losses resulting from changes in the fair value
of these hedges is initially reported, net of tax, as a component of accumulated
other comprehensive income ("AOCI") in stockholders' equity until the underlying
hedged item is reflected in our consolidated statements of income, at which time
the effective amount in accumulated other comprehensive income is reclassified
to cost of sales in our consolidated statements of income. The Company expects
to reclassify a gain of approximately $0.5 million over the next 12 months based
on the year end 2012 exchange rate.
In the event that the gains or losses in AOCI are deemed to be ineffective, the
ineffective portion of gains or losses resulting from changes in fair value, if
any, is reclassified to other income and expense. In the event that the
underlying forecasted transactions do not occur, or it becomes remote that they
will occur, within the defined hedge period, the gains or losses on the related
cash flow hedges will be reclassified from AOCI to other income and expense.
During the current reporting period, all forecasted transactions occurred and,
therefore, there were no such gains or losses reclassified to other income and
expense. As of December 30, 2012, Teledyne had foreign currency forward
contracts designated as cash flow hedges to buy Canadian dollars and to sell
U.S. dollars totaling $51.7 million and these contracts had a fair value of $0.8
million. These foreign currency forward contracts have maturities ranging from
March 2013 to February 2014.
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In addition, the Company utilizes foreign currency forward contracts to mitigate
foreign exchange rate risk associated with foreign-currency-denominated monetary
assets and liabilities, including intercompany receivables and payables and as
of December 30, 2012, Teledyne had foreign currency contracts of this type in
the following currency pairs:
Contracts to Buy Contracts to Sell
Currency Amount Currency Amount
Canadian Dollars C$ 2.6 Euros € (2.0 )
Canadian Dollars C$ 26.3 U.S. Dollars $ (26.3 )
Great Britain Pounds £ 5.5 U.S. Dollars $ (8.9 )
U.S. Dollars $ 8.9 Euros € (6.8 )
U.S. Dollars $ 2.6 Japanese Yen ¥ (218.0 )
U.S. Dollars $ 1.0 Korean Won (1,126.0 )
These contracts had a fair value of $0.1 million at December 30, 2012. The gains
and losses on these derivatives which are not designated as hedging instruments
under ASC 815, Derivatives and Hedging ("ASC 815"), are intended to, at a
minimum, partially offset the transaction gains and losses recognized in
earnings. Under ASC 815, all derivatives are recorded on the balance sheet at
fair value. As discussed below, the accounting for gains and losses resulting
from changes in fair value depends on the use of the derivative and whether it
is designated and qualifies for hedge accounting. Teledyne does not use foreign
currency forward contracts for speculative or trading purposes.
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 appreciation of the U.S. dollar from its
value at December 30, 2012 would decrease the fair value of our foreign currency
forward contracts associated with our cash flow hedging activities by $5.2
million. A hypothetical 10 percent depreciation of the U.S. dollar from its
value at December 30, 2012 would increase the fair value of our foreign currency
forward contracts associated with our cash flow hedging activities by $5.2
million.
Borrowings under our credit facility are at fixed rates that vary with the term
and timing of each loan under the facility. Loans under the facility typically
have terms of one, two, three or six months and the interest rate for each such
loan is subject to change if the loan is continued or converted following the
applicable maturity date. Interest rates are also subject to change based on our
debt to earnings before interest, taxes, depreciation and amortization ratio. As
of December 30, 2012, we had $79.0 million outstanding indebtedness under our
$550.0 million credit facility. Any borrowings under the Company's revolving
credit line are based on a fluctuating market interest rate and, consequently,
the fair value of any outstanding debt should not be affected materially by
changes in market interest rates. A 100 basis point increase in interest rates
would result in an increase in annual interest expense of approximately $0.8
million, assuming the $79.0 million in debt was outstanding for the full year.
We believe that adequate controls are in place to monitor any hedging
activities. Our primary exposure to market risk relates to changes in interest
rates and foreign currency exchange rates. We periodically evaluate these risks
and have taken measures to mitigate these risks. We own assets and operate
facilities in countries that have been politically stable.
Related Party Transactions
Dr. von Schack and Ms. Bruch are directors of The Bank of New York Mellon
Corporation. Dr. Mehrabian was also a director of The Bank of New York Mellon
Corporation until his retirement on April 12, 2011. The Bank of New York Mellon
Corporation is the successor to Mellon Financial Corporation following its
merger with The Bank of New York in 2007. Mr. Cahouet had served as Chairman,
President and Chief Executive Officer of Mellon Financial Corporation and Mellon
Bank, N.A., having retired on December 31, 1998. Mr. Cahouet ceased being a
director of Mellon Financial Corporation on April 18, 2000. We maintain various
arms-length banking relationships with The Bank of New York Mellon Corporation.
On February 25, 2011, we entered into a $550.0 million credit facility under
which The Bank of New York Mellon Corporation is one of 12 lenders, having
committed to lend up to $45.0 million. The Bank of New York Mellon Corporation
also provides cash management services, serves as trustee for the Teledyne
Technologies Incorporated Pension Plan and, through its subsidiaries and
affiliates, provides asset management and transition management services for the
Pension Plan. Notwithstanding these relationships, our Board of Directors has
determined that Ms. Bruch, Mr. Cahouet and Dr. von Schack are "independent,"
within the meaning of the rules of the New York Stock Exchange, and are able to
serve on Audit Committee and Nominating and Governance Committee of Teledyne's
Board of Directors, in the case of Mr. Cahouet, and on Personnel and
Compensation Committee and Nominating and Governance Committee of Teledyne's
Board of Directors, in the case of Dr. von Schack and Ms. Bruch.
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Environmental
We are subject to various federal, state, local and international environmental
laws and regulations which require that we investigate and remediate the effects
of the release or disposal of materials at sites associated with past and
present operations. These include sites at which Teledyne has been identified as
a potentially responsible party under the Comprehensive Environmental Response,
Compensation and Liability Act, commonly known as Superfund, and comparable
state laws. We are currently involved in the investigation and remediation of a
number of sites. Reserves for environmental investigation and remediation
totaled $3.2 million at December 30, 2012 and $3.2 million at January 1, 2012.
As investigation and remediation of these sites proceed and new information is
received, the Company expects that accruals will be adjusted to reflect new
information. Based on current information, we do not believe that future
environmental costs, in excess of those already accrued, will materially and
adversely affect our financial condition or liquidity. However, resolution of
one or more of these environmental matters or future accrual adjustments in any
one reporting period could have a material adverse effect on our results of
operations for that period. See also our environmental risk factor disclosure
beginning at page 21.
For additional discussion of environmental matters, see Notes 2 and 15 to the
Notes to Consolidated Financial Statements.
Government Contracts
We perform work on a number of contracts with the Department of Defense and
other agencies and departments of the U.S. Government including sub-contracts
with government prime contractors. Sales under these contracts with the
U.S. Government, which included contracts with the Department of Defense, were
approximately 32% of total sales in 2012, 36% of total sales in 2011 and 44% of
total sales in 2010. For a summary of sales to the U.S. Government by segment,
see Note 13 to the Notes to Consolidated Financial Statements. Sales to the
Department of Defense represented approximately 26%, 29% and 34% of total sales
for 2012, 2011 and 2010, respectively. See also our government contracts risks
factor disclosure beginning at page 13.
Performance under government contracts has certain inherent risks that could
have a material adverse effect on the Company's business, results of operations
and financial condition. Government contracts are conditioned upon the
continuing availability of Congressional appropriations, which usually occurs on
a fiscal year basis even though contract performance may take more than one
year.
For information on accounts receivable from the U.S. Government, see Note 5 to
the Notes to Consolidated Financial Statements.
Estimates and Reserves
Our discussion and analysis of financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent liabilities. On an ongoing basis,
we evaluate our estimates, including those related to product returns and
replacements, allowance for doubtful accounts, inventories, intangible assets,
income taxes, warranty obligations, pension and other postretirement benefits,
long-term contracts, environmental, workers' compensation and general liability,
employee dental and medical benefits and other contingencies and litigation. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances at the time, the
results of which form the basis for making our judgments. Actual results may
differ materially from these estimates under different assumptions or
conditions. In some cases, such differences may be material. See "Other
Matters - Critical Accounting Policies".
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The following table reflects significant reserves and valuation accounts, which
are estimates and based on judgments as described above, at December 30, 2012
and January 1, 2012 (in millions):
Reserves and Valuation Accounts (a)
2012 2011
Allowance for doubtful accounts $ 4.7 $ 3.8
LIFO inventory reserves $ 17.3 $ 17.4
Other inventory reserves $ 42.0 $ 42.0
Workers' compensation and general liability reserves(b) $ 9.5 $ 10.4
Warranty reserves(b)
$ 17.8 $ 13.3
Environmental reserves(b) $ 3.2 $ 3.2
Other accrued liability reserves(b) $ 24.0 $ 12.5
(a) This table should be read in conjunction with the Notes to Consolidated
Financial Statements.
(b) Includes both long-term and short-term reserves.
Some of the Company's products are subject to specified warranties and the
Company provides for the estimated cost of product warranties. We regularly
assess the adequacy of our pre-existing warranty liabilities and adjust amounts
as necessary based on a review of historic warranty experience with respect to
the applicable business or products, as well as the length and actual terms of
the warranties, which are typically one year. The product warranty reserve is
included in current accrued liabilities and other long-term liabilities on the
balance sheet. Changes in the Company's product warranty reserve are as follows
(in millions):
2012 2011 2010
Balance at beginning of year $ 13.3 $ 13.0 $ 13.6
Accruals for product warranties charged to expense 9.6 5.1 4.0
Cost of product warranty claims (6.9 ) (5.9 ) (4.8 )
Acquisitions 1.8 1.1 0.2
Balance at year-end $ 17.8 $ 13.3 $ 13.0
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with
United States generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and the notes to the financial statements. Some of those judgments
can be subjective and complex, and therefore, actual results could differ
materially from those estimates under different assumptions or conditions. Our
critical accounting policies are those that are reflective of significant
judgment, complexity and uncertainty, and may potentially result in materially
different results under different assumptions and conditions. We have identified
the following as critical accounting policies: revenue recognition; accounting
for pension plans; accounting for business combinations, goodwill and other
long-lived assets; and accounting for income taxes. For additional discussion of
the application of these and other accounting policies, see Note 2 of the Notes
to Consolidated Financial Statements.
Revenue Recognition
Commercial sales and sales from U.S. Government fixed-price type contracts are
generally recorded as shipments are made or as services are rendered. Revenue
related to a product or service is recognized when products are shipped to the
customer or services have been rendered in accordance with terms of an agreement
of sale, under which title and risk of loss have been transferred,
collectability is reasonably assured and pricing is fixed or determinable. The
Company's typical terms of sale are FOB shipping point and, as such, the Company
primarily records revenue for product sales upon shipment. For the very small
percentage of sales where title and risk of loss passes at point of delivery,
the Company recognizes revenue upon delivery to the customer, assuming all other
criteria for revenue recognition are met. For contracts that require the Company
to warehouse certain goods, revenue is recognized when all risks of loss is
borne by the customer and all other criteria for revenue recognition are met. If
any significant obligation to the customer with respect to a sales transaction
remains to be fulfilled following shipment, typically involving acceptance by
the buyer, revenue recognition is deferred until such obligations have been
fulfilled following shipment. The Company does not offer substantial sales
incentives and credits to customers. Accruals for sales returns and other
allowances are provided at the time revenue is recognized based upon past
experience.
For certain fixed-price type contracts that require substantial performance over
a long time period (generally one or more
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years), revenues are recorded under the percentage-of-completion method ("POC").
We measure the extent of progress toward completion using the units-of-delivery
method, cost-to-cost method or upon attainment of scheduled performance
milestones which could be time, event or expense driven. Occasionally, invoices
are submitted to and paid by the customer under a contractual agreement which
has a different time schedule than the related revenue recognition. Sales under
cost-reimbursement contracts, usually from the U.S. Government, are recorded as
allowable costs are incurred and fees are earned. The percentage of Company
sales recognized using the POC method has been decreasing and was 36.7% in 2012,
39.4% in 2011 and 50.0% in 2010, due to the increase in our commercial business
which does not typically utilize the POC method.
The development of cost of sales percentages used to record costs under certain
fixed-price type contracts and fees under certain cost-reimbursement type
contracts accounted for under the POC method of accounting requires management's
judgment to make reasonably dependable cost estimates for the design,
manufacture and delivery of products and services, generally over a long time
period. Since certain fixed-price and cost-reimbursement type contracts extend
over a long period of time, the impact of revisions in cost and revenue
estimates during the progress of work may adjust the current period earnings on
a cumulative catch-up basis. This method recognizes, in the current period, the
cumulative effect of the changes on current and prior quarters. For fixed-price
contracts, if the current contract estimate indicates a loss, a provision is
made for the total anticipated loss in the period that it becomes evident.
Contract cost and revenue estimates for significant contracts are generally
reviewed and reassessed quarterly. These types of contracts and estimates are
most frequently related to our sales to the U.S. Government or sales to other
defense contractors for ultimate sale to the U.S. Government. Changes in
estimates related to contracts accounted for under the POC method are recorded
using the cumulative catch-up method of accounting. The net effect of these
favorable and unfavorable changes in estimates were expense of $1.2 million in
2012 and $0.3 million of income in both 2011 and 2010. The aggregate effects of
these favorable and unfavorable changes in estimates in 2012, 2011 and 2010 were
$18.0 million, $4.7 million and $3.5 million of favorable operating income and
$19.2 million, $4.4 million and $3.2 million of unfavorable operating income,
respectively. We do not believe that any discrete event or adjustments to an
individual contract within the aggregate changes in contract estimates for 2012,
2011 or 2010 was material to the consolidated statements of income for such
annual periods.
Accounting for Pension Plans
The Company's accounting for its defined benefit pension plan requires that
amounts recognized in financial statements be determined on an actuarial basis,
rather than as contributions are made to the plan. A significant element in
determining the Company's pension income or expense is the expected return on
plan assets, as well as the assumed discount rate on pension liabilities. The
Company has assumed, based upon the types of securities the plan assets are
invested in and the long-term historical returns of these investments, that the
long-term expected return on pension assets will be 8.25% in 2013 for its
domestic pension plan, 6.4% for its United Kingdom based pension plan and 3.0%
for its Swiss based pension plan, which was part of the LeCroy acquisition. The
assumed discount rate will be 4.4% in 2013 for its domestic pension plan, 4.2%
for its United Kingdom based pension plan and 1.8% for its Swiss based pension
plan. The Company's long-term expected return on pension assets used in 2012 was
8.25% for its domestic pension plans and the assumed discount rate used in 2012
was 6.6%. For its United Kingdom based pension plan, the Company's long-term
expected return on pension assets used in 2012 was 6.4% and the assumed discount
rate used in 2012 was 4.7%. For its Swiss based pension plan, the Company's
long-term expected return on pension assets used in 2012 was 3.0% and the
assumed discount rate used in 2012 was 2.0%. The actual rate of return on
pension assets was 13.9% in 2012 and a negative 0.4% in 2011 for its domestic
pension plans. The actual rate of return on pension assets was 7.0% in 2012 and
a negative 2.7% in 2011 for its United Kingdom based pension plan. If the actual
rate of return on pension assets is above the projection, the Company may be
able to reduce its contributions to the pension trust. If the actual rate of
return on pension assets is below the projection, the Company may be required to
make additional contributions to the pension trust. The Company made voluntary
pretax cash contributions of $92.8 million to its domestic pension benefit plan
in 2012 and made a voluntary pretax cash contribution of $83.0 million on
January 7, 2013, before recovery from the U.S. Government. The assumed long-term
rate of return on assets is applied to the market-related value of plan assets
at the end of the previous year. The market-related value of plan assets is a
smoothed value, where investment gains and losses have been smoothed over five
years. This produces the expected return on plan assets that is included in the
annual pension income or expense calculation for the current year. The
cumulative difference between this expected return and the actual return on plan
assets is deferred and amortized into pension income or expense over future
periods. At year-end 2012 the Company has a $257.1 million non-cash reduction to
stockholders' equity and a long-term additional liability of $418.6 million
related to its pension plans. At year-end 2011, the Company had a $208.2 million
non-cash reduction to stockholders' equity and a long-term additional liability
of $339.9 million related to its pension plans. See Note 12 of the Notes to
Consolidated Financial Statements for additional pension disclosures.
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Differences in the discount rate and expected long-term rate of return on assets
within the indicated range would have had the following impact on 2012 pension
expense (in millions):
0.25 Percentage 0.25 Percentage
Point Increase Point Decrease
Increase (decrease) to pension expense resulting from:
Change in discount rate
$ (2.0 ) $ 2.1
Change in long-term rate of return on plan assets $ (2.1 )
$ 2.1
See Note 12 of the Notes to Consolidated Financial Statements for additional
pension disclosures.
Accounting for Business Combinations, Goodwill, Acquired Intangible Assets and
Other Long-Lived Assets
The Company accounts for goodwill and purchased intangible assets under ASC 80.
In all acquisitions, the results are included in the Company's consolidated
financial statements from the date of each respective acquisition. Business
acquisitions are accounted for under the purchase method by assigning the
purchase price to tangible and intangible assets acquired and liabilities
assumed. Assets acquired and liabilities assumed are recorded at their fair
values and the excess of the purchase price over the amounts assigned is
recorded as goodwill. Purchased intangible assets with finite lives are
amortized over their estimated useful lives. Adjustments to fair value
assessments are recorded to goodwill over the purchase price allocation period.
Goodwill and acquired intangible assets with indefinite lives are not amortized.
We review goodwill and acquired indefinite-lived intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of these assets may not be recoverable. The Company also
performs an annual impairment test in the fourth quarter of each year. We would
test goodwill for impairment between annual tests if events occur or
circumstances change that would more likely than not reduce our enterprise fair
value below its book value. These events or circumstances could include a
significant change in the business climate, including a significant sustained
decline in an entity's market value, legal factors, operating performance
indicators, competition, sale or disposition of a significant portion of the
business, or other factors. Based on the annual impairment test completed in the
fourth quarter of 2012, no impairment of goodwill or intangible assets with
indefinite lives was indicated.
For goodwill impairment testing, the Company estimates the fair value of the
reporting units, using a discounted cash flow model based on our best estimate
of amounts and timing of future revenues and cash flows and our most recent
business and strategic plans, and compares the estimated fair value to the
carrying value of the reporting unit, including goodwill. The discounted cash
flow model requires judgmental assumptions about projected revenue growth,
future operating margins, discount rates and terminal values. There are inherent
uncertainties related to these assumptions and management's judgment in applying
them to the analysis of goodwill impairment. While the Company believes it has
made reasonable estimates and assumptions to calculate the fair value of its
reporting units, it is possible a material change could occur. If actual results
are not consistent with management's estimates and assumptions, goodwill may be
overstated and a charge would need to be taken against net earnings.
As of December 30, 2012, the Company had 35 reporting units for goodwill
impairment testing. The carrying value of goodwill included in the Company's
individual reporting units ranges from $0.5 million to $235.4 million. The
Company's analysis in 2012 indicated that in all instances, the fair value of
the Company's reporting units exceeded their carrying values and consequently
did not result in an impairment charge. The excess of the estimated fair value
over the carrying value (expressed as a percentage of carrying value of the
respective reporting unit) for each of the Company's reporting units as of the
fourth quarter of 2012, the annual testing date, ranged from approximately 38%
to 2,756%.
Changes in these projections could affect the estimated fair value of certain of
the Company's reporting units and could result in a goodwill impairment charge
in a future period. In order to evaluate the sensitivity of the fair value
calculations used in the goodwill impairment test, the Company applied a
hypothetical 10% decrease to the fair values of each reporting unit and compared
those values to the reporting unit carrying values. Based on this sensitivity
analysis, the Company did not identify any goodwill impairment charges.
The impairment test for indefinite-lived intangibles other than goodwill
(primarily trademarks and trade names) consists of a comparison of the fair
value of the indefinite-lived intangible asset to the carrying value of the
asset as of the impairment testing date. The Company estimates the fair value of
its indefinite-lived intangibles using a discounted cash flow model based on our
best estimate of amounts and timing of future revenues and cash flows and our
most recent business and strategic plans, and compares the estimated fair value
to the carrying value of the asset. The estimated fair values significantly
exceed the carrying value for each of the Company's indefinite-lived intangible
assets as of the fourth quarter of 2012, the annual testing date.
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Accounting for Income Taxes
Income tax expense and deferred tax assets and liabilities reflect management's
assessment of actual future taxes to be paid on items reflected in the financial
statements. Significant judgment is required in evaluating our tax positions and
determining our provision for income taxes. Uncertainty exists regarding tax
positions taken in previously filed tax returns still under examination and
positions expected to be taken in the current year and future returns. Deferred
tax assets and liabilities arise due to differences between the consolidated
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and tax carryforwards. Although we believe our income
tax expense and deferred tax assets and liabilities are reasonable, no assurance
can be given that the final tax outcome will not be different from that which is
reflected in our historical income tax provisions and accruals. To the extent
that the final tax outcome is different than the amounts recorded, such
differences will impact the provision for income taxes in the period in which
such determination is made. The provision for income taxes includes the impact
of uncertain tax benefits that are considered appropriate, as well as the
related net interest.
Significant judgment is required in determining any valuation allowance recorded
against deferred tax assets. In assessing the need for a valuation allowance, we
consider all available evidence including past operating results, estimates of
future taxable income and the feasibility of tax planning strategies. In the
event that we change our determination as to the amount of deferred tax assets
that can be realized, we will adjust our valuation allowance with a
corresponding impact to the provision for income taxes in the period in which
such determination is made.
Our effective tax rates differ from the statutory rate primarily due to the tax
impact of tax credits, including prior year research and development tax
credits, state taxes, tax audit settlements and non U.S. subsidiaries taxed at
rates less than 35%. The effective tax rate was 28.7%, 32.9% and 30.9% in 2012,
2011 and 2010, respectively.
We record uncertain tax positions on the basis of a two-step process whereby (1)
we determine whether it is more likely than not that the tax positions will be
sustained on the basis of the technical merits of the position and (2) for those
tax positions that meet the more-likely-than-not recognition threshold, we
recognize the largest amount of tax benefit that is more than 50 percent likely
to be realized upon ultimate settlement with the related tax authority.
The following presents a rollforward of our unrecognized tax benefits (in
millions):
2012 2011 2010
Beginning of year $ 25.8 $ 10.1 $ 25.2
Increase (decrease) in prior year tax positions (a) 18.1 18.7 (3.5 )
Increase for tax positions taken during the current period 1.5 0.7 0.6
Reduction related to settlements with taxing authorities - - (9.2 )
Reduction related to lapse of the statute of limitations (2.9 ) (3.5 ) (3.0 )
Impact of exchange rate changes 0.1 (0.2 ) -
End of year $ 42.6 $ 25.8 $ 10.1
a) Includes the impact of acquisitions in 2012 and 2011.
We recognized interest related to unrecognized tax benefits of $2.7 million and
$1.7 million within the provision for income taxes in our statements of
operations for fiscal year 2012 and 2011, respectively.
As of December 30, 2012, we estimated that $32.9 million of unrecognized tax
benefits, if resolved in our favor, would positively impact the effective tax
rate and, therefore be recognized as additional tax benefits in our income
statement. Of the $42.6 million of unrecognized tax benefits, $9.7 million would
be offset by deferred tax assets.
We file income tax returns in the United States federal jurisdiction and in
various states and foreign jurisdictions. The Company has substantially
concluded on all U.S. federal income tax matters for all years through 2009,
California income tax matters for all years through 2006 and Canadian income tax
matters for all years through 2003. The Company is currently under audit in
Canada for tax periods 2006 through 2011 and in California for tax years 2007
through 2009. The Company does not believe that the resolution of any of the
audits will have a material adverse effect on the Company's results of
operations. Substantially all other material state, local and foreign income tax
matters have been concluded for years through 2006.
The Company anticipates the total unrecognized tax benefit for various federal
and state tax items may be reduced by $13.7 million due to the expiration of
statutes of limitation and settlements with tax authorities for various federal,
state and Canadian tax issues in the next 12 months.
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Recent Accounting Pronouncements
In July 2012, the Financial Accounting Standards Board ("FASB") issued new
accounting guidance on the testing of indefinite-lived intangible assets for
impairment. The guidance allows entities to first perform a qualitative
assessment to determine the likelihood of an impairment for an indefinite-lived
intangible asset and whether it is necessary to perform the quantitative
impairment assessment currently required. This guidance is effective for annual
and interim impairment tests performed for fiscal years beginning after
September 15, 2012, with early adoption permitted. The Company does not expect
the adoption of this guidance to have a material impact on Teledyne's financial
position, results of operations or cash flows.
In 2011, the FASB issued new disclosure guidance related to the presentation of
the Statement of Comprehensive Income. The new disclosure guidance requires an
entity to present the total of comprehensive income, the components of net
income, and the components of other comprehensive income either in a single
continuous statement of comprehensive income or in two separate but consecutive
statements. Teledyne adopted the new presentation requirement effective
January 2, 2012. Teledyne elected the two-statement approach presenting other
comprehensive income in a separate statement immediately following the condensed
consolidated statements of income.
In 2011, the FASB issued new accounting guidance that amends some fair value
measurement principles and disclosure requirements. The new guidance provides a
consistent definition and measurement of fair value, as well as similar
disclosure requirements between U.S. GAAP and International Financial Reporting
Standards. It also changes certain fair value measurement principles, clarifies
the application of existing fair value measurement and expands the disclosure
requirements, particularly for Level 3 fair value measurements. Teledyne's
adoption of these new provisions, effective January 2, 2012, did not have an
impact on our financial position or results of operations.
Safe Harbor Cautionary Statement Regarding Forward-Looking Information
This Management's Discussion and Analysis of Financial Condition and Results of
Operation contains forward-looking statements, as defined in the Private
Securities Litigation Reform Act of 1995, directly and indirectly relating to
earnings, growth opportunities, product sales, capital expenditures, pension
matters, stock option compensation expense, the credit facility, interest
expense, severance and relocation costs, taxes and strategic plans. All
statements made in this Management's Discussion and Analysis of Financial
Condition and Results of Operation 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; 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;
and cuts to defense spending resulting from future deficit reduction measures,
including potential automatic cuts to defense spending that have been triggered
by the Budget Control Act of 2011. Increasing fuel costs could negatively affect
the markets of our commercial aviation businesses. 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,
including with respect to hydraulic fracturing could negatively affect our
businesses that supply the oil and gas industry. In addition, financial market
fluctuations affect the value of our pension assets.
Changes in the policies of U.S. and foreign governments could result, over time,
in reductions and realignment in defense or other government spending and
further changes in programs in which the Company participates.
While Teledyne'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 outside of the United
States, including those arising from U.S. and foreign government policy changes
or actions and exchange rate fluctuations.
While we believe our control systems are effective, there are inherent
limitations in all control systems, and misstatements due to error or fraud may
occur and may not be detected.
Additional information concerning factors that could cause actual results to
differ materially from those projected in the forward-looking statements is
contained beginning on page 12 of this Form 10-K under the caption "Risk
Factors; Cautionary Statement as to Forward-Looking Statements." 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. We assume no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information or otherwise.
51--------------------------------------------------------------------------------
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