Teledyne Technologies Inc 10-Q for FY2020 Q3
Teledyne Technologies Inc (TDY)
10-Q
2020-10-22
For: 2020-09-27
View Original
Added on
April 08, 2026
About this 10-Q
Teledyne Technologies Inc filed this 10-Q on October 22, 2020, covering the quarter ended September 27, 2020 (FY2020 Q3).
Headline figures
Quarter ended September 27, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $749M
- down 6.6% from $802.2M a year earlier
- Net income
- $93.9M
- down 12.0% from net income of $106.7M a year earlier
- Diluted EPS
- $2.48
- down 12.7% from $2.84 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 10-Q
_____________________________________
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 27, 2020
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission file number 1-15295
_____________________________________
(Exact name of registrant as specified in its charter)
_____________________________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | ||||||||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||||||||
(Registrant’s telephone number, including area code)
____________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| ☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
No ☒
There were 36,881,725 shares of common stock, $.01 par value per share, outstanding as of October 20, 2020.
TELEDYNE TECHNOLOGIES INCORPORATED
TABLE OF CONTENTS
| PAGE | ||||||||
| Part I | ||||||||
| Part II | ||||||||
| Item 1. Legal Proceedings | ||||||||
1
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
TELEDYNE TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 2020 AND SEPTEMBER 29, 2019
(Unaudited - Amounts in millions, except per-share amounts)
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Costs and expenses | |||||||||||||||||||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||||||||||||||
| Total costs and expenses | |||||||||||||||||||||||||||||||||||
Operating income | |||||||||||||||||||||||||||||||||||
| Interest and debt expense, net | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Non-service retirement benefit income | |||||||||||||||||||||||||||||||||||
| Other expense, net | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
Income before income taxes | |||||||||||||||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Basic earnings per common share | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Weighted average common shares outstanding | |||||||||||||||||||||||||||||||||||
| Diluted earnings per common share | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Weighted average diluted common shares outstanding | |||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
TELEDYNE TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 2020 AND SEPTEMBER 29, 2019
(Unaudited - Amounts in millions)
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||||||||
| Foreign exchange translation adjustment | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Hedge activity, net of tax | ( | ||||||||||||||||||||||||||||||||||
| Pension and postretirement benefit adjustments, net of tax | |||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | |||||||||||||||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
TELEDYNE TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited - Amounts in millions, except share amounts)
| September 27, 2020 | December 29, 2019 | ||||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Unbilled receivables, net | |||||||||||
| Inventories, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
Property, plant and equipment, net of accumulated depreciation and amortization of $ at December 29, 2019 | |||||||||||
| Goodwill | |||||||||||
| Acquired intangibles, net | |||||||||||
| Prepaid pension assets | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Other assets, net | |||||||||||
| Total Assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current Liabilities | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Current portion of long-term debt and other debt, net | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
| Total Liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ Equity | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
Treasury stock, | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total Stockholders’ Equity | |||||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
TELEDYNE TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions)
| Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||||||||||
| Balance, December 29, 2019 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Treasury stock issued | — | ( | — | — | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance, March 29, 2020 | ( | ( | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Treasury stock issued | — | ( | — | — | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance, June 28, 2020 | ( | ( | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Treasury stock issued | — | ( | — | — | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Exercise of stock options and other | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance, September 27, 2020 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||||||||||
| Balance, December 30, 2018 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Treasury stock issued | — | ( | — | — | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance, March 31, 2019 | ( | ( | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Treasury stock issued | — | ( | — | — | |||||||||||||||||||||||||||||||
| Stock based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance, June 30, 2019 | ( | ( | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Treasury stock issued | — | ( | — | — | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Exercise of stock options and other | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance, September 29, 2019 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
TELEDYNE TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 27, 2020 AND SEPTEMBER 29, 2019
(Unaudited - Amounts in millions)
| Nine Months | |||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| Operating Activities | |||||||||||||||||
| Net income | $ | $ | |||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | |||||||||||||||||
| Stock-based compensation | |||||||||||||||||
| Changes in operating assets and liabilities excluding the effect of business acquired: | |||||||||||||||||
| Accounts receivable and unbilled receivables | ( | ||||||||||||||||
| Inventories | ( | ||||||||||||||||
| Accounts payable | ( | ||||||||||||||||
| Deferred and income taxes receivable/payable, net | ( | ||||||||||||||||
| Prepaid expenses and other assets | ( | ( | |||||||||||||||
| Accrued expenses and other liabilities | |||||||||||||||||
| Other operating, net | ( | ||||||||||||||||
| Net cash provided by operating activities | |||||||||||||||||
| Investing Activities | |||||||||||||||||
| Purchases of property, plant and equipment | ( | ( | |||||||||||||||
| Purchase of businesses, net of cash acquired | ( | ( | |||||||||||||||
| Other investing, net | |||||||||||||||||
| Net cash used in investing activities | ( | ( | |||||||||||||||
| Financing Activities | |||||||||||||||||
| Net proceeds from credit facility | — | ||||||||||||||||
| Net payments on other debt | ( | ( | |||||||||||||||
| Proceeds from exercise of stock options | |||||||||||||||||
| Other financing, net | — | ( | |||||||||||||||
| Net cash provided by financing activities | ( | ||||||||||||||||
| Effect of exchange rate changes on cash | ( | ||||||||||||||||
| Change in cash and cash equivalents | ( | ||||||||||||||||
| Cash and cash equivalents—beginning of period | |||||||||||||||||
| Cash and cash equivalents—end of period | $ | $ | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
TELEDYNE TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 27, 2020
Note 1. General
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by Teledyne Technologies Incorporated (“Teledyne” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in notes to consolidated financial statements have been condensed or omitted pursuant to such rules and regulations, but resultant disclosures are in accordance with accounting principles generally accepted in the United States (“GAAP”) as they apply to interim reporting. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes in Teledyne’s Annual Report on Form 10-K for the fiscal year ended December 29, 2019 (“2019 Form 10-K”).
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates the computation of the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record a goodwill impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. We adopted the new guidance as of December 30, 2019 which reduced the complexity surrounding the evaluation of goodwill for impairment. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
6
Note 2. Accumulated Other Comprehensive Loss
The changes in AOCI by component, net of tax, for the third quarter and nine months ended September 27, 2020 and September 29, 2019 are as follows (in millions):
| Foreign Currency Translation | Cash Flow Hedges and Other | Pension and Postretirement Benefits | Total | ||||||||||||||||||||
| Balance as of June 28, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income/(loss) before reclassifications | ( | ||||||||||||||||||||||
| Amounts reclassified from AOCI | |||||||||||||||||||||||
| Net other comprehensive income | |||||||||||||||||||||||
| Balance as of September 27, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Foreign Currency Translation | Cash Flow Hedges and Other | Pension and Postretirement Benefits | Total | ||||||||||||||||||||
| Balance as of June 30, 2019 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income/(loss) before reclassifications | ( | ( | |||||||||||||||||||||
| Amounts reclassified from AOCI | ( | ( | |||||||||||||||||||||
| Net other comprehensive income/(loss) | ( | ( | ( | ||||||||||||||||||||
| Balance as of September 29, 2019 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Foreign Currency Translation | Cash Flow Hedges and Other | Pension and Postretirement Benefits | Total | ||||||||||||||||||||
| Balance as of December 29, 2019 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive loss before reclassifications | ( | ( | ( | ||||||||||||||||||||
| Amounts reclassified from AOCI | |||||||||||||||||||||||
| Net other comprehensive income/(loss) | ( | ( | |||||||||||||||||||||
| Balance as of September 27, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Foreign Currency Translation | Cash Flow Hedges and Other | Pension and Postretirement Benefits | Total | ||||||||||||||||||||
| Balance as of December 30, 2018 | ( | ( | ( | ( | |||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | |||||||||||||||||||||
| Amounts reclassified from AOCI | ( | ||||||||||||||||||||||
| Net other comprehensive income (loss) | ( | ||||||||||||||||||||||
| Balance as of September 29, 2019 | ( | ( | ( | ( | |||||||||||||||||||
7
The reclassifications out of AOCI to net income for the third quarter and nine months ended September 27, 2020 and September 29, 2019 are as follows (in millions):
| Amount Reclassified from AOCI for the Three Months Ended | Amount Reclassified from AOCI for the Three Months Ended | Statement of Income | ||||||||||||
| September 27, 2020 | September 29, 2019 | Presentation | ||||||||||||
| (Gain) loss on cash flow hedges: | ||||||||||||||
| (Gain) loss recognized in income on derivatives | $ | $ | ( | See Note 4 | ||||||||||
| Income tax impact | ( | Provision for income taxes | ||||||||||||
| Total | $ | $ | ( | |||||||||||
| Amortization of defined benefit pension and postretirement plan items: | ||||||||||||||
| Amortization of prior service cost | $ | ( | $ | ( | Costs and expenses | |||||||||
| Amortization of net actuarial loss | Costs and expenses | |||||||||||||
| Total before tax | ||||||||||||||
| Income tax impact | ( | ( | Provision for income taxes | |||||||||||
| Total | $ | $ | ||||||||||||
| Amount Reclassified from AOCI for the Nine Months Ended | Amount Reclassified from AOCI for the Nine Months Ended | Statement of Income | ||||||||||||
| September 27, 2020 | September 29, 2019 | Presentation | ||||||||||||
| (Gain) loss on cash flow hedges: | ||||||||||||||
| (Gain) loss recognized in income on derivatives | $ | $ | ( | See Note 4 | ||||||||||
| Income tax impact | ( | Provision for income taxes | ||||||||||||
| Total | $ | $ | ( | |||||||||||
| Amortization of defined benefit pension and postretirement plan items: | ||||||||||||||
| Amortization of prior service cost | $ | ( | $ | ( | Costs and expenses | |||||||||
| Amortization of net actuarial loss | Costs and expenses | |||||||||||||
| Total before tax | ||||||||||||||
| Income tax impact | ( | ( | Provision for income taxes | |||||||||||
| Total | $ | $ | ||||||||||||
Note 3. Business Combinations, Goodwill and Acquired Intangible Assets
Acquisition of the OakGate Technology, Inc.
On January 5, 2020, we acquired OakGate Technology, Inc. (“OakGate”) for $28.5 million in cash, net of cash acquired. Based in Loomis, California, OakGate provides software and hardware designed to test electronic data storage devices from development through manufacturing and end-use applications. The acquired business is part of the Test and Measurement product line of the Instrumentation segment.
Acquisition of Micralyne, Inc.
On August 30, 2019, we acquired Micralyne Inc. (“Micralyne”) for $26.2 million in cash, net of cash acquired and including a $0.5 million purchase price adjustment paid in January 2020. Based in Edmonton, Alberta, Canada, Micralyne is a foundry providing Micro Electro Mechanical Systems or MEMS devices. In particular, Micralyne possesses unique microfluidic technology for biotech applications, as well as capabilities in non-silicon-based MEMS (e.g. gold, polymers) often required for human body compatibility. The acquired business is part of the Digital Imaging segment.
8
Acquisition of the gas and flame detection business of 3M Company
On August 1, 2019, we acquired the gas and flame detection business of 3M Company for $233.5 million in cash, net of cash acquired. The gas and flame detection business includes Oldham, Simtronics, Gas Measurement Instruments, Detcon and select Scott Safety products. The gas and flame detection business provides a portfolio of fixed and portable industrial gas and flame detection instruments used in a variety of industries including petrochemical, power generation, oil and gas, food and beverage, mining and waste water treatment. Principally located in France, the United Kingdom and the United States, the acquired business is part of the Environmental product line of the Instrumentation segment.
Acquisition of the scientific imaging businesses of Roper Technologies, Inc.
On February 5, 2019, we acquired the scientific imaging businesses of Roper Technologies, Inc. for $224.8 million in cash, net of cash acquired and including a purchase price adjustment. Principally located in the United States and Canada, the acquired businesses are part of the Digital Imaging segment. The acquired businesses include Princeton Instruments, Photometrics and Lumenera. The acquired businesses provide a range of imaging solutions, primarily for life sciences, academic research and customized OEM industrial imaging solutions. Princeton Instruments and Photometrics manufacture state-of-the-art cameras, spectrographs and optics for advanced research in physical sciences, life sciences research and spectroscopy imaging. Applications and markets include materials analysis, quantum technology and cell biology imaging using fluorescence and chemiluminescence. Lumenera primarily provides rugged USB-based customized cameras for markets such as traffic management, as well as life sciences applications.
Goodwill and Acquired Intangible Assets
Teledyne’s goodwill was $2,091.3 million at September 27, 2020 and $2,050.5 million at December 29, 2019. The increase in the balance of goodwill in 2020 resulted from goodwill from recent acquisitions, mostly offset by exchange rate changes. Goodwill resulting from the acquisition of OakGate will not be deductible for tax purposes. Teledyne’s net acquired intangible assets were $408.8 million at September 27, 2020 and $430.8 million at December 29, 2019. The decrease in the balance of net acquired intangible assets resulted from amortization of acquired intangible assets and exchange rate changes. The Company completed the process of specifically identifying the amount to be assigned to certain assets, including acquired intangible assets, and liabilities and the related impact on taxes and goodwill for acquisitions made in 2019. The Company is in the process of specifically identifying the amount to be assigned to certain assets, including acquired intangible assets, and liabilities and the related impact on taxes and goodwill for the OakGate acquisition since there was insufficient time between the acquisition dates and the end of the period to finalize the analysis.
Teledyne funded the acquisitions with borrowings under its credit facility and cash on hand. The results of each acquisition have been included in Teledyne’s results since the date of each respective acquisition.
During the third quarter of 2020, the Company evaluated the effects of the COVID-19 pandemic and its negative impact on the global economy on each of the Company’s reporting units and indefinite-lived intangible assets. Management reviewed key assumptions, including revisions of projected future revenues for reporting units and the results of the previous annual impairment testing performed during the fourth quarter of 2019. The Company did not identify an indication of impairment for each of its reporting units and indefinite-lived intangible assets. Although it was determined that a triggering event had not occurred as of September 27, 2020, we will continue to monitor the impacts of the COVID-19 pandemic on the Company’s reporting units and indefinite-lived intangible assets.
Note 4. Derivative Instruments
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 foreign currency risk management objective is to protect the U.S. dollar value of future cash flows and minimize the volatility of reported earnings. The Company utilizes foreign currency forward contracts to reduce the volatility of cash flows primarily related to forecasted revenues and expenses denominated in Canadian dollars for our Canadian companies, and in British pounds for our UK companies. These contracts are designated and qualify as cash flow hedges. The Company has also converted a U.S. dollar denominated, variable rate obligation into a euro fixed rate obligation using a receive float, pay fixed cross currency swap. These cross currency swaps are designated as cash flow hedges. In addition the Company has converted domestic U.S. variable rate debt to fixed rate debt using a receive variable, pay fixed interest rate swap. The interest rate swap is also designated as a cash flow hedge.
The effectiveness of the cash flow hedge forward contracts, is assessed prospectively and retrospectively 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 hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. The effective portion of the cash flow hedge forward contracts’ gains or losses resulting from changes in the fair value of these hedges is initially reported, net of tax, as a component of AOCI in stockholders’ equity until the underlying hedged item is reflected in our consolidated statements of income, at which time the effective amount in AOCI is reclassified to revenue in our consolidated statements of income. Net deferred gains recorded in AOCI, net of tax, for the
9
forward contracts that will mature in the next twelve months total $0.9 million. These gains are expected to be offset by anticipated losses in the value of the forecasted underlying hedged item. Amounts related to the cross currency swaps and interest rate swap expected to be reclassified from AOCI into income in the next twelve months total $2.0 million.
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 September 27, 2020, Teledyne had foreign currency forward contracts designated as cash flow hedges to buy Canadian dollars and to sell U.S. dollars totaling $147.9 million. These foreign currency forward contracts have maturities ranging from December 2020 to February 2022. Teledyne had foreign currency forward contracts designated as cash flow hedges to buy British pounds and to sell U.S. dollars totaling $2.7 million. These foreign currency forward contracts have maturities ranging from December 2020 to February 2021. The cross currency swaps have notional amounts of €113.0 million and $125 million, and €135.0 million and $150.0 million, and matures in March 2023 and October 2024, respectively. The interest rate swap has a notional amount of $125.0 million and matures in March 2023.
The effect of derivative instruments designated as cash flow hedges in the condensed consolidated financial statements for the third quarter and nine months ended September 27, 2020 and September 29, 2019 was as follows (in millions):
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| Net gain (loss) recognized in AOCI - Foreign Exchange Contracts (a) | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Net gain (loss) reclassified from AOCI into COS - Foreign Exchange Contracts (a) | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||
| Net gain (loss) recognized in AOCI - Interest Rate Contracts | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Net gain (loss) reclassified from AOCI into other income and expense, net - Foreign Exchange Contracts (b) | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Net gain (loss) reclassified from AOCI into interest expense - Foreign Exchange Contracts | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Net gain (loss) reclassified from AOCI into interest expense - Interest Rate Contracts | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||
| Net foreign exchange gain (loss) recognized in other income, net (c) | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||
a) Effective portion, pre-tax
b) Amount reclassified to offset earnings impact of liability hedged by cross currency swap
c) Amount excluded from effectiveness testing
Non-Designated Hedging Activities
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. As of September 27, 2020, Teledyne had non-designated foreign currency contracts, of this type in the following pairs (in millions):
| Contracts to Buy | Contracts to Sell | |||||||||||||||||||||||||
| Currency | Amount | Currency | Amount | |||||||||||||||||||||||
| Canadian Dollars | C$ | U.S. Dollars | US$ | |||||||||||||||||||||||
| Canadian Dollars | C$ | Euros | € | |||||||||||||||||||||||
| Great Britain Pounds | £ | U.S. Dollars | US$ | |||||||||||||||||||||||
| Euros | € | U.S. Dollars | US$ | |||||||||||||||||||||||
| Danish Krone | DKR | U.S. Dollars | US$ | |||||||||||||||||||||||
| Great Britain Pounds | £ | Euros | € | |||||||||||||||||||||||
The above table includes non-designated hedges derived from terms contained in triggered or previously designated cash flow hedges. The gains and losses on these derivatives which are not designated as hedging instruments are intended to, at a minimum, partially offset the transaction gains and losses recognized in earnings. Teledyne does not use foreign currency forward contracts for speculative or trading purposes.
10
The effect of derivative instruments not designated as cash flow hedges recognized in other income and expense for the third quarter and nine months ended September 27, 2020 was income of $3.0 million and expense of $5.5 million, respectively.. The effect of derivative instruments not designated as cash flow hedges in other income and expense for the third quarter and nine months ended September 29, 2019 was expense of $0.7 million and income of $0.2 million, respectively. The income/expense was largely offset by losses/gains in the value of the underlying hedged item excluding the impact of forward points.
Fair Value of Derivative Financial Instruments
The Company has elected to use the income approach to value the derivatives, using observable Level 2 market expectations at measurement date and standard valuation techniques to convert future amounts to a single present amount. Level 2 inputs for the valuations are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts on LIBOR and EURIBOR) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR and EURIBOR cash and swap rates, foreign currency forward rates and cross currency basis spreads). Mid-market pricing is used as a practical expedient for fair value measurements. The fair value measurement of an asset or liability must reflect the nonperformance risk of the entity and the counterparty. Therefore, the impact of the counterparty’s creditworthiness when in an asset position and the Company’s creditworthiness when in a liability position has also been factored into the fair value measurement of the derivative instruments and did not have a material impact on the fair value of these derivative instruments. Both the counterparty and the Company are expected to continue to perform under the contractual terms of the instruments.
The fair values of the Company’s derivative financial instruments are presented below. All fair values for these derivatives were measured using Level 2 information as defined by the accounting standard hierarchy (in millions):
| Asset/(Liability) Derivatives | Balance sheet location | September 27, 2020 | December 29, 2019 | ||||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||
| Cash flow forward contracts | Other assets | $ | $ | ||||||||||||||
| Cash flow forward contracts | Accrued liabilities | ( | ( | ||||||||||||||
| Cash flow cross currency swap | Other current assets | ||||||||||||||||
| Cash flow cross currency swap | Accrued liabilities | ||||||||||||||||
| Cash flow cross currency swap | Other non-current liabilities | ( | ( | ||||||||||||||
| Interest rate contracts | Other current assets | ||||||||||||||||
| Interest rate contracts | Other non-current assets | ||||||||||||||||
| Interest rate contracts | Other current liabilities | ( | |||||||||||||||
| Interest rate contracts | Other non-current liabilities | ( | |||||||||||||||
| Total derivatives designated as hedging instruments | ( | ( | |||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||
| Non-designated forward contracts | Other current assets | ||||||||||||||||
| Non-designated forward contracts | Accrued liabilities | ( | ( | ||||||||||||||
| Total derivatives not designated as hedging instruments | ( | ( | |||||||||||||||
| Total derivatives, net | $ | ( | $ | ( | |||||||||||||
11
Note 5. Earnings Per Share
For the third quarter and first nine months of 2020, 239,422 and 242,602 stock options, respectively, were excluded in the computation of diluted earnings per share because they had exercise prices that were greater than the weighted average market price of the Company’s common stock during the respective periods. For the third quarter of 2019, no stock options were excluded in the computation of earnings per share. For the first nine months of 2019, 2,160 stock options were excluded in the computation of diluted earnings per share because they had exercise prices that were greater than the weighted average market price of the Company’s common stock during the period. The weighted average number of common shares used in the calculation of basic and diluted earnings per share consisted of the following (in millions):
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| Weighted average basic common shares outstanding | |||||||||||||||||||||||||||||||||||
| Effect of dilutive securities (primarily stock options) | |||||||||||||||||||||||||||||||||||
| Weighted average diluted common shares outstanding | |||||||||||||||||||||||||||||||||||
Note 6. Stock-Based Compensation Plans
Teledyne has long-term incentive plans pursuant to which it has granted non-qualified stock options, restricted stock and performance shares to certain employees. The Company also has non-employee Board of Director stock compensation plans, pursuant to which common stock, stock options and restricted stock units have been issued to its directors.
Stock Incentive Plan
Stock option compensation expense was $5.7 18.8 million for the first nine months of 2020 and was $20.4 million for the first nine months of 2019. Employee stock option grants are charged to expense evenly over the year vesting period except for stock options that were granted after 2018 to Teledyne’s Executive Chairman and Teledyne’s President and Chief Executive Officer which were expensed immediately. For 2020, the Company currently expects approximately $25.0 million in stock option compensation expense based on stock options outstanding at September 27, 2020. This amount can be impacted by employee retirements and terminations or stock options granted during the remainder of the year. The Company issues shares of common stock upon the exercise of stock options.
The following assumptions were used in the valuation of stock options granted in the first nine months of 2020:
| 2020 | |||||
| Expected volatility | |||||
| Risk-free interest rate range | 1.50% to 1.75% | ||||
| Expected life in years | |||||
| Expected dividend yield | |||||
Based on the assumptions used in the valuation of stock options, the grant date weighted average fair value of stock options granted in the first nine months of 2020 was $106.26 per share.
Stock option transactions for the third quarter and first nine months of 2020 are summarized as follows:
| 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||||||||||||
| Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Granted | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Exercised | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Canceled | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Options exercisable at end of period | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
12
Performance Share Plan and Restricted Stock Award Program
Under the 2015 to 2017 Performance Share Plan, the Company issued 7,673 shares of Teledyne common stock in the first quarter of 2020, 8,586 shares in the first quarter of 2019 and 6,481 shares in the first quarter of 2018.
In the first quarter of 2018, the performance cycle for the -year period ending December 31, 2020, was set. Subject to the terms of the plan, the maximum number of shares that could be issued in three equal installments in 2021, 2022 and 2023 is 61,194 .
The following table shows the restricted stock activity for the first nine months of 2020:
| Shares | Weighted average fair value per share | ||||||||||
| Balance, December 29, 2019 | $ | ||||||||||
| Granted | $ | ||||||||||
| Vested | ( | $ | |||||||||
| Balance, September 27, 2020 | $ | ||||||||||
Note 7. Inventories
Inventories are stated at current cost, net of reserves for excess, slow moving and obsolete inventory. Inventories are valued under the FIFO method, LIFO method or average cost method. Inventories at cost determined on the average cost or the FIFO methods were $339.7 million at September 27, 2020 and $361.2 million at December 29, 2019. The remainder of the inventories using the LIFO method is $33.0 million at September 27, 2020 and $40.0 million at December 29, 2019. Interim LIFO calculations are based on the Company’s estimates of expected year-end inventory levels and costs since an actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Because these estimates are subject to many factors beyond the Company’s control, interim results are subject to the final year-end LIFO inventory valuation.
| Balance at | |||||||||||||||||
| Inventories (in millions): | September 27, 2020 | December 29, 2019 | |||||||||||||||
| Raw materials and supplies | $ | $ | |||||||||||||||
| Work in process | |||||||||||||||||
| Finished goods | |||||||||||||||||
| Reduction to LIFO cost basis | ( | ( | |||||||||||||||
| Total inventories, net | $ | $ | |||||||||||||||
Note 8. Customer Contracts
Estimate at Completion Process
For over time contracts using the cost-to-cost method, we have an Estimate at Completion (“EAC”) process in which management reviews the progress and execution of our performance obligations. This EAC process requires management judgment relative to assessing risks, estimating contract revenue and cost, and making assumptions for schedule and technical issues. Since certain contracts extend over multiple reporting periods, the impact of revisions in cost and revenue estimates during the progress of work may adjust the current period earnings through a cumulative catch-up basis. This method recognizes, in the current period, the cumulative effect of the changes on current and prior quarters. Additionally, 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 reviewed and reassessed quarterly. The majority of revenue recognized over time uses an EAC process. The net aggregate effects of changes in estimates on contracts accounted for under the cost-to-cost method in the first nine months of 2020 was approximately $16.6 million of favorable operating income, primarily related to favorable changes in estimates that impacted revenue within the Digital Imaging and Engineered Systems operating segments. The net aggregate effects of changes in estimates on contracts accounted for under the cost-to-cost method in the first nine months of 2019 was approximately $17.0 million of favorable operating income, primarily related to favorable changes in estimates that impacted revenue, and, to a lesser degree, cost of sales within the Digital Imaging operating segment. None of the effects of changes in estimates on any individual contract were material to the condensed consolidated statements of income for any period presented.
13
Contract Liabilities
We recognize a liability for interim and advance payments in excess of revenue recognized and present it as a contract liability which is included within accrued liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheet, which represented $125.9 million and $14.3 million as of September 27, 2020, and $126.8 million and $17.9 million as of December 29, 2019, respectively.
The Company recognized revenue of $65.7 million during the nine months ended September 27, 2020 from contract liabilities that existed at the beginning of year. The Company recognizes the incremental costs of obtaining or fulfilling a contract as expense when incurred if the amortization period of the asset is one year or less. Incremental costs to obtain or fulfill contracts with an amortization period greater than one year were not material.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price of firm orders for which work has not been performed as of the period end date and excludes unexercised contract options and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity). As of September 27, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $1,742.0 million. The Company expects approximately 74 % of remaining performance obligations to be recognized into revenue within the next twelve months, with the remaining 26 % recognized thereafter.
Product Warranty Costs
Some of the Company’s products are subject to specified warranties, and the Company provides for the estimated cost of product warranties. The adequacy of the warranty reserve is assessed regularly, and the reserve is adjusted 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. The warranty reserve is included in current and long-term accrued liabilities on the Condensed Consolidated Balance Sheet.
| Nine Months | |||||||||||||||||
| Warranty Reserve (in millions): | 2020 | 2019 | |||||||||||||||
| Balance at beginning of year | $ | $ | |||||||||||||||
| Accruals for product warranties charged to expense and other | |||||||||||||||||
| Cost of product warranty claims | ( | ( | |||||||||||||||
| Acquisition | |||||||||||||||||
| Balance at end of period | $ | $ | |||||||||||||||
Accounts Receivable, Net
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities, which are included in accrued liabilities and other long-term liabilities) on the Condensed Consolidated Balance Sheet. Under the typical payment terms of our over time contracts, the customer pays us either performance-based payments or progress payments. Amounts billed and due from our customers are classified as receivables on the Condensed Consolidated Balance Sheet. Accounts receivable is presented net of an allowance for doubtful accounts of $11.4 million at September 27, 2020, and $10.2 million at December 29, 2019.
An allowance for doubtful accounts is established for losses expected to be incurred on accounts receivable balances. Judgment is required in the estimation of the allowance and we evaluate the collectability of our accounts receivable and contract assets based on a combination of factors. If we become aware of a customer’s inability to meet its financial obligations, a specific allowance is recorded to reduce the net receivable to the amount reasonably believed to be collectible from the customer. For all other customers, we use an aging schedule and recognize allowances for doubtful accounts based on the creditworthiness of the debtor, the age and status of outstanding receivables, the current business environment and our historical collection experience adjusted for current expectations for the customers or industry. Accounts receivable are written off against the allowance for uncollectible accounts when we determine amounts are no longer collectible.
| Nine Months | ||||||||||||||
Allowance for doubtful accounts (in millions): | 2020 | |||||||||||||
Balance at beginning of period | $ | |||||||||||||
Accruals for credit loss charged to expense | ||||||||||||||
Other deductions | ( | |||||||||||||
Balance at end of period | $ | |||||||||||||
14
Note 9. Income Taxes
Note 10. Long-Term Debt and Letters of Credit
| Balance at | |||||||||||||||||
| Long-Term Debt (in millions): | September 27, 2020 | December 29, 2019 | |||||||||||||||
$ | $ | $ | |||||||||||||||
Term loan due October 2024, variable rate of | |||||||||||||||||
| Other debt | |||||||||||||||||
| Debt issuance costs | ( | ( | |||||||||||||||
| Total debt | |||||||||||||||||
| Less: current portion of long-term debt and other debt, net | ( | ( | |||||||||||||||
| Total long-term debt | $ | $ | |||||||||||||||
Available borrowing capacity under the $750.0 million credit facility, which is reduced by borrowings and certain outstanding letters of credit, was $614.7 million at September 27, 2020. The credit agreements require the Company to comply with various financial and operating covenants and at September 27, 2020, the Company was in compliance with these covenants. At September 27, 2020, Teledyne had $26.4 million in outstanding letters of credit.
Note 11. Lease Commitments
15
Note 12. Lawsuits, Claims, Commitments, Contingencies and Related Matters
For a further description of the Company’s commitments and contingencies, reference is made to Note 14 of the Company’s financial statements as of and for the fiscal year ended December 29, 2019, included in the 2019 Form 10-K.
At September 27, 2020, the Company’s reserves for environmental remediation obligations totaled $6.6 million, of which $1.5 million is included in current accrued liabilities. At December 29, 2019, the Company’s reserves for environmental remediation obligations totaled $6.0 million. The Company evaluates whether it may be able to recover a portion of future costs for environmental liabilities from its insurance carriers and from third parties. The timing of expenditures depends on a number of factors that vary by site, including the nature and extent of contamination, the number of potentially responsible parties, the timing of regulatory approvals, the complexity of the investigation and remediation, and the standards for remediation. The Company expects that it will expend present accruals over many years and will complete remediation of all sites with which it has been identified in up to 30 years.
Over the last several weeks the exposure associated with the March 27, 2020 bankruptcy of OneWeb Global Limited and its subsidiaries (“OneWeb”) has been substantially reduced. Teledyne’s customer, Airbus OneWeb Satellites, LLC (“AOS”), is a joint venture of OneWeb and Airbus Defense and Space. OneWeb has secured financing and we received an advance payment in October 2020. Additionally, we recently entered into modified contract terms and in October 2020, we resumed limited production. While some risk remains, including a successful exit by OneWeb from bankruptcy, the exposure is substantially mitigated.
Note 13. Pension Plans and Postretirement Benefits
Effective January 1, 2020, Teledyne restructured its domestic qualified defined benefit pension plan. The restructuring involved dividing our domestic qualified defined pension plan into two separate plans, one two plans, based on assumptions and market conditions on the January 1, 2020 effective date. Actuarial gains and losses associated with the active plan will continue to be amortized over the average remaining service period of the active participants, while the actuarial gains and losses associated with the inactive plan will be amortized over the average remaining life expectancy of the inactive participants which is currently approximately 17.7 years.
For the domestic qualified pension plans, the weighted-average discount rate decreased to 3.41 % in 2020 compared with a 4.59 % discount rate used in 2019. Teledyne has not made any cash pension contributions to its domestic qualified pension plan since 2013. No cash pension contributions are planned for 2020 for the domestic qualified pension plans.
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| Service cost — benefits earned during the period (in millions) | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Pension non-service income (in millions): | |||||||||||||||||||||||||||||||||||
| Interest cost on benefit obligation | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Amortization of prior service cost | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Amortization of net actuarial loss | |||||||||||||||||||||||||||||||||||
| Curtailment/settlements | ( | ||||||||||||||||||||||||||||||||||
| Pension non-service income | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||
-
16
Note 14. Segment Information
Teledyne is a leading provider of sophisticated instrumentation, digital imaging products and software, aerospace and defense electronics, and engineered systems. Our customers include government agencies, aerospace prime contractors, energy exploration and production companies, major industrial companies and airlines. The Company has four reportable segments: Instrumentation; Digital Imaging; Aerospace and Defense Electronics; and Engineered Systems.
Segment results includes net sales and operating income by segment but excludes non-service retirement benefit income, equity income or loss, unusual non-recurring legal matter settlements, interest income and expense, gains and losses on the disposition of assets, sublease rental income and non-revenue licensing and royalty income, domestic and foreign income taxes and corporate office expenses. Corporate expense includes various administrative expenses relating to the corporate office and certain non-operating expenses, including certain acquisition-related transaction costs, not allocated to our segments.
As part of a continuing effort to reduce costs and improve operating performance, as well as to respond to the impact of COVID-19, the Company has taken actions to reduce headcount across various businesses, reducing our exposure to weak end markets, such as commercial aerospace. Teledyne incurred $3.3 million and $15.1 million in expense related to these actions, including facility consolidation expense, for the third quarter and first nine months of 2020 respectively, compared with $0.3 million and $1.1 million for the third quarter and first nine months of 2019, respectively. At September 27, 2020, Teledyne had a liability of $2.4 million included in other current liabilities related to these actions.
The following table presents Teledyne’s segment disclosures (dollars in millions):
| Third Quarter | % | Nine Months | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales(a): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Instrumentation | $ | $ | ( | % | $ | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Digital Imaging | ( | % | ( | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Aerospace and Defense Electronics | ( | % | ( | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Engineered Systems | % | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total net sales | $ | $ | ( | % | $ | $ | ( | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating income: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Instrumentation | $ | $ | ( | % | $ | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Digital Imaging | % | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Aerospace and Defense Electronics | ( | % | ( | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Engineered Systems | % | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate expense | ( | ( | ( | % | ( | ( | ( | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating income | $ | $ | ( | % | $ | $ | ( | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(a) Net sales excludes inter-segment sales of $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Identifiable assets are those assets used in the operations of the segments. Corporate assets primarily consist of cash, deferred taxes, net pension assets/liabilities and other assets (in millions):
| Identifiable assets: | September 27, 2020 | December 29, 2019 | ||||||||||||
| Instrumentation | $ | $ | ||||||||||||
| Digital Imaging | ||||||||||||||
| Aerospace and Defense Electronics | ||||||||||||||
| Engineered Systems | ||||||||||||||
| Corporate | ||||||||||||||
| Total identifiable assets | $ | $ | ||||||||||||
17
Product Lines
The Instrumentation segment includes three product lines: Marine Instrumentation, Environmental Instrumentation and Test and Measurement Instrumentation. Teledyne’s other three segments each contain one
The following tables provide a summary of the net sales by product line for the Instrumentation segment (in millions):
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||
| Instrumentation | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||
| Marine Instrumentation | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Environmental Instrumentation | |||||||||||||||||||||||||||||||||||
| Test and Measurement Instrumentation | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
We also disaggregate our revenue from contracts with customers by customer type, contract-type and geographic region for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.
Third Quarter Ended September 27, 2020 | Nine Months Ended September 27, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Customer Type | Customer Type | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | United States Government (a) | Other, Primarily Commercial | Total | United States Government (a) | Other, Primarily Commercial | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Sales: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Instrumentation | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Digital Imaging | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Aerospace and Defense Electronics | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Engineered Systems | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| a) Includes sales as a prime contractor or subcontractor. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Third Quarter Ended September 27, 2020 | Nine Months Ended September 27, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contract Type | Contract Type | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | Fixed Price | Cost Type | Total | Fixed Price | Cost Type | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Sales: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Instrumentation | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Digital Imaging | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Aerospace and Defense Electronics | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Engineered Systems | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Third Quarter Ended September 27, 2020 | Nine Months Ended September 27, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Geographic Region (a) | Geographic Region (a) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | United States | Europe | All other | Total | United States | Europe | All other | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Instrumentation | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Digital Imaging | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Aerospace and Defense Electronics | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Engineered Systems | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| a) Net sales by geographic region of origin. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Third Quarter Ended September 29, 2019 | Nine Months Ended September 29, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Customer Type | Customer Type | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | United States Government (a) | Other, Primarily Commercial | Total | United States Government (a) | Other, Primarily Commercial | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Sales: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Instrumentation | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Digital Imaging | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Aerospace and Defense Electronics | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Engineered Systems | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| a) Includes sales as a prime contractor or subcontractor. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Third Quarter Ended September 29, 2019 | Nine Months Ended September 29, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contract Type | Contract Type | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | Fixed Price | Cost Type | Total | Fixed Price | Cost Type | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Sales: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Instrumentation | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Digital Imaging | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Aerospace and Defense Electronics | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Engineered Systems | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Third Quarter Ended September 29, 2019 | Nine Months Ended September 29, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Geographic Region (a) | Geographic Region (a) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | United States | Europe | All other | Total | United States | Europe | All other | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Instrumentation | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Digital Imaging | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Aerospace and Defense Electronics | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Engineered Systems | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| a) Net sales by geographic region of origin. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Teledyne Technologies Incorporated provides enabling technologies for industrial growth markets that require advanced technology and high reliability. These markets include aerospace and defense, factory automation, air and water quality environmental monitoring, electronics design and development, oceanographic research, deepwater oil and gas exploration and production, medical imaging and pharmaceutical research. Our products include digital imaging sensors, cameras and systems within the visible, infrared and X-ray spectra, monitoring and control instrumentation for marine and environmental applications, harsh environment interconnects, electronic test and measurement equipment, aircraft information management systems, and defense electronics and satellite communication subsystems. We also supply engineered systems for defense, space, environmental and energy applications. We differentiate ourselves from many of our direct competitors by having a customer and company-sponsored applied research center that augments our product development expertise.
Strategy/Overview
Our strategy continues to emphasize growth in our core markets of instrumentation, digital imaging, aerospace and defense electronics and engineered systems. Our core markets are characterized by high barriers to entry and include specialized products and services not likely to be commoditized. We intend to strengthen and expand our core businesses with targeted acquisitions and through product development. We continue to focus on balanced and disciplined capital deployment among capital expenditures, product development, acquisitions and share repurchases. We aggressively pursue operational excellence to continually improve our margins and earnings by emphasizing cost containment and cost reductions in all aspects of our business. At Teledyne, operational excellence includes the rapid integration of the businesses we acquire. Using complementary technology across our businesses and internal research and development, we seek to create new products to grow our company and expand our addressable markets. We continue to evaluate our businesses to ensure that they are aligned with our strategy.
COVID-19 and Other Matters
With regard to the COVID-19 pandemic, our first priority remains the health and safety of our employees and their families. Up to 18% of our total personnel are working from home. Our manufacturing sites remain operational, and we are practicing social distancing, enhanced cleaning protocols, usage of personal protective equipment and other preventative measures.
While no company is immune to global economic challenges, Teledyne's business portfolio is well-balanced across end markets and geographies, and includes a high degree of businesses serving critical infrastructure sectors such as the defense industrial base, water and wastewater, and healthcare and public health. Teledyne’s balance sheet is strong, with $454.5 million of cash and cash equivalents and $614.7 million available under our credit facility maturing in 2024. However, given the continuing dynamic nature of this situation, the Company may not fully estimate the impacts of COVID-19 on its financial condition, results of operations or cash flows.
Over the last several weeks the exposure associated with the March 27, 2020 bankruptcy of OneWeb Global Limited and its subsidiaries (“OneWeb”) has been substantially reduced. Teledyne’s customer, Airbus OneWeb Satellites, LLC (“AOS”), is a joint venture of OneWeb and Airbus Defense and Space. OneWeb has secured financing and we received an advance payment in October 2020. Additionally, we recently entered into modified contract terms and in October 2020, we resumed limited production. While some risk remains, including a successful exit by OneWeb from bankruptcy, the exposure is substantially mitigated.
As part of a continuing effort to reduce costs and improve operating performance, as well as to respond to the impact of COVID-19, the Company has taken actions to reduce headcount across various businesses, reducing our exposure to weak end markets, such as commercial aerospace.
Recent Acquisitions
Acquisition of the OakGate Technology, Inc.
On January 5, 2020, we acquired OakGate Technology, Inc. (“OakGate”) for $28.5 million in cash, net of cash acquired. Based in Loomis, California, OakGate provides software and hardware designed to test electronic data storage devices from development through manufacturing and end-use applications. The acquired business is part of the Test and Measurement product line within the Instrumentation segment.
Acquisition of Micralyne, Inc.
On August 30, 2019, we acquired Micralyne Inc. (“Micralyne”) for $26.2 million in cash, net of cash acquired and including a $0.5 million purchase price adjustment paid in January 2020. Based in Edmonton, Alberta, Canada, Micralyne is a foundry providing Micro Electro Mechanical Systems or MEMS devices. In particular, Micralyne possesses unique microfluidic technology for biotech applications, as well as capabilities in non-silicon-based MEMS (e.g. gold, polymers) often required for human body compatibility. The acquired business is part of the Digital Imaging segment.
Acquisition of the gas and flame detection business of 3M Company
20
On August 1, 2019, we acquired the gas and flame detection business of 3M Company for $233.5 million in cash, net of cash acquired. The gas and flame detection business includes Oldham, Simtronics, Gas Measurement Instruments, Detcon and select Scott Safety products. The gas and flame detection business provides a portfolio of fixed and portable industrial gas and flame detection instruments used in a variety of industries including petrochemical, power generation, oil and gas, food and beverage, mining and waste water treatment. Principally located in France, the United Kingdom and the United States, the acquired business is part of the Environmental product line within of the Instrumentation segment.
Acquisition of the scientific imaging businesses of Roper Technologies, Inc.
On February 5, 2019, we acquired the scientific imaging businesses of Roper Technologies, Inc. for $224.8 million in cash, net of cash acquired and including a purchase price adjustment. Principally located in the United States and Canada, the acquired businesses are part of the Digital Imaging segment. The acquired businesses include Princeton Instruments, Photometrics and Lumenera. The acquired businesses provide a range of imaging solutions, primarily for life sciences, academic research and customized OEM industrial imaging solutions. Princeton Instruments and Photometrics manufacture state-of-the-art cameras, spectrographs and optics for advanced research in physical sciences, life sciences research and spectroscopy imaging. Applications and markets include materials analysis, quantum technology and cell biology imaging using fluorescence and chemiluminescence. Lumenera primarily provides rugged USB-based customized cameras for markets such as traffic management, as well as life sciences applications.
Teledyne funded the acquisitions with borrowings under its credit facility and cash on hand. The results of each acquisition have been included in Teledyne’s results since the date of each respective acquisition.
Results of Operations
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||
| (in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||
| Net sales | $ | 749.0 | $ | 802.2 | $ | 2,276.9 | $ | 2,329.4 | |||||||||||||||||||||||||||
| Costs and expenses | |||||||||||||||||||||||||||||||||||
| Cost of sales | 458.5 | 487.7 | 1,411.7 | 1,415.2 | |||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | 168.0 | 185.8 | 528.9 | 556.3 | |||||||||||||||||||||||||||||||
| Total costs and expenses | 626.5 | 673.5 | 1,940.6 | 1,971.5 | |||||||||||||||||||||||||||||||
| Operating income | 122.5 | 128.7 | 336.3 | 357.9 | |||||||||||||||||||||||||||||||
| Interest expense, net | (4.1) | (5.5) | (11.9) | (16.3) | |||||||||||||||||||||||||||||||
| Non-service retirement benefit income | 3.2 | 1.9 | 8.9 | 6.1 | |||||||||||||||||||||||||||||||
| Other expense, net | (1.9) | (1.7) | (4.7) | (3.5) | |||||||||||||||||||||||||||||||
| Income before income taxes | 119.7 | 123.4 | 328.6 | 344.2 | |||||||||||||||||||||||||||||||
| Provision for income taxes | 25.8 | 16.7 | 58.8 | 57.6 | |||||||||||||||||||||||||||||||
| Net income | $ | 93.9 | $ | 106.7 | $ | 269.8 | $ | 286.6 | |||||||||||||||||||||||||||
| Third Quarter | % | Nine Months | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales(a): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Instrumentation | $ | 263.5 | $ | 282.9 | (6.9) | % | $ | 811.7 | $ | 803.5 | 1.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Digital Imaging | 239.7 | 244.0 | (1.8) | % | 724.0 | 724.8 | (0.1) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Aerospace and Defense Electronics | 144.8 | 177.1 | (18.2) | % | 444.2 | 519.7 | (14.5) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Engineered Systems | 101.0 | 98.2 | 2.9 | % | 297.0 | 281.4 | 5.5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total net sales | $ | 749.0 | $ | 802.2 | (6.6) | % | $ | 2,276.9 | $ | 2,329.4 | (2.3) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating income: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Instrumentation | $ | 50.7 | $ | 52.0 | (2.5) | % | $ | 150.0 | $ | 140.9 | 6.5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Digital Imaging | 45.5 | 41.2 | 10.4 | % | 136.1 | 129.4 | 5.2 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Aerospace and Defense Electronics | 26.7 | 39.5 | (32.4) | % | 57.6 | 110.6 | (47.9) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Engineered Systems | 12.5 | 10.6 | 17.9 | % | 34.7 | 26.0 | 33.5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate expense | (12.9) | (14.6) | (11.6) | % | (42.1) | (49.0) | (14.1) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total operating income | $ | 122.5 | $ | 128.7 | (4.8) | % | $ | 336.3 | $ | 357.9 | (6.0) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (a) Net sales excludes inter-segment sales of $5.6 million and $18.0 million for the third quarter and first nine months of 2020 respectively, and $8.2 million and $22.2 million for the third quarter and first nine months of 2019. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
21
The table below presents net sales and cost of sales by segment and total company:
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||
| Instrumentation | |||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 263.5 | $ | 282.9 | $ | 811.7 | $ | 803.5 | |||||||||||||||||||||||||||||||||
| Cost of sales | $ | 147.0 | $ | 156.6 | $ | 452.3 | $ | 450.2 | |||||||||||||||||||||||||||||||||
| Cost of sales as a % of net sales | 55.8 | % | 55.4 | % | 55.7 | % | 56.0 | % | |||||||||||||||||||||||||||||||||
| Digital Imaging | |||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 239.7 | $ | 244.0 | $ | 724.0 | $ | 724.8 | |||||||||||||||||||||||||||||||||
| Cost of sales | $ | 139.0 | $ | 144.7 | $ | 420.3 | $ | 421.3 | |||||||||||||||||||||||||||||||||
| Cost of sales as a % of net sales | 58.0 | % | 59.3 | % | 58.1 | % | 58.1 | % | |||||||||||||||||||||||||||||||||
| Aerospace and Defense Electronics | |||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 144.8 | $ | 177.1 | $ | 444.2 | $ | 519.7 | |||||||||||||||||||||||||||||||||
| Cost of sales | $ | 90.6 | $ | 105.2 | $ | 297.8 | $ | 308.6 | |||||||||||||||||||||||||||||||||
| Cost of sales as a % of net sales | 62.6 | % | 59.4 | % | 67.0 | % | 59.4 | % | |||||||||||||||||||||||||||||||||
| Engineered Systems | |||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 101.0 | $ | 98.2 | $ | 297.0 | $ | 281.4 | |||||||||||||||||||||||||||||||||
| Costs of sales | $ | 81.9 | $ | 81.2 | $ | 241.3 | $ | 235.1 | |||||||||||||||||||||||||||||||||
| Cost of sales as a % of net sales | 81.1 | % | 82.7 | % | 81.2 | % | 83.5 | % | |||||||||||||||||||||||||||||||||
| Total Company | |||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 749.0 | $ | 802.2 | $ | 2,276.9 | $ | 2,329.4 | |||||||||||||||||||||||||||||||||
| Costs of sales | $ | 458.5 | $ | 487.7 | $ | 1,411.7 | $ | 1,415.2 | |||||||||||||||||||||||||||||||||
| Cost of sales as a % of net sales | 61.2 | % | 60.8 | % | 62.0 | % | 60.8 | % | |||||||||||||||||||||||||||||||||
Third Quarter and First Nine Months Results
The following is a discussion of our 2020 third quarter and first nine months results compared with the 2019 third quarter and first nine months results. Comparisons are with the corresponding reporting period of 2019, unless noted otherwise.
Third quarter of 2020 compared with the third quarter of 2019
Our third quarter of 2020 net sales decreased 6.6%. Net income for the third quarter of 2020 decreased 12.0%. Net income per diluted share was $2.48 for the third quarter of 2020, compared with net income per diluted share of $2.84. The third quarter of 2020 included $3.9 million in severance, facility consolidation, acquisition and other costs compared with $2.0 million in severance, facility consolidation, acquisition and other costs. The third quarter of 2020 included net discrete income tax benefits of $1.2 million compared with $10.4 million.
Net Sales
The third quarter of 2020 net sales, compared with the third quarter of 2019 net sales, reflected lower net sales in each segment except the Engineered Systems segment. The third quarter of 2020 sales included $11.7 million in incremental net sales from recent acquisitions.
Cost of Sales
Cost of sales decreased $29.2 million in the third quarter of 2020 and primarily reflected the impact of lower sales. Cost of sales as a percentage of net sales increased slightly for the third quarter of 2020 to 61.2%, from 60.8%.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, including research and development expense, decreased $17.8 million in the third quarter of 2020 and primarily reflected the impact of lower sales. Selling, general and administrative expenses for the third quarter of 2020, as a percentage of net sales decreased to 22.4% from 23.2% and reflected the impact of lower corporate expense. Corporate expense, which is included in selling, general and administrative expenses, was $12.9 million for the third quarter of 2020, compared with $14.6 million and reflected lower compensation and travel expense. Stock option compensation expense was $5.7 million for both the third quarter of 2020 and 2019.
22
Pension Service Expense
Pension service expense is included in both cost of sales and selling general and administrative expense. For the third quarter of 2020 pension service expense was $2.6 million compared with $2.4 million. For 2020, the weighted-average discount rate used to determine the benefit obligation for the domestic qualified pension plans was 3.41% compared with 4.59% in 2019.
Operating Income
Operating income for the third quarter of 2020 decreased 4.8%. The third quarter of 2020, compared with the third quarter of 2019, reflected lower operating income in Instrumentation and Aerospace and Defense Electronics segments, partially offset by higher operating income in the Digital Imaging and Engineered Systems segment. The third quarter of 2020 included $3.9 million in severance, facility consolidation, acquisition and other costs, compared with $2.0 million in severance, facility consolidation, acquisition and other costs for the third quarter of 2019. The incremental operating income included in the results for the third quarter of 2020 from recent acquisitions was $2.0 million.
Interest Expense, Non-Service Retirement Benefit Income and Other Income/Expense
Interest expense, net of interest income, was $4.1 million for the third quarter of 2020, compared with $5.5 million, and primarily reflected the impact of lower average interest rates. Non-service retirement benefit income was $3.2 million for the third quarter of 2020, compared with $1.9 million. Other income and expense was expense of $1.9 million for the third quarter of 2020, compared with expense of $1.7 million.
Income Taxes
The income tax provision is calculated using an estimated annual effective tax rate, based upon estimates of annual income, permanent items, statutory tax rates and planned tax strategies in the various jurisdictions in which we operate except that certain loss jurisdictions and discrete items, such as the resolution of uncertain tax positions and share-based accounting income tax benefits, are treated separately.
The Company’s effective income tax rate for the third quarter of 2020 was 21.5%, compared with 13.5%. The third quarter of 2020 reflected net discrete income tax benefits of $1.2 million, which included a $0.7 million income tax benefit related to share-based accounting. The third quarter of 2019 included net discrete tax benefits of $10.4 million, which included a $3.5 million income tax benefit related to share-based accounting. Excluding the net discrete income tax benefits in both periods, the effective tax rates would have been 22.5% for the third quarter of 2020 and 21.9% for the third quarter of 2019. The Company’s annual effective tax rate for fiscal year 2020 is expected to be 22.7% before discrete tax items. In addition, we currently expect less discrete tax items in 2020 compared with 2019.
First nine months of 2020 compared with the first nine months of 2019
Our first nine months of 2020 net sales decreased 2.3%. Net income for the first nine months of 2020 decreased 5.9%. Net income per diluted share was $7.14 for the first nine months of 2020 compared with net income per diluted share of $7.66. The first nine months of 2020 included net discrete income tax benefits of $15.8 million compared with $17.8 million. The first nine months of 2020 included $22.9 million in severance, facility consolidation, acquisition and certain changes in contract cost estimates and other costs, compared with $5.7 million in severance, facility consolidation, acquisition and other costs for the first nine months of 2019.
Net Sales
The first nine months of 2020 net sales, compared with the first nine months of 2019 net sales, reflected lower net sales in the Aerospace and Defense Electronics and Digital Imaging segments, partially offset by higher net sales in Instrumentation and Engineered Systems segments. The first nine months of 2020 included $68.2 million in incremental net sales from recent acquisitions.
Cost of Sales
Cost of sales decreased $3.5 million in the first nine months of 2020 and primarily reflected of lower sales. Cost of sales as a percentage of net sales for the first nine months of 2020 increased to 62.0%, compared with 60.8% and reflected the impact of severance, facility consolidation, acquisition and certain changes in contract cost estimates.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, including research and development, decreased by $27.4 million in the first nine months of 2020 and reflected the impact of lower sales, lower research and development expense and lower corporate expense. Selling, general and administrative expenses for the first nine months of 2020, as a percentage of net sales, decreased slightly to 23.2% compared with 23.9%. In the first nine months of 2020 and 2019, we recorded a total of $18.8 million and $20.4 million, respectively, in stock option compensation expense.
23
Pension Service Expense
Pension service expense for the first nine months of 2020 was $7.8 million compared with $7.1 million.
Operating Income
Operating income for the first nine months of 2020 decreased 6.0%. The first nine months of 2020 compared with the first nine months of 2019, reflected higher operating income in each segment except the Aerospace and Defense segment. The first nine months of 2020 included $22.9 million in severance, facility consolidation, acquisition and other costs, compared with $5.7 million in severance, facility consolidation, acquisition and other costs for the first nine months of 2019. Corporate expense of $42.1 million in the first nine months of 2020 compared with $49.0 million and reflected lower compensation, and consulting expense. The incremental operating income included in the results for the first nine months of 2020 from recent acquisitions was $3.7 million.
Interest Expense, Non-Service Retirement Benefit Income and Other Income/Expense
Interest expense, net of interest income, was $11.9 million for the first nine months of 2020, compared with $16.3 million and primarily reflected lower average interest rates. Other income and expense was expense of $4.7 million for the first nine months of 2020, compared with expense of $3.5 million.
Income Taxes
The Company’s effective income tax rate for the first nine months of 2020 was 17.9% compared with 16.7%. The first nine months of 2020 reflected $15.8 million in net discrete income tax benefits, which included a $15.2 million income tax benefit related to share-based accounting. The first nine months of 2019 reflected $17.8 million in net discrete income tax benefits, which included a $11.2 million income tax benefit related to share-based accounting. Excluding the net discrete income tax items in both periods, the effective tax rates would have been 22.7% for the first nine months of 2020 and 21.9% for the first nine months of 2019.
Segment Results
Segment results includes net sales and operating income by segment but excludes non-service retirement benefit income, equity income or loss, unusual non-recurring legal matter settlements, interest income and expense, gains and losses on the disposition of assets, sublease rental income and non-revenue licensing and royalty income, domestic and foreign income taxes and corporate office expenses. Corporate expense includes various administrative expenses relating to the corporate office and certain nonoperating expenses, including certain acquisition related transaction costs, not allocated to our segments. See Note 14 to these condensed consolidated financial statements for additional segment information.
Instrumentation
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||
| Net sales | $ | 263.5 | $ | 282.9 | $ | 811.7 | $ | 803.5 | |||||||||||||||||||||||||||
| Cost of sales | $ | 147.0 | $ | 156.6 | $ | 452.3 | $ | 450.2 | |||||||||||||||||||||||||||
| Selling, general and administrative expenses | $ | 65.8 | $ | 74.3 | $ | 209.4 | $ | 212.4 | |||||||||||||||||||||||||||
| Operating income | $ | 50.7 | $ | 52.0 | $ | 150.0 | $ | 140.9 | |||||||||||||||||||||||||||
| Cost of sales as a % of net sales | 55.8 | % | 55.4 | % | 55.7 | % | 56.0 | % | |||||||||||||||||||||||||||
| Selling, general and administrative expenses % of net sales | 25.0 | % | 26.2 | % | 25.8 | % | 26.5 | % | |||||||||||||||||||||||||||
| Operating income as a % of net sales | 19.2 | % | 18.4 | % | 18.5 | % | 17.5 | % | |||||||||||||||||||||||||||
Third quarter of 2020 compared with the third quarter of 2019
The Instrumentation segment’s third quarter of 2020 net sales decreased 6.9%. Operating income for the third quarter of 2020 decreased 2.5%.
The third quarter of 2020 net sales decrease resulted from lower sales of marine instrumentation, test and measurement instrumentation and environmental instrumentation. Sales of marine instrumentation decreased $12.9 million, sales of test and measurement instrumentation decreased $4.3 million and sales of environmental instrumentation decreased $2.2 million. Environmental instrumentation included $6.3 million in incremental sales from the 2019 acquisition of the gas and flame detection businesses. Test and measurement instrumentation included $3.1 million in sales from the 2020 acquisition of OakGate. Operating income reflected the impact of lower sales, partially offset by improved product line margins. The operating income included in the results for the third quarter of 2020 from recent acquisitions was $1.2 million.
The third quarter of 2020 cost of sales decreased $9.6 million, primarily as a result of lower sales. Cost of sales as a percentage of net sales for the third quarter of 2020 increased slightly to 55.8% from 55.4%. Third quarter 2020 selling, general and administrative expenses decreased $8.5 million, primarily as a result of lower sales. The selling, general and administrative expense percentage decreased to 25.0% in the third quarter of 2020 from 26.2%.
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First nine months of 2020 compared with the first nine months of 2019
The Instrumentation segment’s first nine months 2020 net sales increased 1.0%. Operating income for the first nine months of 2020 increased of 6.5%.
The first nine months of 2020 net sales increase resulted from higher sales of environmental instrumentation, partially offset by lower sales of marine instrumentation and test and measurement instrumentation. Sales of environmental instrumentation increased $27.6 million and sales of marine instrumentation decreased $10.3 million and sales of test and measurement instrumentation decreased $9.1 million. Environmental instrumentation included $53.9 million in incremental sales from the 2019 acquisition of the gas and flame detection businesses. Test and measurement instrumentation included $10.0 million in sales from the 2020 acquisition of OakGate. The increase in operating income the first nine months of 2020 reflected the impact of higher sales and improved product line margins. The operating income included in the results for the first nine months of 2020 from recent acquisitions was $5.4 million.
The first nine months of 2020 cost of sales increased by $2.1 million and primarily reflected the impact of higher sales. The cost of sales percentage decreased slightly to 55.7% from 56.0%. The first nine months of 2020 selling, general and administrative expenses decreased by $3.0 million and primarily reflected the impact lower research and development costs. The selling, general and administrative expense percentage decreased to 25.8% in the first nine months of 2020 from 26.5% and primarily reflected the impact lower research and development costs.
Digital Imaging
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||
| Net sales | $ | 239.7 | $ | 244.0 | $ | 724.0 | $ | 724.8 | |||||||||||||||||||||||||||
| Cost of sales | $ | 139.0 | $ | 144.7 | $ | 420.3 | $ | 421.3 | |||||||||||||||||||||||||||
| Selling, general and administrative expenses | $ | 55.2 | $ | 58.1 | $ | 167.6 | $ | 174.1 | |||||||||||||||||||||||||||
| Operating income | $ | 45.5 | $ | 41.2 | $ | 136.1 | $ | 129.4 | |||||||||||||||||||||||||||
| Cost of sales as a % of net sales | 58.0 | % | 59.3 | % | 58.1 | % | 58.1 | % | |||||||||||||||||||||||||||
| Selling, general and administrative expenses % of net sales | 23.0 | % | 23.8 | % | 23.1 | % | 24.0 | % | |||||||||||||||||||||||||||
| Operating income as a % of net sales | 19.0 | % | 16.9 | % | 18.8 | % | 17.9 | % | |||||||||||||||||||||||||||
Third quarter of 2020 compared with the third quarter of 2019
The Digital Imaging segment’s third quarter of 2020 net sales decreased 1.8%. Operating income for the third quarter of 2020 increased 10.4%.
The third quarter of 2020 net sales primarily reflected lower sales of X-ray products for dental and medical applications, due in part to deferred patient treatments, partially offset by greater sales of infrared detectors for defense applications, geospatial imaging systems and $2.3 million in incremental sales from a 2019 acquisition. The increase in operating income in the third quarter of 2020 primarily reflected favorable product mix.
The third quarter of 2020 cost of sales decreased $5.7 million and primarily reflected the impact of lower sales. Cost of sales as a percentage of net sales for the third quarter of 2020 decreased to 58.0% from 59.3%. Third quarter 2020 selling, general and administrative expenses decreased $2.9 million and primarily reflected the impact of lower sales. The selling, general and administrative expense percentage decreased slightly to 23.0% in the third quarter of 2020 from 23.8%.
First nine months of 2020 compared with the first nine months of 2019
The Digital Imaging segment’s first nine months of 2020 net sales decreased 0.1%. Operating income for the first nine months of 2020 increased 5.2%.
The first nine months of 2020 net sales primarily reflected of lower sales of X-ray products for dental and medical applications, due in part to deferred patient treatments, partially offset by greater sales of infrared detectors for defense applications, MEMS products, and $4.3 million in incremental sales from recent acquisitions. The increase in operating income in the first nine months of 2020 primarily reflected the impact of lower selling, general and administrative expenses.
The first nine months of 2020 cost of sales decreased $1.0 million and reflected the impact of lower sales. The cost of sales percentage in 2020 remained at 58.1%. Selling, general and administrative expenses, including research and development expense, decreased to $167.6 million in the first nine months of 2020, from $174.1 million and reflected lower costs across most major selling, general and administrative expense categories. The selling, general and administrative expense percentage decreased slightly to 23.1% in the first nine months of 2020 from 24.0%.
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Aerospace and Defense Electronics
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||
| Net sales | $ | 144.8 | $ | 177.1 | $ | 444.2 | $ | 519.7 | |||||||||||||||||||||||||||
| Cost of sales | $ | 90.6 | $ | 105.2 | $ | 297.8 | $ | 308.6 | |||||||||||||||||||||||||||
| Selling, general and administrative expenses | $ | 27.5 | $ | 32.4 | $ | 88.8 | $ | 100.5 | |||||||||||||||||||||||||||
| Operating income | $ | 26.7 | $ | 39.5 | $ | 57.6 | $ | 110.6 | |||||||||||||||||||||||||||
| Cost of sales as a % of net sales | 62.6 | % | 59.4 | % | 67.0 | % | 59.4 | % | |||||||||||||||||||||||||||
| Selling, general and administrative expenses % of net sales | 19.0 | % | 18.3 | % | 20.0 | % | 19.3 | % | |||||||||||||||||||||||||||
| Operating income as a % of net sales | 18.4 | % | 22.3 | % | 13.0 | % | 21.3 | % | |||||||||||||||||||||||||||
Third quarter of 2020 compared with the third quarter of 2019
The Aerospace and Defense Electronics segment’s third quarter of 2020 net sales decreased 18.2%. Operating income for the third quarter of 2020 decreased 32.4%.
The third quarter of 2020 net sales reflected $25.6 million of lower sales for aerospace electronics and lower sales of $6.7 million for defense and space electronics. The continued weakness in the commercial aerospace industry, due to COVID-19, has negatively affected sales of aerospace electronics. Reduced sales of defense and space electronics resulted from lower commercial space sales. The decrease in operating income the third quarter of 2020 reflected impact of lower sales.
The third quarter of 2020 cost of sales decreased $14.6 million and primarily reflected the impact of lower sales. Cost of sales as a percentage of net sales for the third quarter of 2020 increased to 62.6% from 59.4% and reflected impact of product mix differences. Selling, general and administrative expenses, including research and development expense, decreased to $27.5 million in the third quarter of 2020 from $32.4 million and primarily reflected the impact of lower sales. The selling, general and administrative expense percentage increased slightly to 19.0% in the third quarter of 2020 from 18.3%.
First nine months of 2020 compared with the first nine months of 2019
The Aerospace and Defense Electronics segment’s first nine months of 2020 net sales decreased 14.5%. Operating income for the first nine months of 2020 decreased 47.9%.
The first nine months of 2020 net sales reflected $72.6 million of lower sales for aerospace electronics and lower sales of $2.9 million for defense and space electronics. The continued weakness in the commercial aerospace industry, due to COVID-19, has negatively affected sales of aerospace electronics. The decrease in operating income in the first nine months of 2020 primarily reflected the impact of lower sales and $12.6 million of higher severance, facility consolidation and certain unfavorable changes in contract cost estimates.
The first nine months of 2020 cost of sales decreased by $10.8 million and reflected the impact of lower sales. Cost of sales as a percentage of sales for the first nine months of 2020 increased to 67.0% from 59.4% and reflected impact of higher severance and facility consolidation costs. Selling, general and administrative expenses, including research and development expense, decreased to $88.8 million in the first nine months of 2020, compared with $100.5 million for the first nine months of 2019 and primarily reflected the impact of lower sales. The selling, general and administrative expense percentage increased slightly to 20.0% in the first nine months of 2020, compared with 19.3%.
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Engineered Systems
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||
| Net sales | $ | 101.0 | $ | 98.2 | $ | 297.0 | $ | 281.4 | |||||||||||||||||||||||||||
| Cost of sales | $ | 81.9 | $ | 81.2 | $ | 241.3 | $ | 235.1 | |||||||||||||||||||||||||||
| Selling, general and administrative expenses | $ | 6.6 | $ | 6.4 | $ | 21.0 | $ | 20.3 | |||||||||||||||||||||||||||
| Operating income | $ | 12.5 | $ | 10.6 | $ | 34.7 | $ | 26.0 | |||||||||||||||||||||||||||
| Cost of sales as a % of net sales | 81.1 | % | 82.7 | % | 81.2 | % | 83.5 | % | |||||||||||||||||||||||||||
| Selling, general and administrative expenses % of net sales | 6.5 | % | 6.5 | % | 7.1 | % | 7.3 | % | |||||||||||||||||||||||||||
| Operating income as a % of net sales | 12.4 | % | 10.8 | % | 11.7 | % | 9.2 | % | |||||||||||||||||||||||||||
Third quarter of 2020 compared with the third quarter of 2019
The Engineered Systems segment’s third quarter of 2020 net sales increased 2.9%. Operating income for the third quarter of 2020 increased 17.9%.
The third quarter of 2020 net sales reflected higher sales of $2.0 million of engineered products and $1.5 million for turbine engines, partially offset by lower sales of $0.7 million of energy systems. The higher sales of engineered products and services primarily reflected increased sales from space, nuclear and other manufacturing programs, as well as electronic manufacturing services products. The increase in operating income in the third quarter of 2020 reflected the impact of higher sales and a greater mix of higher margin fixed-price manufacturing programs.
The third quarter of 2020 cost of sales increased $0.7 million and reflected the impact of higher sales. Cost of sales as a percentage of net sales for the third quarter of 2020 decreased to 81.1% from 82.7%. Selling, general and administrative expenses was $6.6 million for the third quarter of 2020 compared with $6.4 million in 2019. The selling, general and administrative expense percentage was 6.5% for the both the third quarter of 2020 and 2019.
First nine months of 2020 compared with the first nine months of 2019
The Engineered Systems segment’s first nine months of 2020 net sales increased 5.5%. Operating income for the first nine months of 2020 increased 33.5%.
The first nine months of 2020 net sales reflected higher sales of $10.6 million of engineered products and services and $6.7 for turbine engines, partially offset by $1.7 million of lower sales of energy systems products. The higher sales of engineered products and services primarily reflected increased sales from marine, space, nuclear and other manufacturing programs, as well as electronic manufacturing services products, partially offset by lower sales related to missile defense. The higher sales of turbine engines reflected increased sales for the Harpoon missile program. Operating income in the first nine months of 2020 reflected the impact of higher sales.
The first nine months of 2020 cost of sales increased by $6.2 million and primarily reflected the impact of higher sales. Cost of sales as a percentage of sales for the first nine months of 2020 decreased to 81.2% from 83.5%. Selling, general and administrative expenses, including research and development expense, increased to $21.0 million for the first nine months of 2020, compared with $20.3 million for the first nine months of 2019 and primarily reflected the impact of higher sales. The selling, general and administrative expense percentage decreased slightly to 7.1% for the first nine months of 2020 compared with 7.3%.
Financial Condition, Liquidity and Capital Resources
Our net cash provided by operating activities was $382.5 million for the first nine months of 2020, compared with net cash provided by operating activities of $314.2 million. The higher cash provided by operating activities in the first nine months of 2020 reflected lower tax payments, improved accounts receivable collections and cash flow from recent acquisitions, partially offset by higher accounts payable and severance payments.
Our net cash used by investing activities was $80.9 million for the first nine months of 2020, compared with net cash used by investing activities of $547.8 million. The 2020 and 2019 first nine months included $29.0 million and $483.7 million, respectively, for recent acquisitions. On January 5, 2020, we acquired OakGate for $28.5 million in cash. In February 2019, we acquired the scientific imaging businesses of Roper Technologies, Inc. for $224.8 million in cash. On August 1, 2019, we acquired the gas and flame detection business for $230.0 million in cash. On August 30, 2019, we acquired Micralyne Inc. for $25.0 million. Capital expenditures for the first nine months of 2020 and 2019 were $52.0 million and $64.5 million, respectively. Our goodwill was $2,091.3 million at September 27, 2020 and $2,050.5 million at December 29, 2019. Goodwill resulting from the acquisition of OakGate will not be deductible for tax purposes. Teledyne’s net acquired intangible assets were $408.8 million at September 27, 2020 and $430.8 million at December 29, 2019. The decrease in the balance of net acquired intangible assets primarily reflected amortization of acquired intangible assets. The Company completed the process of specifically identifying the amount to be assigned to certain assets, including acquired intangible assets, and liabilities and the related impact on taxes and goodwill for acquisitions made in 2019. The Company is in the process of specifically
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identifying the amount to be assigned to certain assets, including acquired intangible assets, and liabilities and the related impact on taxes and goodwill for the OakGate acquisition since there was insufficient time between the acquisition dates and the end of the period to finalize the analysis. Financing activities used cash of $45.9 million for the first nine months of 2020, compared with cash provided by financing activities of $216.7 million. Proceeds from the exercise of stock options were $29.5 million for the first nine months of 2020 compared with $29.2 million for the first nine months of 2019.
Total debt at September 27, 2020 was $786.7 million. At September 27, 2020, $125.0 million was outstanding under the $750.0 million credit facility. At September 27, 2020, Teledyne had $26.4 million in outstanding letters of credit. Available borrowing capacity under the $750.0 million credit facility, which is reduced by borrowings and certain outstanding letters of credit, was $614.7 million at September 27, 2020. The credit agreements require the Company to comply with various financial and operating covenants and at September 27, 2020, the Company was in compliance with these covenants.
Our principal cash and capital requirements are to fund working capital needs, capital expenditures, income tax payments, pension contributions, debt service requirements and the stock repurchase program, as well as acquisitions. It is anticipated that operating cash flow, together with available borrowings under the credit facility described below, will be sufficient to meet these requirements over the next twelve months. We may raise debt capital, depending on financial, market and economic conditions. We may need to raise additional capital to support acquisitions. We currently expect to spend approximately $70.0 million for capital expenditures in 2020, of which $52.0 million has been spent in the first nine months of 2020. No cash pension contributions have been made since 2013 or are planned for the remainder of 2020 for the domestic qualified pension plan.
As of September 27, 2020, the Company had an adequate amount of margin between required financial covenant ratios (as required by applicable credit agreements) and our actual ratios. At September 27, 2020, the required financial ratios and the actual ratios were as follows:
$750.0 million Credit Facility expires March 2024 and $150.0 million term loan due October 2024 (issued October 2019) | ||||||||||||||||||||
| Financial Covenants | Requirement | Actual Measure | ||||||||||||||||||
| Consolidated Leverage Ratio (Net Debt/EBITDA) (a) | No more than 3.25 to 1 | 1.38 to 1 | ||||||||||||||||||
| Consolidated Interest Coverage Ratio (EBITDA/Interest) (b) | No less than 3.0 to 1 | 36.4 to 1 | ||||||||||||||||||
$510.7 million Private Placement Senior Notes due from November 2020 to 2024 | ||||||||||||||||||||
| Financial Covenants | Requirement | Actual Measure | ||||||||||||||||||
| Consolidated Leverage Ratio (Net Debt/EBITDA) (a) | No more than 3.25 to 1 | 1.38 to 1 | ||||||||||||||||||
| Consolidated Interest Coverage Ratio (EBITDA/Interest) (b) | No less than 3.0 to 1 | 36.4 to 1 | ||||||||||||||||||
a) The Consolidated Leverage Ratio is equal to Net Debt/EBITDA as defined in our private placement note purchase agreement and our $750.0 million credit agreement.
b) The Consolidated Interest Coverage Ratio is equal to EBITDA/Interest as defined in our private placement note purchase agreement and our $750.0 million credit agreement.
Our liquidity is not dependent upon the use of off-balance sheet financial arrangements. We have no off-balance sheet financing arrangements that incorporate the use of special purpose entities or unconsolidated entities.
Critical Accounting Policies
Our critical accounting policies are those that are reflective of significant judgments and uncertainties, and may potentially result in materially different results under different assumptions and conditions. Our critical accounting policies are the following: revenue recognition; accounting for pension plans; accounting for business combinations, goodwill, acquired intangible assets and other long-lived assets; and accounting for income taxes.
For additional discussion of the application of the critical accounting policies and other accounting policies, see Note 1 to these condensed consolidated financial statements and also Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Note 2 of the Notes to Consolidated Financial Statements included in Teledyne’s 2019 Form 10-K.
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Safe Harbor Cautionary Statement Regarding Forward-Looking Information
From time to time we make, and this report contains, forward looking statements, as defined in the Private Securities Litigation Reform Act of 1995, directly or indirectly relating to sales, earnings, operating margin, growth opportunities, acquisitions, product sales, capital expenditures, pension matters, stock option compensation expense, the credit facility, interest expense, severance, relocation and facility consolidation costs, environmental remediation costs, stock repurchases, taxes, exchange rate fluctuations and strategic plans. Forward-looking statements are generally accompanied by words such as “estimate”, “project”, “predict”, “believes” or “expect”, that convey the uncertainty of future events or outcomes. All statements made in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in other sections of this Form 10-Q that are not historical in nature should be considered forward-looking.
Actual results could differ materially from these forward-looking statements. Many factors could change the anticipated results, including: disruptions in the global economy caused by the spread of the COVID-19 pandemic resulting in production, supply, contractual and other disruptions, including facility closures and furloughs and travel restrictions; customer and supplier bankruptcies; changes in demand for products sold to the defense electronics, instrumentation, digital imaging, energy exploration and production, commercial aviation, semiconductor and communications markets; funding, continuation and award of government programs; cuts to defense spending resulting from existing and future deficit reduction measures or changes to U.S. and foreign government spending and budget priorities triggered by the COVID-19 pandemic; the outcome of the OneWeb bankruptcy; impacts from the United Kingdom’s exit from the European Union; uncertainties related to the policies of the U.S. Presidential Administration and uncertainties related to the 2020 Presidential and Congressional elections; the imposition and expansion of, and responses to, trade sanctions and tariffs; escalating economic and diplomatic tension between China and the United States; and threats to the security of our confidential and proprietary information, including cyber security threats. Lower oil and natural gas prices, as well as instability in the Middle East or other oil producing regions, and new regulations or restrictions relating to energy production, could further negatively affect our businesses that supply the oil and gas industry. Disruptions from the production delay of Boeing’s 737 Max aircraft and continued weakness in the commercial aerospace industry due to the COVID-19 pandemic will negatively affect our aerospace electronics businesses. In addition, financial market fluctuations affect the value of the company's pension assets.
Changes in the policies of U.S. and foreign governments, including economic sanctions, could result, over time, in reductions or realignment in defense or other government spending and further changes in programs in which the company participates.
While the company’s growth strategy includes possible acquisitions, we cannot provide any assurance as to when, if or on what terms any acquisitions will be made. Acquisitions involve various inherent risks, such as, among others, our ability to integrate acquired businesses, retain customers and achieve identified financial and operating synergies. There are additional risks associated with acquiring, owning and operating businesses internationally, including those arising from U.S. and foreign government policy changes or actions and exchange rate fluctuations.
While we believe our internal and disclosure control systems are effective, there are inherent limitations in all control systems, and misstatements due to error or fraud may occur and not be detected.
Readers are urged to read our periodic reports filed with the Securities and Exchange Commission for a more complete description of our Company, its businesses, its strategies and the various risks that we face. Various risks are identified in Teledyne’s 2019 Form 10-K and subsequent Quarterly Reports on Form 10-Q.
We assume no duty to publicly update or revise any forward-looking statements, whether as a result of new information or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Except as set forth below, there were no material changes to the information provided under “Item 7A, Quantitative and Qualitative Disclosure About Market Risk” included in our 2019 Form 10-K.
Market Risk
Teledyne transacts business in various foreign currencies and has international sales and expenses denominated in foreign currencies, subjecting the Company to foreign currency risk. The Company’s primary objective is to protect the United States dollar value of future cash flows and minimize the volatility of reported earnings. The Company utilizes foreign currency forward contracts to reduce the volatility of cash flows primarily related to forecasted revenue and expenses denominated in Canadian dollars for our Canadian companies, and in British pounds for our U.K. companies. These contracts are designated and qualify as cash flow hedges. The Company has converted U.S. dollar denominated, variable rate and fixed rate debt obligations of a European subsidiary, into euro fixed rate obligations using a receive float, pay fixed cross currency swap, and a receive fixed, pay fixed cross currency swap. These cross currency swaps are designated as cash flow hedges. In addition, the Company has converted domestic U.S. variable rate debt to fixed rate debt using a receive variable, pay fixed interest rate swap. The interest rate swap is also designated as a cash flow hedge.
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Foreign Currency Exchange Rate Risk
Notwithstanding our efforts to mitigate portions of our foreign currency exchange rate risks, there can be no assurance that our hedging activities will adequately protect us against the risks associated with foreign currency fluctuations. A hypothetical 10 percent price change in the U.S. dollar from its value at September 27, 2020 would result in a decrease or increase in the fair value of our foreign currency forward contracts designated as cash flow hedges to buy Canadian dollars and to sell U.S. dollars by approximately $14.8 million. A hypothetical 10 percent price change in the U.S. dollar from its value at September 27, 2020 would result in a decrease or increase in the fair value of our foreign currency forward contracts designated as cash flow hedges to buy British Pounds and to sell U.S. dollars by approximately $0.3 million. For additional information, see Derivative Instruments discussed in Note 4 to these condensed consolidated financial statements.
Market Risk Disclosure
We are exposed to market risk through the interest rate on our borrowings under our $750.0 million credit facility and our $150.0 million term loan. As of September 27, 2020, we had $125.0 million in outstanding under our credit facility and $150.0 million outstanding under our term loan for a total $275.0 million. A 100 basis point increase in interest rates would result in an increase in annual interest expense of approximately $2.75 million, assuming the $275.0 million in debt was outstanding for the full year. A hypothetical 10 percent price change in the U.S. dollar from its value at September 27, 2020 would result in a decrease or increase in the fair value of our Euro/U.S. Dollar cross currency swap designated as a cash flow hedge by approximately $29.9 million. A hypothetical 10 percent increase in the U.S. interest rates at September 27, 2020 would result in an increase in the fair value of our U.S. dollar interest rate swap designated as a cash flow hedge by approximately $3.0 million.
| Item 4. | Controls and Procedures | ||||
Our disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934, are recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to provide reasonable assurance that information required to be disclosed by us in such reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Our Chief Executive Officer and our Senior Vice President and Chief Financial Officer, with the participation and assistance of other members of management, have reviewed the effectiveness of our disclosure controls and procedures and have concluded that the disclosure controls and procedures, as of September 27, 2020, are effective at the reasonable assurance level.
In connection with our evaluation during the quarterly period ended September 27, 2020, we have made no changes in our internal controls over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
PART II OTHER INFORMATION
| Item 1. | Legal Proceedings | ||||
See Item 1 of Part 1, “Financial Statements -- Note 11 -- Lawsuits, Claims, Commitments, Contingencies and Related Matters.”
| Item 1A. | Risk Factors | ||||
There are no material changes to the risk factors previously disclosed in our 2019 Form 10-K in response to Item 1A to Part 1 of Form 10-K. See also Part I Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information regarding COVID-19 risks and Part I Item 3, Quantitative and Qualitative Disclosures About Market Risk, for updated disclosures about interest rate exposure and exchange rate risks.
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| Item 6. | Exhibits | ||||
| (a) | Exhibits | |||||||
| Exhibit 31.1 | ||||||||
| Exhibit 31.2 | ||||||||
| Exhibit 32.1 | ||||||||
| Exhibit 32.2 | ||||||||
| Exhibit 101 (INS) | XBRL Instance Document | |||||||
| Exhibit 101 (SCH) | XBRL Schema Document | |||||||
| Exhibit 101 (CAL) | XBRL Calculation Linkbase Document | |||||||
| Exhibit 101 (LAB) | XBRL Label Linkbase Document XBRL Schema Document | |||||||
| Exhibit 101 (PRE) | XBRL Presentation Linkbase Document XBRL Schema Document | |||||||
| Exhibit 101 (DEF) | XBRL Definition Linkbase Document XBRL Schema Document | |||||||
| Exhibit 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| TELEDYNE TECHNOLOGIES INCORPORATED | |||||||||||||||||
| DATE: October 21, 2020 | By: | /s/ Susan L. Main | |||||||||||||||
| Susan L. Main, Senior Vice President and | |||||||||||||||||
| Chief Financial Officer | |||||||||||||||||
| (Principal Financial Officer and Authorized Officer) | |||||||||||||||||
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Teledyne Technologies Incorporated
Index to Exhibits
| Exhibit Number | Description | ||||
| Exhibit 31.1 | |||||
| Exhibit 31.2 | |||||
| Exhibit 32.1 | |||||
| Exhibit 32.2 | |||||
| Exhibit 101 (INS) | XBRL Instance Document | ||||
| Exhibit 101 (SCH) | XBRL Schema Document | ||||
| Exhibit 101 (CAL) | XBRL Calculation Linkbase Document | ||||
| Exhibit 101 (DEF) | XBRL Definition Linkbase Document XBRL Schema Document | ||||
| Exhibit 101 (LAB) | XBRL Label Linkbase Document XBRL Schema Document | ||||
| Exhibit 101 (PRE) | XBRL Presentation Linkbase Document XBRL Schema Document | ||||
| Exhibit 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||
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