Teleflex Incorporated — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with the three months ended April 1, 2012. Teleflex designs, manufactures and sells medical devices globally, principally for critical care, surgical and cardiac applications, and also provides OEM products and services.
Financial performance
| Metric | Q1 2013 | Prior-year quarter |
|---|---|---|
| Net revenues | $411.9 million | $380.6 million |
| Gross profit / margin | $200.5 million / 48.7% | $184.1 million / 48.4% |
| Income (loss) from continuing operations | $27.7 million | $(284.1) million |
| Net income (loss) attributable to common shareholders | $27.0 million; diluted EPS $0.63 | $(283.7) million; diluted EPS $(6.96) |
| Segment operating profit | $58.6 million | $60.4 million |
| Cash from continuing operating activities | $6.1 million | $26.3 million |
Revenue increased 8.2% as reported and 8.2% on a constant-currency basis. Management attributed approximately $34.0 million of revenue to 2012 acquisitions, including about $33.5 million from LMA; new products and pricing also contributed, partly offset by approximately $9.0 million of lower volume, including fewer shipping days. Gross margin improved modestly, while segment operating profit fell 3.1%.
By product group, constant-currency revenue increased 12.0% in Critical Care and 3.3% in Surgical Care, and declined 7.3% in Cardiac Care and 1.1% in OEM. Segment revenue increased 8.5% in Americas, 5.8% in EMEA and 24.8% in Asia, while OEM declined 1.1%. Segment operating profit decreased in Americas and EMEA, and increased in Asia and OEM.
Cash, liquidity and debt
- Cash and equivalents were $306.6 million at March 31, down from $337.0 million at year-end. Continuing operations generated $6.1 million of operating cash; capital expenditures were $15.6 million, implying approximately $9.5 million of negative operating cash flow after capital expenditures.
- Total debt was $972.7 million, including $968.0 million of long-term borrowings and $4.7 million of current borrowings. Net debt was $666.1 million, and net debt to total capital was 27%, versus 26% at year-end.
- Current assets were $1.058 billion and current liabilities $261.5 million. The company reported that it expected to meet cash requirements and access credit as needed over the next 12 months.
- Cash dividends were $0.34 per share, or $14.0 million in total. No shares had been repurchased under the existing authorization.
Material changes, outlook and risks
- The prior-year quarter included a $332.1 million goodwill impairment charge following a change in reporting structure. The resulting large year-over-year earnings swing is not a like-for-like indicator of operating improvement; Q1 2013 also included $9.2 million of restructuring and other impairment charges.
- Q1 2013 restructuring and impairment charges included a $4.5 million write-off of acquired Axiom in-process research and development, $2.7 million related to the LMA integration plan and approximately $2.0 million for other restructuring. The company estimated up to approximately $15 million of charges over the LMA program. It expected a further $2.3 million of charges on 2012 initiatives and approximately $2.7 million of future lease termination costs for a 2011 program.
- Management estimated the 2.3% medical-device excise tax would cost approximately $13 million annually beginning in 2013; $2.9 million was recorded in Q1 selling, general and administrative expense. No specific earnings or revenue guidance is provided in the supplied filing text.
- European public-health-system collections remain a notable exposure. Net receivables from Italy, Spain, Portugal and Greece were $78.3 million, versus $70.6 million at year-end; receivables in those four countries represented 37% of consolidated net receivables. Average receivable days were 297. Management warned that further deterioration could delay payments and increase credit losses.
- The company reported $41.5 million of contingent consideration liabilities for acquisitions, including $21.9 million current; possible undiscounted payments were estimated at $5.0 million to $87.3 million. It also disclosed environmental accruals of approximately $8.7 million in total and noted that ultimate costs could exceed accrued amounts. Routine litigation was not believed likely to be material, but an unfavorable resolution could be adverse.
- Teleflex noted that its 3.875% convertible notes could become convertible if the stock-price conditions are met, potentially requiring current classification. It said it believed it could fund principal repayment using cash, its credit facility or capital markets. The senior credit agreement requires a leverage ratio no greater than 4.0:1 and interest coverage of at least 3.5:1; the filing does not provide the quarter-end covenant ratios in the supplied text.
Most important facts for investors to verify
- How much of reported growth is sustainable organic growth after separating acquisition contributions, fewer shipping days, pricing and product-level volume trends.
- Whether operating cash generation recovers as inventory and other working-capital needs normalize, and how cash balances evolve against dividends, capital spending and debt obligations.
- European public-hospital receivables, collection timing, allowance adequacy and any additional credit losses.
- Progress and total costs of LMA integration and other restructuring, and the commercial prospects underlying acquisition-related contingent payments.
- Convertible-note conversion status, covenant headroom, refinancing options and the effect of the medical-device excise tax and raw-material costs on margins.