Teleflex Incorporated — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. Although the request identifies 2011 Q4, this filing is an annual report; selected fourth-quarter results are included below. Teleflex completed its shift to a medical-technology-only company after selling its remaining aerospace and commercial businesses.
Business and financial performance
Teleflex develops and sells medical devices, primarily single-use products for critical care and surgical procedures, in more than 130 countries. Critical Care generated about 66% of revenue. The company reported one operating segment for 2011 and planned to report four beginning in 2012.
| Metric | FY2011 | FY2010 | Change / context |
|---|---|---|---|
| Net revenue | $1,528.9 million | $1,433.3 million | Up 6.7%; 4.3% constant-currency growth and 2.4% favorable currency impact |
| Gross profit / margin | $718.8 million / 47.0% | $688.5 million / 48.0% | Margin down 1.0 percentage point |
| Income from continuing operations | $121.7 million | $89.7 million | Diluted continuing-operations EPS: $2.96 vs. $2.21 |
| Net income attributable to common shareholders | $323.3 million | $201.1 million | Includes substantial discontinued-operation gains |
| Operating cash flow, continuing operations | $103.1 million | $151.6 million | Down, mainly reflecting a $59.5 million tax refund received in 2010 and increased inventory |
| Free cash flow | $58.0 million | $121.6 million | Non-GAAP; operating cash flow less capital expenditures |
| Total debt / cash / net debt | $959.8 million / $584.1 million / $375.7 million | $917.1 million / $208.5 million / $708.6 million | Net debt to total capital fell to 16% from 28% |
| Current assets / current liabilities | $1,280.3 million / $271.0 million | $921.2 million / $420.8 million | Cash increased substantially during the year |
All product groups grew in 2011: Critical Care revenue rose 6.4% to $1,004.1 million; Surgical Care rose 5.6% to $277.4 million; Cardiac Care rose 13.3% to $80.0 million; and OEM and Development Services rose 7.8% to $166.3 million. Growth reflected higher product sales and favorable currency movements.
For Q4 2011, revenue was $411.7 million versus $386.3 million in Q4 2010. Continuing-operations income was $41.9 million versus $13.6 million; net income was $168.2 million versus $81.4 million, with the quarterly net result boosted by discontinued operations and disposal gains.
Material changes and notable items
- Gross margin declined due primarily to higher manufacturing, raw-material and freight costs, plus a $2.0 million SKU-rationalization charge; pricing increases were partly offset by European price erosion.
- Continuing-operations income benefited from lower interest expense, but included $15.4 million of debt-extinguishment losses. The 2010 comparison included $46.6 million of such losses.
- FY2011 net income included $203.3 million of income from discontinued operations, including $270.6 million of pretax disposal gains. The cargo systems and container businesses were sold for approximately $280 million; the marine business was sold in March 2011. Do not treat reported net-income growth as solely recurring operating growth.
- Operating cash flow declined, while investing cash flow benefited from divestiture proceeds. Cash at year-end was $584.1 million, of which $469.5 million was held by foreign subsidiaries; repatriation could trigger additional taxes.
- Teleflex issued $250 million of 6.875% subordinated notes due 2019, prepaid its 2004 notes, repaid term debt and terminated a $350 million interest-rate swap, paying $14.8 million. The swap termination left $7.0 million after tax in accumulated other comprehensive income to be amortized as interest expense through September 2012.
Liquidity, outlook and risks
Management said it expected cash flow, available cash, the revolving credit facility and receivables securitization program to fund operating needs, capital spending and debt obligations for the next 12 months and the foreseeable future, and expected covenant compliance through 2012. At year-end, approximately $397 million was available under the $400 million revolver; the receivables facility had $42.5 million of borrowing capacity and $4.7 million outstanding. Debt covenants require leverage of no more than 4.0:1 and interest coverage of at least 3.50:1; reported ratios were 2.99:1 and 4.95:1.
The filing provides no clear numerical 2012 revenue or earnings guidance. Management planned to begin transitioning to a single ERP system in 2012 and reorganize reporting segments. A goodwill impairment test under the new reporting-unit structure was planned for Q1 2012 and could result in material impairment charges. The North American reporting unit’s fair value exceeded carrying value by about 12% at year-end; it held approximately 68% of goodwill.
- Public hospitals in Italy, Spain, Portugal and Greece represented about 9% of revenue but 38% of net trade receivables at year-end; collection delays or further deterioration could pressure cash flow and earnings.
- Management estimated the U.S. medical-device excise tax beginning in 2013 would cost approximately $15 million annually; the filing notes the full effect of healthcare reform remained uncertain.
- Other material risks include product liability, recalls, regulatory compliance, reimbursement and pricing pressure, commodity costs, foreign exchange, restructuring execution, acquisition integration, and substantial indebtedness and restrictive debt covenants.
- The FDA formally confirmed in June 2011 that all issues from ARROW’s 2007 corporate warning letter had been addressed.
Important facts for investors to verify
- Separate recurring medical-device operating performance from disposal gains and discontinued-operation results when assessing earnings and EPS.
- Review the 2012 goodwill allocation and impairment test, especially for the North American businesses.
- Track collections and receivables exposure in southern Europe, and the cash conversion of higher inventory levels.
- Confirm covenant headroom, debt maturities, access to committed facilities, and the location and tax cost of foreign cash.
- Monitor margin recovery, the expected 2013 device excise tax, ERP transition execution, and the effect of the new reporting segments.