Business context and reporting period
Teleflex Incorporated’s Form 10-K covers the fiscal year ended December 31, 2010; it also reports unaudited fourth-quarter results. Teleflex is a global medical-technology supplier serving more than 130 countries, while continuing to operate Aerospace and Commercial businesses it expects to divest over time. Medical contributed 80% of 2010 revenue and 87% of segment operating profit.
Key financial metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Net revenue | $1.802 billion | $1.766 billion |
| Gross profit / margin | $794.1 million / 44.1% | $772.2 million / 43.7% |
| Income from continuing operations | $125.9 million | $134.8 million |
| Diluted EPS from continuing operations | $3.09 | $3.35 |
| Net income attributable to common shareholders | $201.1 million | $303.0 million |
| Operating cash flow from continuing operations | $206.6 million | $172.2 million |
| Free cash flow (non-GAAP) | $173.0 million | $143.5 million |
| Total debt / net debt | $917.1 million / $708.6 million | $1.197 billion / $1.008 billion |
| Cash and cash equivalents | $208.5 million | $188.3 million |
Revenue grew about 2%, with 3% core growth partly offset by dispositions and a Medical variable-interest-entity deconsolidation. Gross margin improved 0.4 percentage points. Continuing-operations income declined despite higher operating income before interest, debt-extinguishment losses and taxes ($273.6 million versus $256.9 million), primarily reflecting $46.6 million of 2010 debt-extinguishment losses. Total net income also fell as income from discontinued operations declined to $76.5 million from $179.2 million, which included substantial prior-year divestiture gains.
Fourth-quarter 2010 revenue was $493.2 million, versus $486.2 million a year earlier; continuing-operations income was $28.9 million versus $46.2 million. Fourth-quarter diluted EPS from continuing operations was $0.71, compared with $1.15.
Operating cash flow increased year over year, but comparisons were affected by a $59.5 million tax refund in 2010 and a $97.5 million tax payment related to a divestiture in 2009. Capital expenditures were $33.5 million. At year-end, current assets were $921.2 million and current liabilities were $420.8 million. The company reported a 2.65:1 consolidated leverage ratio and 4.68:1 interest coverage ratio, within covenant limits of no more than 3.50:1 and no less than 3.50:1, respectively.
Material changes versus the prior comparable period
- Medical revenue was essentially flat at $1.433 billion; segment operating profit fell 9% to $276.1 million. A voluntary custom IV tubing recall reduced critical-care revenue by about $17 million, and recall, remediation and related shutdown costs weighed on results.
- Aerospace revenue rose 6% to $173.5 million and segment operating profit increased to $22.5 million from $9.7 million, reflecting market recovery, higher volumes, favorable sales mix and manufacturing efficiencies.
- Commercial revenue rose 16% to $194.9 million and segment operating profit increased to $17.9 million from $10.8 million, principally as recreational marine markets recovered.
- SG&A increased to $475.3 million from $454.2 million, and R&D rose to $42.6 million from $36.7 million. Management cited higher sales, marketing and clinical-education investment, recall/remediation costs and increased R&D spending.
- Debt declined by approximately $279 million year over year. August refinancing included $400 million of 3.875% convertible notes due 2017, repayment of $200 million of term loans and retirement of the 2007 notes; Teleflex also prepaid $165.8 million of 2004 notes in December.
Outlook, management commentary, risks and unusual items
Management described a strategy of sustainable profitable growth through new products, expanded geographic reach, sales-channel investment and selective acquisitions, alongside margin improvement and a gradual shift toward a medical-technology-focused portfolio. It expected commercial aviation conditions to improve, while anticipating limited near-term growth in recreational marine. The filing provides no specific consolidated revenue or earnings guidance. Management said it did not foresee difficulty meeting cash requirements or accessing credit over the next 12 months, while noting that weaker economic conditions could impair customer collections and demand.
- Regulatory: Arrow’s 2007 FDA corporate warning letter remained open. Following reinspection, FDA observations were classified as “voluntary action indicated”; Teleflex was still seeking formal closure. Unsatisfactory remediation could lead to further regulatory action.
- Product and operating risks: The custom IV tubing and certain intra-aortic balloon catheter recalls drove remediation costs; a fourth-quarter catheter recall had an approximately $3 million impact. Product liability, further recalls, regulatory compliance, manufacturing interruptions and supplier constraints are material risks.
- Healthcare reform: Teleflex estimated the U.S. medical-device excise tax taking effect in 2013 could cost approximately $16 million annually. Pricing pressure, reimbursement changes and public-hospital payment delays could also affect performance.
- Leverage and liquidity: Debt covenants restrict certain borrowing, acquisitions, dividends and repurchases. The company reported approximately $396 million available under its revolving credit facility and $25.9 million under its receivables facility at year-end. It relies in part on foreign cash flows and repatriations to support U.S. debt service.
- Other unusual items and subsequent events: 2010 included gains on sales of businesses, including the Actuation, Heavy Lift and SSI businesses, and $46.6 million in debt-extinguishment losses. The CEO changed in January 2011; the former CEO’s estimated $5.5 million separation payment was expected to be recorded in first-quarter 2011. Teleflex acquired VasoNova in January 2011 for $25 million upfront, with potential additional payments of $15 million to $30 million.
Important facts for investors to verify
- Whether the FDA formally closes Arrow’s warning letter and whether any further remediation or restrictions arise.
- The financial and operational effects of product recalls, including any additional costs, sales disruption or liability.
- Underlying Medical growth and profitability after separating recall costs, investment spending, divestitures and accounting changes.
- Debt repayment, refinancing costs, covenant headroom and the potential cash or dilution effects of the convertible notes and warrants.
- Collection trends at European public hospitals, foreign-currency exposure and the realization of operating cash flow excluding tax refunds and other one-time effects.
- The implementation and actual cost of the medical-device excise tax, and progress toward divesting non-core businesses.