Teleflex Incorporated — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 29, 2013; comparisons are with the corresponding 2012 periods. Teleflex is a global medical-technology company selling primarily single-use devices for critical care, surgical and cardiac applications, as well as products and services to medical-device manufacturers.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $413.8m | $368.1m | $1,245.7m | $1,132.0m |
| Gross profit / margin | $204.0m / 49.3% | $180.6m / 49.1% | $614.0m / 49.3% | $549.0m / 48.5% |
| Income from continuing operations | $45.8m | $24.5m | $116.9m | $(212.4)m |
| Net income (loss) attributable to common shareholders | $46.6m | $21.7m | $116.1m | $(219.4)m |
| Diluted EPS | $1.08 | $0.52 | $2.68 | $(5.37) |
| Operating cash flow, continuing operations | Not separately reported | Not separately reported | $134.2m | $139.1m |
Revenue increased 12.4% in Q3 and 10.1% year to date; constant-currency growth was 11.6% and 9.8%, respectively. Acquisitions, principally LMA, were the largest contributor. Q3 operating income before interest, debt-extinguishment loss and taxes was $66.0m, versus $49.8m. For nine months it was $179.2m, versus a loss of $155.8m in 2012, which included a $332.1m goodwill impairment charge.
Q3 revenue growth was strongest in Critical Care (+18.7% reported); Surgical Care rose 5.2%, while Cardiac Care declined 1.6% and OEM declined 8.5%. For nine months, Critical Care grew 14.8%, Surgical Care 5.3%, while Cardiac Care fell 3.9% and OEM fell 7.0%. Segment operating profit was $73.1m in Q3, up 43.6%, and $208.4m year to date, up 18.4%.
Cash, debt and liquidity
- Cash and cash equivalents were $326.4m at September 29, 2013, down from $337.0m at year-end 2012.
- Net cash from continuing operations was $134.2m for nine months, compared with $139.1m. Capital expenditures were $54.6m; investing cash outflow was $95.1m, including $40.5m for acquisitions. Financing cash outflow was $52.0m, including $41.9m of dividends.
- The company reported $985.4m of total debt and $659.0m of net debt in its net-debt calculation; net debt was $633.0m at December 31, 2012. Net debt to total capital remained 26%.
- In July, Teleflex replaced its $775m term-and-revolver facility with an $850m revolving facility, repaid the $375m term loan, and recorded $1.3m of debt-extinguishment expense and $6.4m of refinancing fees. The revolver rate was 1.93% at quarter-end.
- Management stated it expected cash, operating cash flow and available credit to fund requirements for the next 12 months and foreseeable future, and reported compliance with debt covenants. The credit agreement requires leverage of no more than 4.0:1 and interest coverage of at least 3.5:1; minimum liquidity of $400m applies during the six months before convertible-note maturity.
Material developments, outlook and risks
- 2013 acquisitions of Ultimate Medical and Eon Surgical had estimated total consideration of $38.5m. Teleflex also signed an agreement on October 29 to acquire Vidacare for $262.5m net of cash acquired, initially expected to be funded from the revolver; closing was expected in Q4, subject to customary conditions and approvals.
- Restructuring and other impairment charges were $7.1m in Q3 and $29.2m year to date. These included a $3.4m impairment of assets held for sale and, year to date, a $4.5m write-off of acquired in-process research and development. Teleflex expected about $7m of additional LMA-related restructuring charges over the next year.
- Management reported unexpected development difficulties with Semprus technology. Approximately $42m of net assets were associated with the investment; failure to resolve the issues could lead to potentially material impairment charges.
- The 2.3% medical-device excise tax was estimated to cost approximately $12m for 2013; $2.7m was recorded in Q3 and $8.4m year to date.
- Credit risk remains concentrated in delayed-paying publicly funded healthcare systems in Greece, Italy, Spain and Portugal. Net receivables in those countries were $106.6m, 34% of total net receivables; the allowance was $8.4m. Management warned that further economic deterioration could increase credit losses and delay collections.
- Environmental liabilities recorded were $8.8m in total ($2.4m accrued liabilities and $6.4m other liabilities); the filing notes potential exposure could exceed recorded amounts. Routine litigation was not considered likely to be material based on information available, but an unfavorable resolution could be materially adverse. Tax examinations were ongoing in Canada, the Czech Republic, Germany and Austria.
- No specific earnings or revenue guidance was provided. Forward-looking risks include acquisition integration and synergies, restructuring execution, product demand and acceptance, competition and pricing, input costs, foreign exchange, interest rates and global economic conditions.
- Teleflex revised prior-period cash-flow presentation for contingent-consideration payments, moving them from investing to financing activities. The filing says this did not affect balance sheets, income statements or equity and was not material to previously issued financial statements.
Important facts for investors to verify
- How much reported growth and segment-profit improvement reflects acquired businesses, particularly LMA, versus organic performance.
- Whether OEM and Cardiac Care declines persist, and whether management resolves the Semprus development issues or records further impairment.
- Collection trends and allowance adequacy for European public-hospital receivables, including the substantial exposure in Greece, Italy, Spain and Portugal.
- The funding, closing and integration impact of the proposed Vidacare acquisition, and the resulting debt and covenant headroom.
- Actual medical-device excise-tax costs, restructuring spending and savings, and cash conversion as inventory and receivables consume working capital.
- Potential dilution or cash requirements if the convertible notes become convertible; the filing says the stock price had approached the conversion threshold.