Teleflex Incorporated — Q3 2012 Form 10-Q
Business context and reporting period. Teleflex is a global medical-technology company focused on single-use devices for critical care, surgical and cardiac applications, plus OEM products. This unaudited filing covers the three and nine months ended September 30, 2012; comparatives are the three and nine months ended September 25, 2011. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $368.1m | $362.7m | $1,132.0m | $1,089.5m |
| Gross profit / margin | $180.6m / 49.1% | $175.6m / 48.4% | $549.0m / 48.5% | $519.0m / 47.6% |
| Income (loss) from continuing operations | $24.5m | $32.9m | $(212.4)m | $77.5m |
| Net income (loss) attributable to common shareholders | $21.7m | $43.7m | $(219.4)m | $155.5m |
| Diluted EPS | $0.52 | $1.07 | $(5.37) | $3.82 |
| Cash from continuing operations | Not provided for quarter | Not provided for quarter | $139.1m | $60.2m |
- Q3 revenue increased 1.5% reported and 6.2% at constant currency; nine-month revenue rose 3.9% reported and 7.4% at constant currency. Foreign exchange reduced revenue growth by 4.7 and 3.5 percentage points, respectively.
- Q3 gross margin improved 0.7 percentage point, principally from pricing and lower North American manufacturing costs, partly offset by currency effects. Nine-month margin improved 0.9 point; approximately $4.9m of Asia inventory write-offs partly offset gains.
- Q3 segment operating profit was $50.9m versus $61.7m, down 17.5%; nine-month segment operating profit was $176.1m versus $170.1m, up 3.5%. These measures exclude goodwill impairment, restructuring, interest and taxes.
- Cash and cash equivalents were $634.8m at September 30, 2012, versus $584.1m at year-end 2011. Debt was $967.3m, including $4.7m current and $962.6m long-term borrowings; net debt was $332.5m versus $375.7m. Net debt to total capital was 16% at both dates.
- Nine-month capital expenditures were $46.1m, dividends paid were $41.7m, and continuing-operations investing and financing activities used $42.2m and $34.7m, respectively. The filing does not provide free cash flow as a defined measure.
- Current assets were $1,293.1m and current liabilities $248.7m at September 30. The company reported total assets of $3,670.8m and total liabilities of $1,915.4m.
Material changes and unusual items
- The nine-month continuing-operations loss includes a $332.1m non-cash goodwill impairment recorded in Q1 after the company reorganized its North American reporting units. The charge affected Vascular ($220m), Anesthesia/Respiratory ($107m) and Cardiac ($5m); management said it reflected the new reporting-unit allocation, not a change in its outlook for North American operations. Only $45m of the impairment was deductible, contributing to a nine-month effective tax rate of negative 1.4%.
- Q3 SG&A rose to $114.9m from $101.6m, including a $7.6m realized loss on currency forward contracts entered into ahead of the LMA acquisition, increased employee and selling costs, acquisition expenses and acquired-business operating costs. R&D increased to $14.8m from $12.3m.
- Growth was strongest in Asia and OEM: Q3 segment revenues rose 29.8% and 11.0%, respectively; EMEA fell 8.7% and Americas grew 1.4%. EMEA segment operating profit declined 74.6%, affected by the currency-contract loss, manufacturing costs and currency movements. Nine-month EMEA revenue and operating profit declined 3.3% and 16.5%.
- In 2012, Teleflex acquired four businesses/product lines for estimated total consideration of $111.6m, including $55.8m estimated contingent consideration. The potential undiscounted payments for contingent consideration arrangements across acquisitions were $7m–$107m at September 30; $58.9m was recorded as a liability. The filing notes that changes in valuation assumptions could materially affect results or financial position.
- On October 23, 2012, after quarter-end, Teleflex acquired substantially all assets of LMA International for $292.2m cash and a related UK, Ireland and Channel Islands business for $19.9m cash.
- Teleflex sold its orthopedic OEM business in August for $45m cash. Discontinued operations produced a nine-month loss of $6.3m, versus income of $79.2m in 2011, which included significant divestiture gains. The nine-month 2012 discontinued-operations results include a $9.7m goodwill impairment.
Liquidity, outlook and risks
- Management stated it did not foresee difficulty meeting cash requirements or accessing credit over the next 12 months. It expected operating cash flow, cash balances and credit availability to fund operations, capital expenditures and debt obligations. No specific earnings or revenue guidance was provided in the supplied filing text.
- Credit agreements require a maximum consolidated leverage ratio of 4.0:1 and minimum interest coverage ratio of 3.5:1, as defined in the agreements. The filing states the goodwill impairment is excluded from covenant calculations. Debt agreements also restrict certain borrowing, acquisitions, dividends and share repurchases. No shares had been repurchased under the $300m authorization.
- Receivables from Spain, Italy, Greece and Portugal were $102.7m, 38% of total net receivables, at September 30. Publicly funded hospital net receivables in those countries were $70.6m. Delayed government payments, weaker economic conditions and potential credit losses could affect cash flows; management described its allowance for doubtful accounts as $7.8m, or 2.7% of gross receivables.
- The 2.3% U.S. medical-device excise tax was scheduled to begin in 2013; management estimated an annual impact of approximately $15m, subject to uncertainty about application.
- Environmental liabilities accrued were approximately $8.9m in total, with potential exposure possibly exceeding recorded amounts. Routine litigation was not considered likely to be material based on information then available, but adverse outcomes could be material. Significant tax examinations were ongoing in Canada, the Czech Republic, France and Austria.
- Management identified risks including customer and supplier relationships, product demand and acceptance, acquisition integration, restructuring execution, competition and pricing, unrecovered input-cost increases, foreign exchange and interest-rate changes, market entry and general economic conditions. The company said there were no significant changes to its previously disclosed risk factors.
Most important facts for investors to verify
- Whether underlying revenue and segment-profit growth persists after isolating currency effects, the six additional days in the nine-month comparison, and the LMA-related $7.6m currency loss.
- Whether the Q1 goodwill impairment has any implications beyond the reporting-unit reorganization, and whether future impairment testing could lead to further charges.
- Collection trends and allowance adequacy for European public-healthcare receivables, especially in Spain, Italy, Greece and Portugal.
- The final purchase accounting, integration performance and contingent-payment exposure from 2012 acquisitions, including the post-quarter LMA transactions.
- Compliance headroom under debt covenants, post-acquisition leverage and liquidity, and the realized impact of the medical-device excise tax from 2013.