Teleflex Incorporated — Q1 2012 Form 10-Q
Reporting period: Three months ended April 1, 2012; comparison is the three months ended March 27, 2011. The 2012 quarter included six additional days, which contributed to year-over-year revenue growth. Teleflex is a global medical technology company; former marine and aerospace businesses are presented as discontinued operations.
Financial performance
| Metric | Q1 2012 | Prior comparable period | Change / context |
|---|---|---|---|
| Net revenue | $387.8 million | $354.0 million | +9.5% reported; +10.9% constant currency |
| Gross profit / margin | $185.8 million / 47.9% | $164.5 million / 46.5% | Margin +1.4 percentage points |
| Operating income before interest, debt extinguishment and taxes | $(270.4) million | $49.7 million | Includes $332.1 million goodwill impairment |
| Continuing-operations net income (loss) | $(284.1) million | $14.1 million | 2012 loss reflects impairment; 2011 included $14.6 million debt-extinguishment cost |
| Net income (loss) attributable to common shareholders | $(283.7) million; $(6.96) per diluted share | $77.8 million; $1.92 per diluted share | 2011 included $64.1 million income from discontinued operations, including a disposal gain |
| Operating cash flow, continuing operations | $26.7 million | $7.3 million | Improved mainly from working-capital changes |
| Capital expenditures | $15.0 million | $5.9 million | Higher, including OEM plant expansion and IT investment |
| Cash and cash equivalents | $590.9 million | $584.1 million at Dec. 31, 2011 | Quarter-end balance |
| Total debt / net debt | $962.1 million / $371.2 million | $959.8 million / $375.7 million at Dec. 31, 2011 | Net debt to total capital 18%, versus 16% |
Business and material changes
- Revenue grew across all reported segments: North America +9.5%, EMEA +7.3%, AJLA +11.8%, and OEM +14.9%. Management cited volume, new products and price increases; unfavorable currency partially offset growth. The extra six selling days also contributed.
- Segment operating profit increased to $60.9 million from $50.3 million. Growth was broad-based; EMEA and OEM recorded particularly strong increases. Segment operating profit excludes goodwill impairment, restructuring, interest and taxes.
- Gross margin improvement reflected price increases and lower manufacturing costs in North America, EMEA and OEM. SG&A was $113.4 million, or 29.2% of revenue, broadly flat as a percentage of sales; R&D was $11.6 million.
- A reorganization changed reporting from one reportable segment to four and expanded North America from one to five goodwill reporting units. Impairment testing identified impairment in Vascular ($220 million), Anesthesia/Respiratory ($107 million) and Cardiac ($5 million), totaling $332.1 million. Goodwill fell from $1.44 billion at year-end to $1.12 billion.
Liquidity, outlook and risks
- Continuing-operations cash flow was positive; investing used $15.0 million and financing used $12.6 million. Including discontinued operations and currency effects, cash increased $6.8 million during the quarter.
- Long-term borrowings were $957.4 million. The filing reports fair value of long-term debt of $1.11 billion, above its carrying value. Interest expense rose to $18.2 million from $16.1 million; average debt interest rate declined to 4.2% from 5.1%.
- Management said operating cash flow, cash on hand and access to credit facilities should fund operating needs, capital expenditures and debt obligations for the next 12 months and foreseeable future. No specific revenue or earnings guidance is provided in the filing.
- Management estimated the medical-device excise tax beginning in 2013 would cost approximately $15 million annually; application details remained uncertain. Senior credit agreements require a maximum consolidated leverage ratio of 4.0:1 and minimum interest coverage of 3.5:1. The filing states the noncash goodwill impairment is excluded from covenant calculations.
- Restructuring and other impairment charges were a net credit of $0.8 million, primarily reflecting a $2.0 million reversal of an Arrow-related contract termination estimate. The company expected further 2011-program costs in 2012, including facility and contract exit costs; lease termination payments may continue through 2015.
- Environmental liabilities accrued were approximately $9.0 million, with an estimated 15–20-year payment horizon; the company cautioned ultimate costs could exceed the accrual. Routine litigation and tax examinations are ongoing; outcomes could affect results, though management did not expect current litigation to be material based on information available.
- Other disclosed risks include customer or supplier changes, product demand and acceptance, competition and pricing, raw-material costs, execution of restructuring and acquisitions, currency and interest rates, and general economic conditions. The company reported effective disclosure controls and no significant quarterly change in risk factors.
Key facts for investors to verify
- Whether operating revenue and segment profit growth persist after accounting for the six additional selling days, foreign exchange and pricing.
- Whether assumptions used in the $332.1 million goodwill impairment test remain appropriate and whether further impairment indicators emerge.
- Debt covenant headroom, refinancing requirements and the difference between debt carrying value and disclosed fair value.
- Cash conversion and working-capital trends, capital spending plans, and the ability to maintain the $0.34-per-share dividend.
- The eventual cost and timing of the medical-device excise tax, restructuring obligations, environmental remediation and uncertain tax positions.