Teleflex Incorporated — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 26, 2011; comparisons are to the periods ended June 27, 2010. Unless noted, amounts are in millions of dollars. Continuing operations reflect Teleflex’s medical-device business; marine, cargo container and cargo systems activities are presented as discontinued operations.
Business context and financial performance
Teleflex develops and supplies medical devices, principally for critical care, surgical and cardiac applications, as well as OEM products. Management continued its portfolio shift toward healthcare: it sold the marine business in March 2011 and classified cargo container and cargo systems businesses as held for sale.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Continuing net revenues | $391.3 | $358.4 | $745.3 | $702.0 |
| Gross profit | $184.0 | $174.3 | $348.5 | $345.1 |
| Gross margin | 47.0% | 48.6% | 46.8% | 49.2% |
| Income from continuing operations attributable to common shareholders | $31.3 | $32.1 | $45.1 | $64.7 |
| Net income attributable to common shareholders | $34.1 | $60.1 | $111.9 | $97.8 |
| Diluted EPS, continuing operations | $0.77 | $0.80 | $1.11 | $1.61 |
| Diluted EPS, total | $0.83 | $1.49 | $2.75 | $2.43 |
Q2 revenue rose 9.2% reported and 4.0% at constant currency; first-half revenue rose 6.2% reported and 3.5% at constant currency. All major product groups grew at constant currency in Q2 and year to date. Q2 constant-currency growth was led by Cardiac Care (10.5%), OEM (6.8%), Surgical Care (4.3%) and Critical Care (3.2%).
Q2 SG&A was $111.8 million (28.6% of sales), versus $99.8 million (27.8%); R&D was $12.5 million versus $10.3 million. First-half operating income before interest, debt-extinguishment loss and taxes was $106.1 million, down from $129.6 million.
Cash flow, debt and liquidity
- First-half operating cash flow from continuing operations was $39.6 million, down from $79.7 million. Capital spending was $15.3 million.
- Cash increased to $365.8 million from $208.5 million at year-end. Continuing-operations investing cash flow was $55.1 million, including $100.9 million of net proceeds from the marine sale and $30.6 million spent on VasoNova.
- Total debt was $979.6 million, compared with $917.1 million at December 31, 2010; net debt was $613.8 million, down from $708.6 million. Net debt to total capital was 24%, versus 28%.
- Teleflex had $375 million of term loans, $400 million of 3.875% convertible notes due 2017 and $250 million of 6.875% subordinated notes due 2019. The term loans mature in 2014 and bore 2.5625% at quarter-end. No revolver borrowings were outstanding; approximately $397.2 million of borrowing capacity remained, subject to terms and covenants.
- Current assets were $1,148.9 million and current liabilities $364.3 million. Cash and cash equivalents were $365.8 million. The company paid $27.4 million in dividends in the first half ($0.68 per share).
Material changes and unusual items
- Q2 total net income fell year over year, primarily reflecting lower income from discontinued operations; the 2010 comparison included larger disposal gains. First-half net income increased, including a $57.0 million after-tax gain on the marine sale, while continuing-operations income declined.
- Gross margin contracted 1.6 percentage points in Q2 and 2.4 points for the first half. Management cited higher manufacturing, raw-material and freight costs; inventory write-downs; and selling-price erosion. First-half price erosion was $2.0 million.
- First-half debt refinancing generated a $15.4 million debt-extinguishment loss. Teleflex issued $250 million of 6.875% notes, repaid $125 million of term loans with part of the proceeds, and prepaid $165.8 million of 2004 notes, including a $13.9 million make-whole payment.
- Teleflex acquired VasoNova for estimated consideration of $40.3 million, including contingent consideration. The remaining contingent-consideration liability was $9.5 million at quarter-end.
- Q2 included $3.1 million of impairment charges on investments in affiliates and $3.2 million of restructuring and other impairment charges. The company also recorded $8.7 million of reserves for retained liabilities of previously divested businesses.
Outlook, commentary and risks
- The filing provides no quantified revenue or earnings guidance. Management said it expected to continue building inventory in the second half of 2011 to improve service levels.
- Management cited slower payments and factoring-agreement termination in Italy as contributors to higher receivables and weaker operating cash flow. Receivables from publicly funded hospitals in Greece, Italy and Spain totaled $59.3 million; further deterioration could increase credit losses and hurt results and cash flow.
- Management estimated the medical-device excise tax taking effect in 2013 would cost approximately $15 million annually. It noted that expanded insurance coverage could support product use, while healthcare-cost controls could pressure pricing.
- Key operating risks include pricing and competition, unrecovered raw-material cost increases, customer or supplier disruptions, product acceptance, acquisition integration, restructuring execution, foreign exchange and interest rates, and general economic conditions. Debt agreements restrict certain actions, including additional borrowing, dividends and share repurchases.
- Environmental liabilities accrued were approximately $7.7 million; the company cautioned that ultimate costs could exceed the accrual. Litigation was described as ordinary-course and not expected to be material based on information then available, but adverse developments could be material.
- The FDA formally notified Teleflex in June 2011 that all issues raised in Arrow International’s 2007 corporate warning letter had been addressed. No significant change in market risk was reported for the quarter.
Important facts for investors to verify
- How much of reported revenue growth reflects sustainable volume and product demand versus currency effects, and whether margins recover as cost and pricing pressures evolve.
- Whether receivables from public hospitals in southern Europe are collected on schedule and whether operating cash flow improves after factoring changes and planned inventory increases.
- The completion timing, proceeds and potential retained obligations from the cargo container and cargo systems divestitures.
- Debt maturities, covenant headroom, refinancing costs and the effect of the higher-coupon 2019 notes on future interest expense.
- Potential changes in VasoNova contingent consideration, retained divestiture liabilities, litigation and environmental exposures.
- The assumptions underlying the estimated $15 million annual medical-device excise tax impact beginning in 2013.