Teleflex Incorporated — Q2 2012 Form 10-Q
Reporting period: Three and six months ended July 1, 2012; comparisons are with periods ended June 26, 2011. Teleflex is a global medical-technology company. In 2012 it reorganized reporting into North America, EMEA, AJLA and OEM segments; prior-period segment comparisons reflect the new presentation.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net revenues | $383.3 million | $381.2 million | $763.9 million | $726.7 million |
| Gross profit | $184.4 million | $181.4 million | $368.5 million | $343.4 million |
| Gross margin | 48.1% | 47.6% | 48.2% | 47.3% |
| Income from continuing operations attributable to common shareholders | $47.0 million | $30.8 million | Loss of $237.4 million | $44.1 million |
| Net income (loss) attributable to common shareholders | $42.6 million | $34.1 million | Loss of $241.1 million | $111.9 million |
| Diluted EPS | $1.04 | $0.83 | Loss of $5.91 | $2.75 |
| Interest expense | $18.2 million | $15.8 million | $36.5 million | $31.9 million |
Q2 revenue grew 0.6% reported and 4.7% at constant currency; first-half revenue rose 5.1% reported and 7.9% at constant currency. Foreign exchange reduced revenue by $15.7 million in Q2 and $20.5 million in the first half. First-half volume growth also benefited from six additional fiscal days versus 2011.
Q2 continuing-operations income before interest, debt-extinguishment losses and taxes was $64.7 million, versus $55.9 million. First-half results included a non-cash $332.1 million goodwill impairment charge, following a North America reporting-unit restructuring; the charge drove the continuing-operations loss. Gross-margin improvement reflected pricing and lower North America and EMEA manufacturing costs, partly offset by currency effects and AJLA inventory write-offs ($2.8 million in Q2; $4.9 million in the first half). Q2 effective tax rate was negative 0.6%, including a $7.7 million foreign-tax-audit settlement benefit and an approximately $5.0 million deferred-tax-liability reduction.
Cash, debt and liquidity
- Continuing-operations operating cash flow was $89.2 million for the first half, versus $37.8 million a year earlier. Management attributed the improvement mainly to working capital, including collection of approximately $17.5 million from the Spanish government.
- First-half continuing investing cash outflow was $74.4 million, including $62.6 million for acquisitions and $28.9 million of capital expenditures, partly offset by $17.2 million of asset-sale proceeds. Continuing financing cash outflow was $24.4 million, primarily dividends of $27.8 million.
- Cash was $545.0 million at July 1, down from $584.1 million at year-end. Current assets were $1,249.6 million and current liabilities $242.7 million.
- Total debt was $964.6 million; net debt was $419.6 million, versus $959.8 million and $375.7 million at year-end. Net debt to total capital increased to 20% from 16%. Long-term borrowings were $959.9 million.
- Management stated it expected cash, operating flows and credit access to fund requirements for the next 12 months and foreseeable future. Credit agreements require leverage of no more than 4.0:1 and interest coverage of at least 3.5:1; the filing says the non-cash goodwill impairment is excluded from those covenant calculations.
Business changes, outlook and risks
- Segment revenue growth was strongest in OEM (Q2 +11.7%; first half +17.5%), AJLA (Q2 +9.9%; first half +10.7%) and North America (Q2 +2.5%; first half +6.0%). EMEA revenue declined 7.9% in Q2 and 0.6% in the first half, substantially reflecting currency. Q2 Cardiac Care product-group revenue fell 7.6%, with lower intra-aortic balloon pump and catheter sales.
- Four second-quarter acquisitions—Hotspur Technologies, Semprus BioSciences, Axiom Technology Partners’ EFx product line and the EZ-Blocker product line—had estimated total consideration of $111.9 million, including $55.8 million initial cash payments and $56.1 million estimated contingent consideration. Aggregate potential contingent payments were approximately $61 million to $90 million, tied to objectives including regulatory approvals and sales targets.
- On July 18, 2012, after quarter-end, Teleflex announced a definitive agreement to sell its OEM orthopedic business for $45.2 million, subject to approvals and customary conditions; closing was expected by the end of Q3 2012. The business was presented as discontinued operations. Its Q2 discontinued-operations loss was $4.4 million, including a $9.7 million goodwill impairment.
- Management estimated the medical-device excise tax taking effect in 2013 would cost approximately $15 million annually; it noted uncertainties in the tax’s application. No specific earnings or revenue guidance is provided in the filing.
- Key risks include foreign exchange, pricing and competition, raw-material costs, acquisition integration and contingent-consideration estimates, and potential customer payment delays or credit losses. Net receivables from publicly funded hospitals in Italy, Spain, Portugal and Greece were $74.4 million at July 1; management warned deterioration in those markets could adversely affect results and cash flows.
- Environmental liabilities accrued were approximately $9.1 million, with a 15–20-year estimated payment horizon and potential exposure above the accrual. The company also described ordinary-course litigation and ongoing tax examinations; outcomes remain uncertain. It expected approximately $2.7 million of additional contract-termination costs for a 2011 restructuring program.
Important facts for investors to verify
- Whether core revenue and segment profit trends persist after adjusting for currency and the six extra fiscal days in the first half.
- Whether the goodwill impairment reflects lasting deterioration in the affected North America businesses, and whether further impairment testing changes carrying values.
- Acquisition performance, regulatory and sales milestones, and potential cash payments or fair-value changes for contingent consideration.
- Progress and final proceeds from the planned orthopedic divestiture, including any retained liabilities.
- Collections from European public hospitals, liquidity and covenant headroom, and the impact of the 2013 medical-device excise tax.