Teleflex Incorporated — FY2012 Form 10-K
Business context and reporting period. Teleflex is a global medical-technology company focused on single-use devices for critical care, surgical and cardiac procedures, and OEM services. This annual filing covers the fiscal year ended December 31, 2012; fourth-quarter figures are also summarized below. Teleflex reported through four segments: Americas, EMEA, Asia and OEM.
Financial performance
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net revenue | $1,551.0 million | $1,492.5 million |
| Gross profit / margin | $748.2 million / 48.2% | $708.8 million / 47.5% |
| Income from continuing operations before interest, debt extinguishment and taxes | Loss of $97.4 million | Income of $229.6 million |
| Income (loss) from continuing operations | Loss of $181.8 million | Income of $119.3 million |
| Net income (loss) attributable to common shareholders | Loss of $190.1 million | Income of $323.3 million |
| Operating cash flow from continuing operations | $193.9 million | $94.4 million |
| Free cash flow | $128.5 million | $49.8 million |
Revenue increased 3.9% reported and 6.8% in constant currency; unfavorable currency translation reduced revenue by approximately $42.3 million. Growth reflected volume, acquisitions, price increases and new products. Gross margin improved 0.7 percentage points, mainly from pricing and lower North American manufacturing costs.
The annual loss was driven chiefly by a $332.1 million non-cash goodwill impairment charge following a change in North American reporting units. The charge was not attributed to a significant change in business outlook. The 2011 comparison also included substantial gains from divestitures in discontinued operations, making the year-over-year net-income comparison especially uneven. Segment operating profit, which excludes goodwill impairment and certain other items, was $237.5 million versus $236.2 million.
By product group, Critical Care revenue rose 3.7%, Surgical Care 5.0%, and OEM 8.2%; Cardiac Care declined 1.7% reported, but grew 2.2% in constant currency. EMEA revenue fell 2.9% reported, while Americas, Asia and OEM grew 5.6%, 16.1% and 8.2%, respectively.
Fourth quarter: Revenue was $419.1 million versus $403.0 million a year earlier. Gross profit was $199.2 million versus $189.8 million. Continuing-operations income was $30.6 million versus $41.8 million; net income attributable to common shareholders was $29.3 million versus $167.8 million, with the prior-year quarter benefiting from discontinued-operation gains.
Cash, debt and liquidity
At year-end, cash and cash equivalents were $337.0 million, total debt was $970.0 million and net debt was $633.0 million, compared with $584.1 million cash, $959.8 million debt and $375.7 million net debt in 2011. Net debt to total capital increased to 26% from 16%, mainly because cash declined after the LMA acquisition and equity was reduced by the impairment charge. Current assets were $1,069.1 million and current liabilities $274.4 million.
Operating cash flow rose by $99.5 million, primarily from improved working-capital movements. Investing activities used $385.9 million, including $387.0 million for acquisitions, partly offset by $66.7 million in asset and business-sale proceeds. Capital expenditures were $65.4 million. The annual dividend was $1.36 per share.
The company reported $375.0 million outstanding under its term loan, due October 2014, and $250.0 million of 6.875% notes due 2019; $400.0 million principal of 3.875% convertible notes is due 2017. It had no revolving-credit borrowings and approximately $397.6 million of committed revolving capacity available. The company was in compliance with its debt covenants at year-end, reporting leverage of 2.88:1 against a 4.0:1 maximum and interest coverage of 5.37:1 against a 3.50:1 minimum. Management stated it expected to meet cash needs and remain covenant-compliant through 2013.
Material changes, outlook and risks
- Teleflex acquired LMA and several late-stage technologies in 2012. Aggregate acquisition consideration was approximately $422.2 million, including estimated contingent consideration. LMA contributed about $24 million of revenue from acquisition through year-end.
- The LMA integration program is expected to incur up to approximately $16 million of restructuring charges and to generate annual pretax savings of $15–$20 million by the end of 2015. Separate 2012 restructuring initiatives were expected to require additional charges and payments.
- The filing does not provide a clear consolidated revenue or earnings forecast for 2013. Management estimated the U.S. medical-device excise tax would cost approximately $15 million annually beginning in 2013.
- European public-health-system collections remain a notable risk: receivables in Italy, Spain, Portugal and Greece were $101.0 million, or 34% of consolidated net receivables, at year-end. Average days sales outstanding in those countries were 288 days in 2012.
- Other principal risks include medical-device regulation and product liability, reimbursement and pricing pressure, acquisition integration and restructuring execution, foreign exchange and input-cost volatility, and substantial indebtedness. Convertible notes could become convertible under specified share-price conditions, potentially requiring cash repayment of principal and reducing working capital.
- Teleflex recorded $11.1 million of reserves for litigation and claims. It also accrued approximately $8.8 million for environmental matters; the filing cautions that ultimate costs could exceed recorded amounts. Tax examinations and uncertain tax positions are additional contingencies.
Important facts for investors to verify
- Assess underlying earnings and cash generation separately from the goodwill impairment and gains or losses from discontinued operations.
- Track whether LMA and other acquisitions deliver the expected growth, integration savings and contingent-payment outcomes.
- Monitor the 2014 term-loan maturity, refinancing plans, convertible-note terms and compliance with debt covenants.
- Review collections, allowances and aging for European government receivables, as well as the effect of the medical-device excise tax and currency movements.
- Check subsequent disclosures for changes in litigation, environmental and tax contingencies, restructuring costs, and goodwill impairment assumptions.