Teleflex Incorporated — Q3 2011 Form 10-Q
Business context and period. The quarter ended September 25, 2011; comparisons are with the quarter ended September 26, 2010. Teleflex’s continuing operations are now a medical-device business, serving critical care, surgical care, cardiac care and OEM customers. The company reported its marine and aerospace businesses as discontinued operations.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net revenue | $371.9 | $345.0 | $1,117.2 | $1,047.0 |
| Gross profit | $178.3 | $166.6 | $526.8 | $511.7 |
| Gross margin | 47.9% | 48.3% | 47.2% | 48.9% |
| Continuing-operations income | $33.8 | $11.0 | $79.8 | $76.1 |
| Net income attributable to common shareholders | $43.7 | $22.2 | $155.5 | $120.0 |
| Diluted EPS, continuing operations | $0.82 | $0.27 | $1.94 | $1.87 |
| Diluted EPS, net income | $1.07 | $0.55 | $3.82 | $2.98 |
| Operating cash flow, continuing operations | Not stated for quarter | Not stated for quarter | $64.7 | $103.9 |
- Q3 revenue rose 7.8% reported, comprising 3.2% constant-currency growth and a 4.6% currency benefit. Nine-month revenue increased 6.7% reported, with 3.4% constant-currency growth.
- Q3 constant-currency growth was 3.6% in Critical Care, 1.9% in Surgical Care and 5.6% in OEM; Cardiac Care declined 1.7%. Critical Care was the largest product group.
- Q3 income from continuing operations improved substantially year over year; nine-month continuing income rose modestly. Net income also includes discontinued operations, including the marine-business sale gain in the 2011 year-to-date period.
- Gross margin declined in both comparison periods. Management cited higher manufacturing, raw-material and fuel-related freight costs, increased inventory write-downs, and selling-price erosion.
- Nine-month operating cash flow from continuing operations fell to $64.7 million from $103.9 million. Management attributed the decline mainly to the prior-year $59.5 million tax refund and higher 2011 inventory investment; inventory growth was intended partly to improve customer service and stock a Singapore distribution facility.
Balance sheet, debt and liquidity
- At September 25, 2011, cash and cash equivalents were $371.7 million, current assets $1,186.4 million and current liabilities $384.0 million.
- Reported current and long-term borrowings totaled $982.0 million, compared with $917.1 million at December 31, 2010. Net debt was $610.3 million, down from $708.6 million; net debt to total capital was 24%, versus 28%.
- The company had $375 million of term loans at a 2.50% rate, due October 2014; $400 million of 3.875% convertible subordinated notes due 2017; and $250 million of 6.875% senior subordinated notes due 2019. The $400 million revolving facility had no borrowings and approximately $397.4 million of remaining capacity, net of letters of credit.
- Debt maturities include $375 million in 2014 and $650 million in 2015 and thereafter. The fair value of long-term debt was reported at $1,060.3 million, compared with its $952.3 million carrying value.
- Cash increased by $163.2 million in the first nine months, including proceeds from asset sales and financing activity. Capital expenditures were $27.6 million and dividends paid were $41.3 million.
Material changes, outlook and risks
- Portfolio changes: Teleflex sold its marine business in March 2011 for stated consideration of $123.1 million and recorded a $57.0 million after-tax gain. On October 21, 2011, it announced a definitive agreement to sell its cargo systems and container aerospace businesses to an AAR CORP. subsidiary for $280 million, subject to approvals and other customary conditions; closing was expected by year-end 2011. These businesses were classified as discontinued operations.
- Debt refinancing: The company issued $250 million of 6.875% notes, prepaid its $165.8 million 2004 notes, amended and extended certain credit-facility maturities, and repaid $125 million of term loans. Nine-month debt-extinguishment losses were $15.4 million.
- Other unusual items: Nine-month results included a $3.1 million impairment of investments in affiliates. SG&A included approximately $2 million of net former-CEO separation costs and increased sales, marketing and clinical-education spending. Teleflex also paid $7.6 million in September to settle litigation concerning recall costs related to a former business.
- Discontinued-operation liabilities: Teleflex recorded accruals for retained liabilities associated with divested businesses. Environmental liabilities were accrued at approximately $7.6 million, with the company noting that ultimate costs could exceed the accrual and may be paid over 15–20 years.
- Credit and market exposure: At September 25, receivables from publicly funded hospitals in Greece, Italy and Spain totaled $68.3 million. Management warned that further deterioration or slower payments could increase credit losses and adversely affect cash flow and results. The filing also identifies currency, interest-rate, customer, supplier, pricing, raw-material-cost, product-acceptance and acquisition-integration risks.
- Regulatory and tax: The FDA formally notified Teleflex in June 2011 that issues in a prior corporate warning letter concerning Arrow’s quality systems had been addressed. The company said no material risk-factor changes occurred in the quarter. Management estimated the U.S. medical-device excise tax, beginning in 2013, could cost approximately $15 million annually.
- Guidance: The filing does not provide a clear numerical earnings or revenue forecast. It describes the cargo-business sale as expected to close by the end of 2011 and discusses forward-looking risks. Management stated that operating cash flow and access to credit facilities were expected to fund operations, capital spending and debt obligations.
- Reporting note: Teleflex identified $0.5 million after tax of environmental costs that had been reported in continuing operations in the first and second quarters of 2011; it reclassified them to discontinued operations for the nine-month period and said it would revise prior-quarter presentation. Management considered the error immaterial.
Important facts for investors to verify
- Whether the $280 million cargo-business sale closed on the anticipated schedule, and its final proceeds, taxes and effect on debt and continuing results.
- Whether continuing revenue growth and gross-margin trends persist after currency effects, pricing pressure and elevated manufacturing costs.
- Whether inventory investment converts into sales and cash flow, and whether hospital receivables in southern Europe are collected or require additional reserves.
- Debt repayment capacity, covenant compliance, refinancing needs and the terms of the 2014 and later maturities.
- Final exposure for retained divestiture-related claims, environmental obligations, product warranties and tax examinations.
- The treatment of the prior-quarter environmental-cost reclassification and any subsequent revisions to reported results.