Teleflex Incorporated — Q2 2010 Form 10-Q
Business context and reporting period. The unaudited quarter ended June 27, 2010; comparative periods ended June 28, 2009. Teleflex is principally a global medical-technology company, with Aerospace and Commercial businesses. Results exclude Heavy Lift, SSI, Power Systems and ATI operations presented as discontinued operations.
Key financial results
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $461.7m | $439.2m | $882.9m | $854.3m |
| Gross profit / margin | $208.8m / 45.2% | $198.1m / 45.1% | $403.2m / 45.7% | $382.4m / 44.8% |
| Continuing-operations income before interest and taxes | $79.4m | $59.1m | $148.4m | $115.9m |
| Income from continuing operations | $42.4m | $33.1m | $77.6m | $56.5m |
| Net income attributable to common shareholders | $60.1m | $6.5m | $97.8m | $222.0m |
| Diluted EPS | $1.49 | $0.16 | $2.43 | $5.56 |
Q2 continuing-operations operating margin, calculated as continuing-operations income before interest and taxes divided by revenue, was approximately 17.2%, versus 13.5%; the six-month comparison was approximately 16.8% versus 13.6%. Q2 and six-month continuing-operations effective tax rates were 29.3% and 29.6%, compared with 14.1% and 19.4% a year earlier. Management attributed the higher rates to expiration of U.S. tax provisions affecting foreign income and increased discrete tax charges.
Cash flow and liquidity. For the first six months, operating cash flow from continuing operations was $100.2m, versus cash used of $27.8m in 2009. Continuing-operations investing activities provided $59.3m, including $74.7m net proceeds from business and asset sales; capital expenditures were $15.3m. Continuing-operations financing activities used $44.2m, including $64.2m of long-term debt repayments and $27.1m of dividends. Cash ended the period at $287.1m, up from $188.3m at year-end.
Total debt was $1,169.6m and net debt $882.5m at June 27, compared with net debt of $1,008.2m at December 31, 2009. Net debt to total capital was 36%, down from 39%. Current assets were $1,035.4m and current liabilities $321.3m. The $400m revolving credit facility had no borrowings and approximately $5m of standby letters of credit outstanding. Debt maturities include $756.6m in 2012. The $39.7m accounts-receivable securitization balance is now reported as secured borrowing and short-term debt following an accounting change.
Material changes and operating trends
- Q2 revenue rose 5%; management reported 7% core growth, partly offset by currency and the accounting-related Medical segment deconsolidation. Six-month revenue rose 3%.
- Medical Q2 revenue was essentially flat at $358.4m; segment operating profit declined 6% to $73.5m, reflecting higher commercial, administrative and R&D spending. A voluntary custom IV tubing recall weighed on vascular-access sales.
- Aerospace Q2 revenue increased 30% to $48.0m and segment operating profit rose to $7.5m from $1.0m, amid improving aviation demand and stronger volumes and mix.
- Commercial Q2 revenue increased 26% to $55.3m and operating profit rose 128% to $7.5m, principally as marine markets recovered from depressed 2009 levels.
- R&D spending increased to $10.9m in Q2 and $20.4m for six months, reflecting investment in antimicrobial technologies and a Malaysia innovation center. Interest expense declined with lower average debt.
Common-shareholder net income includes discontinued-operation gains: Q2 2010 included $28.8m before tax on disposition, while first-half 2010 included $38.6m before tax. In contrast, first-half 2009 included a $275.8m pretax gain on disposition, making reported net income comparisons substantially affected by divestitures.
Outlook, risks and unusual items
- No overall earnings or revenue guidance is provided in the filing. Management expected $0.9m–$1.7m of additional Arrow integration restructuring charges in the second half of 2010 and projected aggregate annual pretax savings of $70m–$75m after integration actions are complete. It also projected $3.5m–$4.5m of 2010 annual pretax savings from the completed Commercial restructuring program.
- The Heavy Lift sale closed June 25 for $50m; the company reported a $17.1m after-tax gain. SSI was sold for approximately $25m, with a $2.0m after-tax gain.
- Arrow’s 2007 FDA corporate warning letter remained in effect pending resolution of outstanding issues. The company said it had substantially implemented corrective actions; further FDA action could require additional resources or affect operations.
- Healthcare reform includes a 2.3% medical-device excise tax beginning in 2013; management estimated an annual impact of approximately $16m. Potential pricing pressure from healthcare cost controls is also noted.
- Environmental remediation accruals were approximately $8.3m, with payments estimated over 15–20 years; management warned actual costs could exceed the accrual. Czech tax authorities questioned transfer pricing and tax incentives, though the company said a loss would not materially affect it. Unrecognized tax benefits could change by zero to $23m within 12 months.
- Other risks include product-liability and other litigation, product demand and recall impacts, raw-material costs, foreign exchange and interest rates, and compliance with debt covenants. Management believed operating cash flow and credit access would fund operations and obligations.
Most important facts for investors to verify
- Whether underlying Medical growth and profitability recover, including the sales impact and resolution of the custom IV tubing recall.
- Progress toward final FDA resolution of Arrow’s warning letter and the status of related certificate requests.
- Ability to service and refinance debt, particularly the $756.6m maturity in 2012, while maintaining covenant compliance.
- Realization of projected restructuring savings and remaining integration costs.
- Actual effects of healthcare reform, including the estimated $16m annual device tax beginning in 2013, and outcomes of environmental and tax contingencies.