Teleflex Incorporated — Q1 2011 Form 10-Q
Reporting period: Three months ended March 27, 2011; unaudited. Comparisons are with the three months ended March 28, 2010, unless noted. Dollars are in millions except per-share data. Prior-period results were recast to present Marine and the cargo container business as discontinued operations.
Business context
Teleflex is principally a global medical technology company, with a smaller Aerospace segment. In Q1, Medical represented 91% of continuing revenue and Aerospace 9%. The company sold its Marine business on March 22 and approved a plan to sell its cargo container business.
Financial performance
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Continuing-operations revenue | $388.7 | $367.3 |
| Gross profit / gross margin | $176.0 / 45.3% | $176.9 / 48.2% |
| Continuing operating income before interest, debt-extinguishment loss and taxes | $54.6 | $66.6 |
| Interest expense | $16.2 | $19.0 |
| Loss on extinguishment of debt | $14.6 | — |
| Continuing-operations income | $17.5 | $33.5 |
| Net income attributable to common shareholders | $77.8 | $37.7 |
| Diluted EPS: continuing operations / total | $0.42 / $1.92 | $0.83 / $0.94 |
| Cash from continuing operating activities | $14.1 | $34.4 |
Total net income included $60.7 million from discontinued operations, largely reflecting the Marine sale. Marine generated a reported $59.6 million after-tax gain on sale; discontinued-operations income also includes operating results and related items. Continuing revenue increased 6%, entirely from core growth, according to management. Continuing-operations income and diluted EPS declined despite higher revenue.
Medical revenue rose 3% to $354.0 million, while segment operating profit fell 18% to $60.5 million. Critical Care revenue increased 5% and Surgical Care 3%; Cardiac Care and OEM revenue each declined 4%. Aerospace revenue increased 46% to $34.7 million and operating profit rose to $5.0 million from $1.2 million, helped by higher volumes and product mix. Consolidated gross margin fell 2.9 percentage points; Medical gross margin declined to 46.5% from 49.7%, while Aerospace improved to 33.3% from 25.6%.
Cash, debt and liquidity
- Cash and equivalents were $202.3 million at March 27, versus $208.5 million at year-end. Net cash from continuing operations was $14.1 million; continuing investing activities provided $64.6 million, including $101.6 million of Marine-sale proceeds, while financing activities used $87.5 million.
- Total borrowings were $852.2 million, including $29.7 million current and $822.5 million long-term; net debt was $649.9 million, down from $708.6 million at December 31. Net debt to total capital was 26%, versus 28%.
- The company prepaid $165.8 million of 2004 senior notes, funded with revolving-credit borrowings and cash. It added $100 million of term loans and extended certain credit-facility maturities to October 2014. At quarter-end, the $400 million revolver had no borrowings and approximately $4 million of standby letters of credit outstanding.
- Management said operating cash flow and access to credit facilities should fund operating needs, capital expenditures and debt obligations. The filing reports debt covenants and restrictions on dividends, share repurchases and other activities; it does not provide specific covenant headroom.
Material changes, outlook and risks
- Revenue growth was concentrated in Aerospace and selected Medical product lines. Management attributed Medical profit pressure to about $8 million of higher sales, marketing, regulatory and R&D spending, approximately $6 million of lower gross profit, higher manufacturing and raw-material costs, unfavorable mix and freight surcharges.
- SG&A increased to $109.8 million from $100.6 million; R&D rose to $11.0 million from $9.3 million. Management cited higher Medical commercial and regulatory spending, former-CEO separation costs and VasoNova-related expenses.
- Teleflex acquired VasoNova in January for an estimated $40.4 million, including $25 million initial cash consideration and estimated contingent consideration. A $6 million contingent payment followed FDA clearance; additional payments of $15 million to $30 million may depend on regulatory and sales targets.
- Marine was sold for stated consideration of $123.1 million, including cash, a subordinated note and assumed liabilities. The cargo container business remained held for sale at quarter-end. The filing provides no specific company-wide earnings or revenue guidance for the year.
- Management estimated the medical-device excise tax, scheduled to begin in 2013, could cost approximately $15 million annually. It said the ultimate effect of healthcare reform remained uncertain.
- Arrow’s 2007 FDA corporate warning letter remained open, although the company said the FDA had classified later inspection observations as “voluntary action indicated” and that remediation was substantially complete. Further FDA action remains possible if corrective measures are deemed inadequate.
- Other exposures include environmental remediation liabilities of approximately $7.2 million, tax examinations and ordinary-course lawsuits and claims. Management did not consider current litigation likely to be material, but noted an unfavorable outcome could materially affect results or liquidity. The Arrow integration plan could entail only nominal future charges, according to management.
Most important facts for investors to verify
- Separate underlying continuing-business earnings from the Marine divestiture gain and other discontinued-operations effects.
- Track whether Medical margins and segment profit recover after higher costs, mix pressures and product-recall effects.
- Review debt maturities, covenant compliance and refinancing needs, particularly the scheduled 2014 debt payments.
- Monitor completion and proceeds of the cargo container sale, VasoNova milestone payments, and resolution of the FDA warning letter.
- Assess the eventual effects of healthcare reform and the estimated 2013 medical-device excise tax.