Teleflex Incorporated — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; comparisons are to the periods ended July 1, 2012. Teleflex designs, manufactures and supplies medical technology products, primarily single-use devices for critical care, surgical and cardiac applications, and serves customers in more than 140 countries.
Financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net revenue | $420.1 million | $383.3 million | $831.9 million | $763.9 million |
| Gross profit | $209.5 million | $184.4 million | $410.0 million | $368.5 million |
| Gross margin | 49.9% | 48.1% | 49.3% | 48.2% |
| Income from continuing operations | $43.4 million | $47.3 million | $71.1 million | Loss of $236.8 million |
| Net income (loss) attributable to common shareholders | $42.4 million | $42.6 million | $69.5 million | Loss of $241.1 million |
| Diluted EPS | $0.98 | $1.04 | $1.61 | Loss of $5.91 |
| Operating cash flow, continuing operations | Not provided separately | Not provided separately | $54.8 million | $89.2 million |
Q2 revenue increased 9.6% year over year; six-month revenue rose 8.9%. On a constant-currency basis, revenue increased 9.6% and 8.9%, respectively. Growth was substantially acquisition-driven: 2012 acquisitions contributed about $33.1 million in Q2 and $67.1 million for the half, largely from LMA. Gross margin improved 1.8 percentage points in Q2 and 1.1 points for the half, reflecting LMA’s higher-margin sales and pricing, partly offset by higher freight and warehousing costs.
Q2 segment operating profit was $76.7 million, up 18.5%; first-half segment operating profit was $135.3 million, up 8.1%. Americas and Asia improved, while EMEA declined (5.4% in Q2; 7.3% for the half). OEM revenue fell 10.8% in Q2 and 6.2% for the half, mainly on lower catheter and performance-fiber sales. Critical Care led product-group growth; Cardiac Care declined, including lower intra-aortic balloon pump sales.
Cash, debt and liquidity
- Cash and equivalents were $281.4 million at June 30, down from $337.0 million at year-end 2012. Total debt was $975.5 million and net debt $694.1 million; net debt to total capital was 28%, compared with 26% at year-end.
- First-half operating cash flow from continuing operations was $54.8 million, down $34.4 million year over year, mainly due to working-capital changes, including a $29.4 million inventory build, and higher domestic pension contributions.
- Investing cash outflow was $73.9 million, including $36.9 million in capital expenditures and $37.0 million net acquisition payments. Financing cash outflow was $32.9 million, including $27.9 million in dividends.
- On July 16, 2013, after quarter-end, Teleflex replaced its $375 million term loan and $400 million revolver with an $850 million revolving credit facility. The company reported a 1.94% interest rate on the new facility at transaction date, paid $6.4 million in fees, and expected approximately $1.3 million in third-quarter expense for unamortized term-loan issuance costs.
- Management said it expected to meet cash requirements and access credit as needed over the next 12 months. The credit agreement requires a maximum 4.0:1 leverage ratio and minimum 3.5:1 interest coverage ratio; minimum liquidity of $400 million applies beginning six months before convertible-note maturity.
Changes, outlook and material items
- The prior-year six-month loss includes a $332.1 million goodwill impairment charge recorded in Q1 2012. Accordingly, the year-over-year swing in first-half net income is not a like-for-like indication of operating improvement.
- Q2 2013 included $13.0 million of restructuring and impairment charges; the six-month total was $22.1 million, including a $4.5 million write-off of acquired in-process research and development. Teleflex expected about $5 million of additional LMA restructuring charges over the program’s remaining life.
- The company acquired Ultimate Medical and Eon Surgical in June for estimated total consideration of $38.5 million. Purchase-price allocations remained subject to evaluation. Management also reported 2013 medical-device excise tax of $5.7 million for the first half and estimated about $12 million for the full year.
- No specific revenue or earnings guidance is provided in the supplied filing text. Management identified growth priorities including new products, market expansion, operating efficiencies and selective acquisitions. Forward-looking risks include integration and synergy execution, product demand and acceptance, pricing and competition, raw-material costs, currency and interest rates, sovereign-debt concerns, and general economic conditions.
- Receivables in Spain, Italy, Greece and Portugal were $113.5 million net of allowances at June 30, or 36% of total net receivables. Average collection days for public-hospital receivables in those countries were 297, versus 287 a year earlier. Management warned that further deterioration could increase credit losses and delay customer payments.
- Environmental liabilities accrued were $2.2 million current and $6.7 million in other liabilities; the filing notes that ultimate costs are uncertain and could exceed accruals. Management said ordinary-course litigation was not expected to be material, but an unfavorable resolution could adversely affect results or liquidity.
- Teleflex reclassified contingent-consideration payments from investing to financing cash flows and stated that prior-period cash-flow classifications would be revised in future filings; it said the changes were not material to previously issued financial statements and did not affect earnings or balance sheets.
Key facts for investors to verify
- How much reported growth reflects acquired businesses versus sustainable underlying demand, particularly in Critical Care and LMA products.
- Whether inventory growth converts into sales and cash, and whether operating cash flow recovers from the first-half decline.
- Progress and remaining costs of LMA and other restructuring programs, plus integration and return on the 2013 acquisitions.
- Collection trends and allowance adequacy for European public-hospital receivables, alongside exposure to currency and sovereign-debt risks.
- Post-refinancing debt, borrowing costs, covenant headroom and potential cash requirements if the convertible notes become current or are converted.