Teleflex Incorporated — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 26, 2016; comparisons are with the periods ended June 28, 2015. Unaudited results. Teleflex develops and sells medical technology products, principally single-use devices for critical care and surgical procedures.
Financial results
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $473.6m | $452.0m | $898.4m | $881.5m |
| Gross profit / margin | $256.4m / 54.1% | $233.2m / 51.6% | $481.5m / 53.6% | $455.9m / 51.7% |
| Income from continuing operations | $59.4m | $45.2m | $110.6m | $84.5m |
| Net income attributable to common shareholders | $59.3m | $44.6m | $110.0m | $82.9m |
| Diluted EPS | $1.26 | $0.93 | $2.29 | $1.74 |
| Interest expense | $11.9m | $16.2m | $25.7m | $33.4m |
Q2 revenue rose 4.8%; first-half revenue rose 1.9%. Management attributed growth mainly to sales volumes of existing products and new products, partly offset in the first half by unfavorable currency movements. First-half revenue included a $10.1m unfavorable currency impact. Gross margin expanded in both periods, reflecting manufacturing cost improvements, product mix and, in Q2, resolution of certain prior-period product recall and quality issues. Operating income from continuing operations before interest and taxes was $98.4m for Q2 and $165.9m for the first half.
First-half net cash provided by operating activities was $181.5m, versus $109.6m. Capital expenditures were $19.5m; investing cash outflow was $18.7m and financing cash outflow was $22.2m. Cash and equivalents were $476.5m at June 26, 2016, up from $338.4m at year-end 2015. Dividends were $0.34 per share for Q2 and $0.68 per share for the first half.
At June 26, reported borrowings were $1,081.9m net of debt discounts and issuance costs ($174.0m current and $907.9m long-term), compared with $1,059.2m at December 31, 2015. The company issued $400m of 4.875% senior notes due 2026 and used net proceeds to repay revolving-credit borrowings. It also exchanged or settled portions of its 3.875% convertible notes due 2017. A $19.3m loss on extinguishment of debt was recognized in the first half. Teleflex reported compliance with its credit agreement covenants at quarter-end. In July, it repaid $50m on its revolving credit facility using cash.
Material changes and segment trends
- Q2 segment revenue increased across all reported segments. First-half revenue declined 1.8% in EMEA, while the other listed segments grew.
- First-half segment operating profit increased 12.1% to $201.8m. Vascular North America, Anesthesia North America and Asia posted notable gains; Surgical North America, EMEA and OEM segment profit declined.
- The effective tax rate was 11.9% for Q2 and 8.8% for the first half, versus 10.5% and 14.7%, respectively, in 2015. First-half results benefited from foreign tax credit estimates and settlement of a foreign tax audit.
Outlook, risks and unusual items
- No company-wide revenue or earnings guidance is stated in the provided filing text. A 2016 manufacturing-footprint restructuring plan is expected to incur $34m–$44m in pretax charges, with $27m–$31m expected to require cash outlays. Teleflex expects $12m–$16m in annualized savings once fully implemented, beginning in 2017; completion is expected by the end of 2018.
- Management said cash from operations, cash on hand and available borrowing facilities should fund operating needs, capital spending and debt obligations for the next 12 months and foreseeable future. The company cautioned that customer payment delays, weaker purchases and credit losses could worsen if economic conditions deteriorate.
- Net receivables from customers in Greece, Italy, Spain and Portugal were $65.6m, or 23.4% of total net current and long-term receivables. Average outstanding days for receivables from public hospitals in those countries were 206 days in the first half. Teleflex highlighted potential collection losses if conditions worsen.
- A Louisiana product-liability jury verdict involving a former marine business awarded $23.0m punitive and $0.1m compensatory damages. The appeals court affirmed the verdict on June 29, 2016; a rehearing motion was pending. Teleflex said amounts above $10m are expected to be covered by insurance. Recorded litigation accruals were $2.6m overall; the filing does not state the specific accrual for this case.
- Environmental liabilities recorded were $7.1m, with uncertainty that ultimate costs could exceed accruals. The company also disclosed continuing commercialization challenges for Semprus-related technology and possible material impairment of its $41.0m in-process R&D asset.
- Forward-looking risks include execution and savings from restructuring, product demand and acceptance, pricing and competition, reimbursement changes, acquisition integration, foreign exchange, interest rates and global economic conditions. Management reported no significant change in risk factors from the 2015 Form 10-K.
Investor facts to verify
- Underlying revenue and margin trends, including the contribution of new products, price, currency and prior-period quality issues.
- Restructuring execution, cash charges, capital spending, timing and delivery of the projected annual savings.
- Convertible-note settlement effects, refinancing costs, debt maturities, covenant headroom and the use of cash for debt repayment.
- Collection trends and credit-loss allowances for European public-healthcare customers, particularly Greece, Italy, Spain and Portugal.
- Status and potential exposure of the Louisiana litigation, insurance coverage and the Semprus technology’s path to regulatory approval and commercialization.