Teleflex Incorporated — Q3 2014 Form 10-Q
Reporting period: Quarter ended September 28, 2014; year-to-date figures cover the nine months then ended. Comparisons are with the corresponding 2013 periods. Teleflex designs, manufactures and sells medical technology products, primarily single-use devices for critical care and surgical procedures.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $457.2M | $413.8M | $1,363.8M | $1,245.7M |
| Gross profit | $236.2M | $204.0M | $701.4M | $614.0M |
| Gross margin | 51.7% | 49.3% | 51.4% | 49.3% |
| Income before interest, debt extinguishment and taxes | $81.9M | $66.0M | $215.7M | $179.2M |
| Net income attributable to common shareholders | $54.8M | $46.6M | $137.0M | $116.1M |
| Diluted EPS | $1.18 | $1.08 | $2.96 | $2.68 |
- Revenue grew 10.5% in Q3 and 9.5% year to date. Acquisitions were the largest stated contributor: $26.6M of Q3 growth and $76.8M of nine-month growth. Price, new products, volume and currency also contributed.
- Gross margin improved, supported by acquired and higher-margin products, pricing and new products; higher raw-material and manufacturing costs partly offset the gains. SG&A rose to 30.2% of revenue in Q3 from 27.8%, and to 31.2% year to date from 28.8%, reflecting acquisition-related costs and other higher expenses.
- Q3 income from continuing operations was $55.2M versus $45.8M. Year-to-date it was $139.3M versus $116.9M. Effective tax rates were higher than in 2013: 14.9% versus 10.2% for Q3 and 16.8% versus 14.0% year to date.
- Q3 segment performance was mixed: EMEA, Vascular North America and OEM operating profit increased substantially; Asia operating profit fell 21.7% despite 12.3% revenue growth. Nine-month Anesthesia/Respiratory North America revenue declined 3.5%, while Asia revenue increased 17.7%.
Cash flow, debt and liquidity
- Operating cash flow from continuing operations was $208.8M for the nine months, up from $135.9M. Capital expenditures were $48.2M; net cash used in investing activities was $71.5M and net cash used in financing activities was $274.0M.
- Cash declined $145.6M from year-end 2013 to $286.4M. The company paid $42.2M in dividends, or $1.02 per share year to date.
- At September 28, 2014, borrowings totaled about $1.10B before unamortized debt discount, versus $1.33B at year-end. Net debt was $818.3M, down from $902.7M; net debt to total capital was 29%, compared with 32%.
- In May, Teleflex issued $250M of 5.25% senior notes due 2024 and used $245M of proceeds to repay revolver borrowings. Management said cash, operating cash flow, credit-facility borrowings and receivables sales should fund requirements and debt obligations for the next 12 months and foreseeable future.
- The $400M principal amount of 3.875% convertible notes due 2017 was classified as current because the stock-price conversion condition had been met. The company said it believed it could fund principal repayment with cash and revolver availability, while noting that doing so could adversely affect liquidity and results.
Outlook, material developments and risks
- The 2014 manufacturing-footprint plan is expected to generate $28M–$35M in annualized savings when fully implemented, with savings beginning in 2015. Estimated total pretax charges are $42M–$53M, including $32M–$40M of future cash outlays; related capital expenditures are expected to be $24M–$30M. Most charges, cash outlays and capital expenditures are expected before the end of 2016. The timing of 2014 costs was revised downward, without changing total estimates.
- Other restructuring includes a European plan expected to cost about $9M, with completion expected in 2014, and smaller 2014 programs estimated at about $3M. No specific consolidated revenue or earnings guidance was provided in the supplied filing text.
- The FDA issued a warning letter concerning alleged quality-system violations at the Arlington Heights facility. Teleflex reported corrective actions, but further enforcement remains possible until the FDA accepts and verifies remediation; foreign-government export certificates for affected products are restricted in the interim.
- Receivables from Spain, Italy, Greece and Portugal remained a significant collection exposure: $87.7M net, or 29.4% of total net current and long-term receivables, at quarter-end. Management warned that worsening economic or healthcare-system conditions could require additional allowances and harm cash flow. Average receivable days for public hospitals in those countries were 241 year to date.
- Teleflex is monitoring slower third-party sales and inventory levels at some Asian distributors, particularly in China. Separately, approximately $41M of Semprus technology-related assets are at risk of impairment if development issues are not resolved.
- Other notable exposures include environmental remediation liabilities and ordinary-course litigation. Recorded litigation reserves were approximately $4.2M; management did not expect current claims to have a material adverse effect, but unfavorable developments could do so. The filing reported no significant quarterly change in risk factors.
Important facts for investors to verify
- How much of revenue and profit growth reflects acquisitions versus organic demand, and whether higher gross margins can persist as acquisition-related SG&A and amortization continue.
- Progress against restructuring milestones, total expected charges and cash costs, and delivery of the $28M–$35M annualized savings target.
- FDA remediation status, inspection outcomes and any effect on product availability or export certifications.
- Collections and allowance adequacy for European public-sector receivables, and distributor inventory and demand trends in China and other Asian markets.
- Liquidity and refinancing implications of the convertible notes’ current classification, alongside debt covenants and cash requirements.
- Further development results for Semprus technology and any resulting impairment assessment.