Teleflex Incorporated — Q1 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 30, 2014, compared with the three months ended March 31, 2013. Teleflex designs, manufactures and distributes medical technology products, primarily single-use devices, selling in more than 150 countries. Effective January 1, 2014, it reorganized reporting into six segments; prior-period segment figures were recast.
Financial performance and position
| Metric | Q1 2014 | Prior period | Change |
|---|---|---|---|
| Net revenue | $438.5 million | $411.9 million | +6.5% |
| Gross profit / margin | $221.2 million / 50.4% | $200.5 million / 48.7% | Margin +1.7 percentage points |
| Income from continuing operations before interest and taxes | $59.0 million | $49.4 million | +19.5% |
| Income from continuing operations | $35.3 million | $27.7 million | +27.3% |
| Net income attributable to common shareholders | $35.0 million | $27.0 million | +29.3% |
| Diluted earnings per share | $0.76 | $0.63 | +20.6% |
| Operating cash flow, continuing operations | $33.6 million | $5.3 million | +$28.3 million |
Reported gross margin improved, supported by higher-margin acquired products, new products and pricing; higher raw-material and manufacturing costs partly offset the benefit. SG&A rose to $140.3 million from $127.0 million, increasing to 32.0% of revenue from 30.8%, mainly reflecting acquired businesses, amortization and IT costs. R&D declined to $14.1 million from $15.0 million. The effective tax rate fell to 19.5% from 21.7%, primarily due to a greater mix of income in lower-tax foreign jurisdictions.
Revenue growth included $23.2 million attributed in MD&A to businesses acquired in 2013–14, $4.5 million from price increases, $3.2 million from new products and $1.9 million from favorable currency; a $6.0 million volume decline partly offset growth. Segment revenue increased in Vascular North America (+10.3%), EMEA (+5.5%), Asia (+17.1%) and OEM (+5.9%); it declined in Anesthesia/Respiratory North America (-5.9%) and Surgical North America (-4.0%). Surgical North America operating profit fell 22.8%, while Vascular North America rose 86.9% and EMEA 15.7%.
Operating cash flow improved year over year, primarily from working-capital movements and lower domestic pension contributions. Investing activities used $39.5 million, including $29.0 million for acquisitions and $12.1 million in capital expenditures. Continuing-operations financing used $5.5 million, including $14.1 million of dividends. Cash and cash equivalents were $421.6 million at quarter end, down from $432.0 million at year end. Operating cash flow less capital expenditures was approximately $21.5 million, a derived measure not presented by the company.
At March 30, current assets were $1.221 billion and current liabilities $631.8 million (current ratio approximately 1.93). Current borrowings were $359.3 million and long-term borrowings $930.0 million; reported net debt was $913.1 million and net debt to total capital 32%. The $400 million face amount of 3.875% convertible notes was classified as current because the stock-price conversion threshold had been met. Management said it expected to meet obligations using cash and available borrowing capacity, while noting repayment could affect liquidity and results.
Material changes, outlook and notable matters
- Acquisitions: Teleflex acquired Australian distributor Mayo Healthcare on February 3 for consideration of approximately $28.5 million. It contributed to reported results from the acquisition date. The company also included results from 2013 acquisitions Vidacare, Ultimate and Eon.
- Restructuring: A European plan launched in February generated $8.3 million of termination-benefit charges in Q1; total estimated charges were approximately $9 million, with expected annualized pretax savings of $8–9 million when fully implemented. A separate board-approved plan announced April 28, after quarter end, targets $28–35 million of annualized savings when implemented, with estimated charges of $42–53 million and capital expenditures of $24–30 million. The company expected to begin realizing savings from this later plan in 2015.
- Debt repayment after quarter end: Teleflex repatriated $230 million from non-U.S. subsidiaries and on April 28 used those funds toward a $235 million repayment of revolving-credit borrowings. This was not reflected in March 30 balances.
- Regulatory risk: The FDA issued a March warning letter alleging quality-system violations at the Arlington Heights, Illinois facility. The company reported corrective actions underway; further FDA enforcement is possible, and export certificates for products made there are being withheld pending correction and FDA verification. 2013 sales of products made at the facility were approximately $35.6 million.
- Receivables and credit exposure: The company described extended payment periods at publicly funded healthcare customers, especially in parts of Europe. Net receivables in Spain, Italy, Greece and Portugal were $97.9 million, or 32% of total net current and long-term receivables, at March 30; the filing warns further economic deterioration could require additional allowances.
- Other risks and contingencies: Teleflex recorded $7.5 million of environmental liabilities and $3.9 million of reserves for litigation matters. It stated litigation outcomes could nevertheless be materially adverse if developments are unfavorable. Approximately $38 million of net assets related to Semprus technology remained exposed to potential impairment if development difficulties are not resolved. Contingent consideration liabilities were $17.9 million, with possible undiscounted payments ranging from zero to $61.0 million.
- Reporting item: The filing reclassified $7.2 million of prior-year contingent-consideration payments from investing to financing cash flows, describing the correction as not material to previously issued financial statements. It also disclosed corrections to prior-year consolidating cash-flow presentation.
The filing provides no overall revenue or earnings guidance. Management stated that available cash, operating cash flow, revolving-credit capacity and accounts-receivable sales should fund operating needs and obligations for the next 12 months and foreseeable future. Forward-looking results remain subject to acquisition integration, restructuring execution, customer demand and pricing, raw-material costs, currency and interest rates, and global economic and sovereign-debt conditions.
Investor verification priorities
- Reconcile Mayo Healthcare’s Q1 contribution: the acquisition note reports $4.1 million of revenue, while MD&A cites $2.0 million in its acquisition and Asia-segment discussion.
- Assess the FDA warning letter, timing and effectiveness of corrective actions, and potential effects on production and export certificates.
- Track execution costs, cash outlays and savings from both restructuring plans, including the April 2014 plan’s stated $28–35 million annualized savings target.
- Confirm the impact of the $235 million post-quarter revolving-credit repayment on debt, liquidity and interest expense, and monitor the convertible notes’ current classification and repayment requirements.
- Monitor European public-healthcare receivables, collection trends, allowance adequacy and the distinction between the $59.8 million public-hospital exposure cited in MD&A and the $97.9 million regional receivables total in the notes.
- Evaluate acquisition-related performance, particularly segment trends and the risk of impairment to Semprus-related assets.