Teleflex Incorporated — Q2 2015 Form 10-Q
Business context and reporting period
Teleflex is a global medical-technology company focused mainly on single-use devices for critical care and surgical procedures. This unaudited quarterly report covers the three and six months ended June 28, 2015; comparisons are with the periods ended June 29, 2014. Effective April 1, 2015, the company reorganized and realigned operating segments; prior-period segment comparisons were restated.
Financial results
Amounts below are in millions of dollars, except per-share data. Figures may differ slightly due to rounding.
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $452.0 | $468.1 | $881.5 | $906.7 |
| Gross profit / margin | $233.2 / 51.6% | $244.1 / 52.1% | $455.9 / 51.7% | $465.2 / 51.3% |
| Income before interest, debt extinguishment and taxes | $77.0 | $74.8 | $142.6 | $133.8 |
| Income from continuing operations | $45.2 | $48.8 | $84.5 | $84.1 |
| Net income attributable to common shareholders | $44.6 | $47.3 | $82.9 | $82.2 |
| Diluted EPS, continuing operations | $0.93 | $1.04 | $1.76 | $1.81 |
| Diluted EPS, net income | $0.93 | $1.02 | $1.74 | $1.78 |
- Revenue declined 3.4% in Q2 and 2.8% in the first half. Management attributed the principal headwind to unfavorable foreign-exchange movements of $37.9 million and $69.7 million, respectively. Existing-product volume, new-product sales and pricing partly offset the currency impact.
- Q2 gross margin fell 50 basis points, with increased manufacturing costs—including recall and quality-related costs—more than offsetting favorable product mix, volume efficiencies and pricing. First-half gross margin rose 40 basis points year over year.
- First-half operating cash flow from continuing operations was $109.6 million, versus $120.2 million. Investing cash outflow was $68.9 million, including $31.3 million of capital expenditures and $37.6 million for acquisitions. Cash ended the period at $325.0 million.
- At June 28, total borrowings were $1.142 billion and net debt was $816.7 million; net debt to total capital was 30%. Current borrowings were $416.0 million and long-term borrowings $696.0 million. Current classification includes $399.8 million of convertible notes that may be convertible under stated conditions. On July 29, after quarter-end, Teleflex repaid $50 million of revolving-credit borrowings.
- The quarterly dividend was $0.34 per share; first-half dividends totaled $28.2 million.
Material changes and unusual items
- Teleflex prepaid $250 million of 6.875% notes due 2019 on June 1, funding the repayment mainly with revolving-credit and securitization borrowings. The make-whole payment and write-off of debt issuance costs resulted in a $10.5 million Q2 loss on extinguishment of debt.
- First-half results included $5.0 million of restructuring charges; Q2 included $0.6 million in the restructuring line. A separate manufacturing-footprint program also generated accelerated depreciation and related costs in cost of goods sold.
- New 2015 acquisitions—Human Medics, Trintris, Truphatek and certain Stenning assets—had estimated aggregate consideration of $40.4 million. Acquired businesses contributed $2.6 million of first-half revenue and a $0.9 million pretax loss.
- Six-month other comprehensive income included a $61.9 million foreign-currency translation loss, contributing to comprehensive income of $23.4 million, down from $89.5 million a year earlier.
Outlook, management commentary and risks
- Management said cash from operations, cash on hand, the revolving credit facility and receivables securitization should fund operating needs, capital expenditures and debt obligations for the next 12 months and foreseeable future. The filing does not provide a specific consolidated revenue or EPS forecast.
- The 2015 restructuring programs are expected to incur $6–$7 million of pretax charges and generate annual pretax savings of $12–$14 million in 2017. The 2014 manufacturing-footprint plan is expected to incur total charges of approximately $37–$44 million and is expected to be substantially complete by the end of 2017.
- Management cited recalls and third-party component quality issues, increased manufacturing costs, foreign-exchange exposure, and execution and integration risks. The Semprus in-process research and development asset was valued at $41.0 million; commercialization challenges remain, and a future impairment could be material.
- Net receivables from customers in Greece, Italy, Spain and Portugal were $76.4 million, or 26.5% of total net current and long-term receivables. Average days outstanding for public-hospital receivables in those countries were 230 days. Further deterioration in customer or government finances could require additional allowances.
- Teleflex disclosed a Louisiana product-liability verdict involving its former marine business: $0.1 million compensatory and $23.0 million punitive damages, plus interest. The company intended to appeal; it had accrued its best estimate of probable loss and stated that amounts above $10 million were expected to be covered by insurance. Environmental liabilities of $7.7 million were accrued, with the filing noting potential exposure could exceed reserves.
Important facts for investors to verify
- Whether underlying revenue and margin trends improve after separating foreign-exchange effects from volume, price and product-mix changes.
- The financial and operational effects of product recalls and quality issues, including related manufacturing costs and any impact on new-product launches.
- Progress against restructuring milestones, total charges, and the stated 2017 savings target.
- Liquidity and refinancing plans for current-classified convertible notes, revolving-credit borrowings and other debt; also monitor covenant compliance.
- Collections, aging and allowance adequacy for European public-hospital receivables, and the outcome of the Louisiana appeal and other contingencies.
- Commercialization progress and impairment assumptions for the $41.0 million Semprus IPR&D asset.