Teleflex Incorporated — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone Q4 filing; it also includes unaudited fourth-quarter data. Teleflex is a global medical-technology company focused primarily on single-use devices for critical care and surgical procedures.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Net revenue | $1,809.7 million | $1,839.8 million |
| Gross profit / margin | $944.4 million / 52.2% | $942.4 million / 51.2% |
| Income from continuing operations before interest, debt extinguishment and taxes | $315.9 million | $284.9 million |
| Income from continuing operations | $236.8 million | $191.5 million |
| Net income attributable to common shareholders | $244.9 million | $187.7 million |
| Diluted EPS from continuing operations / net income | $4.91 / $5.10 | $4.10 / $4.04 |
| Operating cash flow from continuing operations | $303.4 million | $290.2 million |
| Free cash flow (non-GAAP) | $242.0 million | $222.7 million |
| Cash and cash equivalents at year-end | $338.4 million | $303.2 million |
| Total debt carrying amount | $1,065.9 million | $1,068.4 million |
| Net debt / total capital | 27.2% | 29.5% |
Free cash flow is operating cash flow less capital expenditures. Year-end current assets were $1,006.4 million and current liabilities were $666.7 million. Of cash and equivalents, $316.0 million was held at foreign subsidiaries. The company reported $396.0 million drawn on its $850 million revolving facility, plus $3.8 million of standby letters of credit; it also reported $6.7 million available under its receivables securitization facility.
For Q4 2015, revenue was $484.5 million versus $476.0 million in Q4 2014; income from continuing operations was $90.8 million and diluted EPS from continuing operations was $1.88. Q4 net income included a $10.5 million gain from discontinued operations, principally reflecting a tax benefit.
Material changes versus the prior year
- Full-year revenue declined 1.6%, despite higher existing-product volume, new-product sales, acquisitions and pricing. Unfavorable currency movements reduced revenue by $129.1 million, led by EMEA and Asia.
- Gross margin increased 100 basis points to 52.2%, reflecting product mix, volume and price gains, partly offset by currency and product recall/quality costs.
- Income from continuing operations increased; the 2015 effective tax rate fell to 3.2% from 13.0%, aided by tax benefits including U.S. tax-return filings and reserve reductions. This unusually low rate contributed to reported earnings growth.
- Operating cash flow rose $13.2 million, while investing cash outflow increased to $154.8 million, including $93.8 million of net acquisition payments and $61.4 million of capital expenditures.
- Debt was reshaped: Teleflex repaid its $250 million 6.875% notes due 2019, funded partly with revolving borrowings, and recorded a $10.5 million debt-extinguishment loss. The company reported $1.089 billion of debt principal before unamortized discount.
- EMEA revenue fell 13.3% and segment operating profit fell 19.5%, primarily due to currency. Vascular North America revenue grew 7.6% and operating profit 36.2%; Anesthesia North America revenue grew 2.9% and operating profit 39.8%.
Outlook, management commentary, risks and unusual items
- In February 2016, the board approved a further manufacturing and distribution restructuring. Teleflex estimated $34–$44 million of pretax charges, including $27–$31 million of future cash outlays, and $12–$16 million in annualized savings once fully implemented. Actions are expected to begin in Q2 2016 and be substantially completed by year-end 2018; savings are expected to begin in 2017.
- The company said operating cash flow, cash and borrowing facilities should fund foreseeable operating needs, capital spending and debt obligations. However, approximately $399.6 million principal of convertible notes was classified as current because a share-price conversion condition had been met. As of February 15, 2016, conversion notices covered about $44.7 million principal; Teleflex elected to settle principal in cash and excess conversion value in shares.
- Collections from publicly funded hospitals in Greece, Italy, Spain and Portugal remain a concern. Receivables from those countries were $62.3 million at year-end, or 23.9% of net current and long-term receivables; average days outstanding were 204. The filing warns that further deterioration could increase credit losses and pressure cash flow.
- Other material risks include medical-device regulation and product liability, competition and reimbursement/pricing pressure, foreign-exchange and raw-material volatility, acquisition integration, restructuring execution, debt covenants and refinancing, and manufacturing or supply interruptions. Product recalls and quality issues identified in 2015 affected gross margin.
- Teleflex retained a $41.0 million in-process R&D asset related to Semprus technology. Despite reported technical progress, commercialization and regulatory approval remain uncertain, and future impairment charges could be material.
- Litigation reserves were $2.5 million at year-end. A retained-liability lawsuit relating to a former marine business included a $23 million punitive-damages verdict under appeal; the company said amounts above $10 million were expected to be covered by insurance. Environmental liabilities were also recorded, with potential exposure uncertain.
- The medical-device excise tax was suspended for 2016 and 2017; Teleflex recorded $10.2 million of expense in 2015 and noted the tax could resume in 2018 absent an extension. The company maintained its $0.34 quarterly dividend in February 2016. Its 2007 share-repurchase authorization was terminated, with no shares repurchased under it.
Most important facts for investors to verify
- How much of revenue and earnings growth reflects underlying demand versus acquisitions, currency effects, pricing and the unusually low 2015 tax rate.
- Whether the new restructuring delivers the stated $12–$16 million annual savings, and whether its charges, cash costs and timing remain within management’s estimates.
- The pace and cash impact of convertible-note conversions, and the resulting debt, dilution and liquidity needs.
- Collection trends and reserve adequacy for European public-healthcare receivables, especially in Greece, Italy, Spain and Portugal.
- Progress toward commercializing Semprus technology, and any changes in product recall, quality, regulatory or litigation exposures.
The filing reports that the financial statements received an unqualified audit opinion and that internal control over financial reporting was effective as of December 31, 2015.