Teleflex Incorporated — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 29, 2014; comparisons are to the periods ended June 30, 2013. Teleflex is a global medical-technology company focused primarily on single-use devices used in critical care and surgical procedures.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net revenue | $468.1m | $420.1m | $906.7m | $831.9m |
| Gross profit | $244.1m | $209.5m | $465.2m | $410.0m |
| Gross margin | 52.1% | 49.9% | 51.3% | 49.3% |
| Income from continuing operations before interest and taxes | $74.8m | $63.8m | $133.8m | $113.2m |
| Net income attributable to common shareholders | $47.3m | $42.4m | $82.2m | $69.5m |
| Diluted EPS | $1.02 | $0.98 | $1.78 | $1.61 |
| Operating cash flow from continuing operations | Not separately provided | Not separately provided | $120.2m | $56.2m |
- Q2 revenue grew 11.4%; first-half revenue grew 9.0%. Management attributed first-half growth substantially to acquisitions ($50.2m of revenue), with contributions from pricing, new products and foreign exchange.
- Gross margin improved 2.2 percentage points in Q2 and 2.0 points in the first half, supported by acquisition mix, pricing, currency and new products; higher raw-material and manufacturing costs partly offset the improvement.
- SG&A was $146.8m in Q2 and $287.1m for the first half, respectively 31.4% and 31.7% of revenue, up from 27.7% and 29.2%. Acquired-business costs, amortization, employee-related expenses and IT costs contributed to the increases. R&D declined to $14.9m in Q2 and $28.9m in the first half.
- First-half operating cash flow increased $64.0m year over year, primarily due to more favorable working-capital movements and lower domestic pension contributions. Capital expenditures were $30.9m; cash used in investing activities was $55.3m.
Balance sheet, debt and liquidity
- At June 29, 2014, cash was $237.4m, down from $432.0m at year-end 2013; current assets were $1.041bn and current liabilities $652.5m. The resulting current ratio was approximately 1.6, versus 1.9 at year-end.
- Borrowings had a carrying value of approximately $1.062bn: $362.3m current and $700.0m long-term. The company’s stated net debt was $867.3m and net debt to total capital was 30%, compared with 32% at year-end.
- Teleflex issued $250m of 5.25% senior notes due 2024 and used $245m of proceeds to repay its revolving facility. It also repaid $235m of revolving borrowings using repatriated overseas cash. First-half financing cash outflow was $260.1m, including $480m of debt repayments, partly offset by $250m of new borrowings.
- The $400m principal amount of 3.875% convertible notes due 2017 was classified as current because the stock-price conversion condition had been met. Management said it believed available cash and credit-facility borrowings could fund repayment, while noting use of those resources could adversely affect liquidity and results.
- Management stated cash from operations, available cash, revolver capacity and receivables sales were expected to fund operating needs, capital expenditures and debt obligations for the next 12 months and foreseeable future. The filing does not provide a specific full-year earnings or revenue guidance range.
Material changes and segment trends
- Acquisitions, including Vidacare and Mayo Healthcare, were significant growth contributors. Mayo Healthcare was acquired in February for net consideration of $28.5m.
- Q2 segment revenue increased in Vascular North America (+13.1%), EMEA (+12.2%), Asia (+24.1%) and OEM (+14.0%). Anesthesia/Respiratory North America declined 5.9%; Surgical North America was broadly flat (+0.6%).
- Anesthesia/Respiratory North America operating profit fell 32.1% in Q2, reflecting lower sales of higher-margin products and higher employee costs. Surgical North America first-half operating profit declined 8.8%. EMEA, Asia and Vascular North America reported higher operating profit.
- Effective January 2014, Teleflex changed its segment structure and certain cost-allocation methods; comparative periods were restated.
Outlook, risks and unusual items
- A manufacturing-footprint realignment is expected to generate $42m–$53m in aggregate pretax charges, including $32m–$40m of future cash outlays, and $24m–$30m of capital expenditures. Management expects annualized savings of $28m–$35m once fully implemented, beginning in 2015; completion is expected by the end of 2017.
- Other 2014 restructuring programs include a European plan with estimated pretax charges of $8m–$9m, expected to be substantially completed in 2014, and additional programs estimated at $2m–$3m. First-half restructuring and impairment charges totaled $15.4m, down from $22.1m.
- The FDA issued a warning letter concerning quality-system issues at the Arlington Heights facility. Teleflex reported corrective actions, but further FDA enforcement is possible; certificates for foreign governments relating to products made there will not be granted until the cited violations are corrected.
- Receivables from Spain, Italy, Greece and Portugal were $95.7m net, or 30.8% of total net current and long-term receivables. Management warned that worsening economic or public-health-system conditions could lead to delays, additional allowances or credit losses. Average days outstanding for public hospitals in those countries were 238 for the first half.
- Approximately $41m of assets related to Semprus technology were identified as at risk if development difficulties are not resolved, potentially resulting in a material impairment. Environmental liabilities and ordinary-course litigation are also disclosed; the company said current litigation was not expected to be material, but unfavorable developments could be adverse.
- Other notable items include a $6.7m first-half reduction in contingent-consideration liabilities, primarily from changed probabilities of regulatory and sales milestones, and a 2.3% medical-device excise tax of $6.2m for the first half.
Investor verification priorities
- Check whether revenue growth and margin gains persist excluding acquired businesses, pricing and foreign-exchange effects, and track weakness in Anesthesia/Respiratory North America.
- Monitor execution costs, capital spending and realized savings from the manufacturing realignment and other restructuring plans.
- Follow FDA remediation and any enforcement actions affecting the Arlington Heights facility or product certifications.
- Assess collections and allowance adequacy for European public-health-system receivables, and monitor the Semprus assets for impairment indicators.
- Review the convertible notes’ quarterly conversion classification, debt maturities, covenant headroom and liquidity following the substantial first-half cash decline.