Business context and reporting period
Teleflex Incorporated is a global medical-technology company that develops, manufactures and sells medical devices, primarily for critical care and surgical procedures. This unaudited Form 10-Q covers the three months ended March 27, 2016; comparisons are with the three months ended March 29, 2015. Segment comparisons reflect the company’s revised segment structure, with prior periods restated.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net revenues | $424.9 million | $429.4 million |
| Gross profit / margin | $225.1 million / 53.0% | $222.6 million / 51.8% |
| Income from continuing operations | $51.2 million | $39.3 million |
| Net income attributable to common shareholders | $50.7 million | $38.4 million |
| Diluted net earnings per share | $1.04 | $0.81 |
| Operating cash flow, continuing operations | $66.8 million | $42.4 million |
- Operating income from continuing operations was $67.5 million versus $65.6 million. Gross margin increased 120 basis points.
- Cash and cash equivalents were $392.6 million at March 27, up from $338.4 million at year-end. Total assets were $3.94 billion; total equity was $2.06 billion.
- Debt was $1.08 billion on the company’s net-debt schedule, versus $1.08 billion at year-end. Net debt was $690.1 million and net debt to total capital was 25.1%, down from 27.0%. The balance sheet reported $421.2 million of current borrowings and $642.0 million of long-term borrowings.
- Continuing-operations investing cash use was $6.6 million, including $7.8 million of capital expenditures. Continuing-operations financing cash use was $11.1 million, including $14.2 million of dividends. Dividends were $0.34 per share.
Material changes versus the prior period
- Revenue declined 1.1%. Management attributed the decrease principally to $9.0 million of unfavorable currency movements and $3.9 million lower existing-product volumes, partly offset by $4.6 million of new-product sales, $2.3 million of price increases and $1.5 million from 2015 acquisitions.
- Gross margin improved on a higher mix of higher-margin products, acquisitions, distributor conversions and pricing, partly offset by quality-related costs.
- Selling, general and administrative expense fell $3.4 million, including a $3.2 million benefit from the suspension of the medical-device excise tax for 2016 and 2017. Interest expense fell $3.4 million, mainly following the 2015 redemption of higher-rate notes.
- The effective tax rate fell to 4.9% from 19.2%, mainly due to benefits from settling a foreign tax audit and revised estimates of foreign tax credits related to potential repatriation.
- Performance varied by segment: operating profit rose in Asia, Vascular North America and Anesthesia North America, but declined in EMEA and OEM. EMEA revenue fell 5.6%, while OEM operating profit fell 35.0%.
Outlook, commentary, risks and unusual items
- No broad revenue or earnings guidance is stated in the provided filing text. Management said available cash, operating cash flow and borrowing capacity should fund operating requirements, capital spending and debt obligations for the next 12 months and foreseeable future.
- A new manufacturing-footprint restructuring plan, approved in February 2016, is expected to generate $12 million to $16 million in annualized savings when fully implemented, with savings expected to begin in 2017. Estimated pretax charges are $34 million to $44 million, including $27 million to $31 million of future cash outlays; completion is expected by the end of 2018. Planned capital expenditures are $13 million to $17 million. The company recorded $10.0 million of restructuring expense in the quarter.
- Subsequent event: On April 4, 2016, Teleflex exchanged cash and shares for $219.2 million principal amount of convertible notes, paying $220.7 million in cash (funded through revolving-credit borrowings) and issuing 2.17 million shares. The company recognized a $16.3 million debt-extinguishment loss in April. After the exchange and previously received conversion notices, $136.2 million principal remained outstanding; additional conversion settlements were expected in May and June 2016.
- Credit risk is concentrated in certain publicly funded European healthcare systems. Net receivables from Greece, Italy, Spain and Portugal were $70.3 million, or 25.6% of total net current and long-term receivables, at quarter-end; management cited possible delays and credit losses if conditions worsen.
- Other matters to monitor include environmental accruals of $7.3 million, litigation accruals of $2.7 million, and a product-liability appeal involving a former marine business, with a $23.0 million punitive-damages verdict and insurance expected to cover liability above $10.0 million. Management cautioned that adverse developments could make claims materially adverse.
- Teleflex reported $41.0 million of in-process research and development assets related to Semprus technology and warned that commercialization challenges remain and a material impairment could ultimately be required.
- The company stated it was in compliance with its debt covenants at March 27, 2016. Its revolving-credit agreement requires a maximum consolidated leverage ratio of 4.0:1 and minimum interest coverage of 3.50:1.
Important facts for investors to verify
- Whether the new restructuring plan achieves the projected savings, timing and cash-cost estimates.
- Post-quarter cash, revolving-credit usage, remaining convertible-note obligations and dilution following the April exchange and conversion settlements.
- Collection trends and allowance adequacy for European public-hospital receivables, particularly in Greece, Italy, Spain and Portugal.
- Whether segment trends in EMEA and OEM persist, and whether reported margin gains are sustained after restructuring and quality-related costs.
- Updates on the Semprus asset’s commercialization and impairment risk, and on the Louisiana litigation appeal and environmental contingencies.