Teleflex Incorporated — Q3 2015 Form 10-Q
Reporting period: Quarter ended September 27, 2015; comparisons are with the quarter ended September 28, 2014. Nine-month comparisons cover the corresponding periods. Teleflex makes and sells medical technology products, primarily single-use devices for critical care and surgical applications. Segment reporting was reorganized effective April 1, 2015; prior-period segment data was restated.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net revenue | $443.7M | $457.2M | $1,325.2M | $1,363.8M |
| Gross profit | $228.2M | $236.2M | $684.1M | $701.4M |
| Gross margin | 51.4% | 51.7% | 51.6% | 51.4% |
| Income from continuing operations | $61.6M | $55.2M | $146.0M | $139.3M |
| Net income attributable to common shareholders | $60.8M | $54.8M | $143.7M | $137.0M |
| Diluted EPS | $1.25 | $1.18 | $3.00 | $2.96 |
- Q3 revenue declined 2.9%; management attributed the decrease principally to $32.8M of unfavorable currency movements, partly offset by existing-product volume, new products, pricing, and acquired-business sales. For nine months, revenue fell 2.8%, including a $102.5M adverse currency impact.
- Q3 gross margin declined 30 basis points. Higher manufacturing costs, including recall and quality-related costs, and currency headwinds outweighed benefits from product mix, pricing, and acquisitions. Nine-month gross margin increased 20 basis points year over year, notwithstanding those cost pressures.
- Q3 SG&A was $138.8M (31.3% of revenue), versus $138.3M (30.2%). Nine-month SG&A was $420.8M versus $425.4M. R&D was $12.6M in Q3 and $38.9M year to date, down from $14.9M and $43.8M, respectively.
- Q3 continuing-operations income benefited from a 1.3% effective tax rate, versus 14.9% a year earlier. The nine-month rates were 9.5% and 16.8%. Tax benefits included effects of U.S. tax filings, legislative tax-rate changes, and estimated foreign tax credits; these helped lift earnings despite lower revenue.
Cash flow, balance sheet, and debt
- Operating cash flow from continuing operations was $176.8M for the first nine months, down from $208.8M. Management cited working-capital changes, higher domestic pension contributions, and a lower restructuring reserve.
- Investing cash outflow was $108.6M, including $63.5M for acquisitions and $45.6M of capital expenditures. Financing cash outflow was $70.9M; dividends paid were $42.4M. Cash decreased $26.8M to $276.5M.
- At September 27, 2015, borrowings were $1,062.7M net of debt discount; reported debt before discount was $1,089.1M. Cash-adjusted net debt was $812.6M, and net debt to total capital was 30%, unchanged from year-end 2014. Current borrowings were $416.7M and long-term borrowings $646.0M.
- The company redeemed $250M of 6.875% notes due 2019 in June, paying an $8.6M make-whole amount and recording a total $10.5M debt-extinguishment loss, including a debt-cost write-off. The redemption was funded with revolving-credit and securitization borrowings and cash. Revolver borrowings were $396.0M at quarter-end; the revolver rate was 1.95%.
- The 3.875% convertible notes due 2017, with $399.8M principal outstanding, were classified as current because the stock-price conversion condition was met. Teleflex said it believed it had sufficient cash and revolver capacity to repay principal, while warning that using those resources could adversely affect results and liquidity.
- Management said cash, operating cash flow, and available credit facilities should fund operating needs, capital expenditures, and debt obligations for the next 12 months and foreseeable future. The company reported compliance with its credit-agreement covenants at quarter-end.
Material developments, outlook, and risks
- Segment results were mixed. Q3 revenue grew in Vascular North America (+7.8%) and Surgical North America (+9.6%); EMEA declined 14.4%, largely from currency, and EMEA operating profit fell 31.9%. North American segment operating profits generally improved; EMEA and All Other operating profit weakened.
- Six 2015 acquisitions had aggregate estimated fair value of $66.4M. Acquired businesses contributed $4.6M of Q3 revenue and $9.9M for the first nine months. Purchase-price allocations remained preliminary.
- 2015 restructuring programs were expected to incur $6M–$7M of pretax charges and, when completed, generate annual pretax savings of $12M–$14M. The 2014 manufacturing-footprint plan was expected to continue through 2017, with estimated aggregate charges of $37M–$44M. No company-wide revenue or EPS guidance is stated in the provided filing text.
- Quality issues and product recalls increased manufacturing costs and affected certain product sales. Management also identified currency movements, customer demand and pricing, acquisition integration, restructuring execution, raw-material costs, and global economic conditions as risks.
- Credit risk remains concentrated in public healthcare systems in Greece, Italy, Spain, and Portugal: net receivables there were $72.1M, or 26.1% of total net current and long-term receivables, at quarter-end. Management cited average receivable days of 229 for public hospitals in those countries and warned of potential payment delays or credit losses.
- Contingencies include environmental liabilities of $7.4M accrued and ongoing litigation. A product-liability case involving the former marine business resulted in a $23.0M punitive-damages verdict plus interest; Teleflex appealed and said amounts above $10.0M were expected to be covered by insurance. The company stated it did not believe outstanding matters were likely to be material, but an unfavorable resolution could have a material adverse effect.
- Teleflex held $41.0M of in-process R&D related to Semprus technology; despite progress toward regulatory approval, significant commercialization challenges remain and a material impairment could ultimately be required. The filing reported no goodwill impairment in the period.
- The filing reports no significant change in risk factors and no material change in internal control over financial reporting. It also disclosed revisions to certain prior-period consolidating guarantor information; the company said these did not affect consolidated results and were not material to that information.
Important facts for investors to verify
- How much of underlying revenue and earnings trends reflects currency, pricing, volume, acquisitions, and product mix, particularly in EMEA?
- What are the extent, cost, and resolution timeline of the product recalls and quality issues, and could they cause further sales or margin pressure?
- Can Teleflex deliver the stated restructuring savings, and what further charges and cash outlays remain?
- How will the company fund or refinance the convertible notes classified as current, and what will repayment mean for liquidity and interest expense?
- Are receivables from the cited European healthcare systems collectible without additional reserves, and could litigation or the Semprus asset require material charges?