Teleflex Incorporated — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 25, 2016; comparisons are to the periods ended September 27, 2015. Teleflex is a global medical technology company focused primarily on single-use devices for critical care and surgical procedures.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenue | $455.6 million | $443.7 million | $1,354.1 million | $1,325.2 million |
| Gross profit | $241.6 million | $228.2 million | $723.1 million | $684.1 million |
| Gross margin | 53.0% | 51.4% | 53.4% | 51.6% |
| Income from continuing operations | $66.2 million | $61.6 million | $176.8 million | $146.0 million |
| Net income attributable to common shareholders | $66.3 million | $60.8 million | $176.3 million | $143.7 million |
| Diluted EPS | $1.40 | $1.25 | $3.69 | $3.00 |
- Q3 revenue rose 2.7%; nine-month revenue rose 2.2%. Management attributed growth to new products, existing-product volumes and pricing, partly offset by foreign-exchange headwinds.
- Gross margin improved 160 basis points in Q3 and 180 basis points year to date, reflecting pricing, product mix, lower manufacturing costs and favorable currency effects. R&D expense increased to $15.1 million in Q3 and $42.9 million year to date.
- Income from continuing operations before interest, debt extinguishment and taxes was $86.5 million in Q3 and $252.4 million year to date. Interest expense was $12.9 million and $38.6 million, respectively. Year-to-date results included a $19.3 million debt-extinguishment loss.
- Operating cash flow from continuing operations was $301.6 million for the nine months, versus $176.8 million a year earlier. Capital expenditures were $35.9 million; investing cash outflow was $40.2 million and financing cash outflow was $97.9 million.
- At September 25, cash was $499.5 million; current assets were $1,163.9 million and current liabilities $452.4 million. Borrowings were $1,046.2 million before discounts and issuance costs ($1,031.9 million carrying value): $181.9 million current and $850.0 million long term. The credit-facility leverage and interest-coverage covenants were met.
Material changes and management outlook
- Segment trends were mixed. Q3 revenue increased in all listed segments; year-to-date EMEA revenue declined 1.1%. Year-to-date operating profit increased in Vascular North America and Asia, while declining in EMEA and OEM.
- In May, Teleflex issued $400 million of 4.875% senior notes due 2026 and used the net proceeds to repay revolving-credit borrowings. It also exchanged or settled portions of its 3.875% convertible notes due 2017 through cash and share transactions, recording $19.3 million in year-to-date extinguishment losses in total.
- The 2016 Other Restructuring Program is expected to cost $2.5–$3.5 million in pre-tax charges, plus about $1 million of accelerated depreciation and other costs; expected annualized savings are $4.5–$5.5 million, with savings beginning in 2017.
- The 2016 Manufacturing Footprint Realignment Plan is expected to incur $34–$44 million of pre-tax charges and $17–$19 million of capital expenditures; projected annualized savings are $12–$16 million, expected to begin in 2017.
- Teleflex revised its 2014 footprint plan: estimated charges increased to $43–$48 million, cash outlays to $33–$38 million, and completion moved from end-2017 to the first half of 2020. Estimated annualized savings were reduced from $28–$35 million to $23–$27 million; management expects pricing-related revenue gains plus savings to improve annualized pre-tax income by about $28–$33 million once complete.
- Management stated that available cash, operating cash flow and committed borrowing facilities should fund operating needs, capital expenditures and debt obligations for the next 12 months and the foreseeable future. The filing provides no overall revenue or earnings guidance.
Risks, contingencies and unusual items
- Credit and collection exposure remains concentrated in Greece, Italy, Spain and Portugal: net current and long-term receivables there were $59.8 million, or 22.9% of total net trade receivables. Separately, receivables from publicly funded hospitals in those countries were $34.7 million. Management warned that economic deterioration could increase payment delays and credit losses.
- A Louisiana product-liability verdict involving the former marine business included $23.0 million in punitive damages and $0.1 million in compensatory damages; the appellate court affirmed it, and review petitions were pending at the Louisiana Supreme Court. Teleflex stated that liability above $10 million is believed to be covered by insurance.
- Teleflex reported $41.0 million of in-process research and development assets associated with Semprus technology and cautioned that commercialization challenges remain and a potentially material impairment may become necessary.
- Environmental liabilities recorded were $6.3 million. The company also disclosed ongoing litigation and tax examinations, including in Austria and Canada; it did not believe outstanding claims were likely to be material based on information then available.
- Foreign-exchange movements, healthcare reimbursement and pricing, raw-material costs, acquisition integration, restructuring execution and global economic conditions were identified as factors that could affect results. No significant change to the previously reported risk factors was disclosed.
Investor verification priorities
- Confirm that reported revenue and margin gains translate into sustainable growth, particularly given segment-level weakness in EMEA and OEM year-to-date profit.
- Track delivery of restructuring savings against revised cost, cash-outlay, capital-spending and completion estimates.
- Review debt maturities, refinancing needs and covenant headroom, including the remaining convertible notes due 2017.
- Monitor collections, aging and allowance adequacy for Southern European and publicly funded hospital receivables.
- Follow the Louisiana litigation review and insurance coverage, and assess Semprus commercialization progress and impairment risk.