Teleflex Incorporated — Q2 2018 Form 10-Q
Reporting period: Quarter ended July 1, 2018; comparisons are with the quarter ended July 2, 2017. Six-month figures cover the first half of each year. Teleflex provides medical technology products, primarily single-use devices used in hospital and healthcare settings.
Key financial results
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net revenue | $609.9 million | $528.6 million | $1,197.1 million | $1,016.5 million |
| Gross profit | $344.8 million | $290.3 million | $676.0 million | $545.8 million |
| Gross margin | 56.5% | 54.9% | 56.5% | 53.7% |
| Operating income from continuing operations before interest, debt extinguishment and taxes | $33.5 million | $110.2 million | $120.3 million | $171.0 million |
| Net income (loss) | $(2.5) million | $78.0 million | $53.7 million | $118.2 million |
| Diluted EPS | $(0.05) | $1.67 | $1.15 | $2.53 |
| Operating cash flow from continuing operations | Not separately presented for the quarter | $181.6 million | $197.7 million |
Q2 revenue rose 15.4%; first-half revenue increased 17.8%. Management attributed much of the growth to acquired businesses and favorable foreign exchange, with additional contribution from new products. Acquisitions generated $47.8 million of Q2 and $113.4 million of first-half revenue; favorable currency movements added $14.0 million and $38.5 million, respectively.
Gross margin improved year over year, supported by acquired businesses, favorable manufacturing costs and cost-improvement initiatives. However, operating expenses and restructuring charges weighed heavily on reported earnings: Q2 SG&A was $229.9 million, or 37.7% of revenue, versus $158.9 million, or 30.1%, a year earlier. First-half SG&A was $445.3 million, or 37.2%, versus $322.9 million, or 31.8%. Q2 interest expense was $26.6 million, compared with $19.9 million.
Liquidity, debt and cash flow
- Cash and cash equivalents were $346.3 million at July 1, 2018, up from $333.6 million at December 31, 2017.
- Total borrowings were $2.232 billion: $86.9 million current and $2.145 billion long-term. Cash less borrowings implies net debt of approximately $1.886 billion.
- First-half operating cash flow was $181.6 million, down $16.1 million year over year, principally due to working-capital movements and higher income-tax payments.
- First-half investing cash outflow was $60.5 million, including $38.0 million of capital expenditure and $22.5 million of acquisition payments. Financing cash outflow was $102.4 million, including $62.6 million of contingent-consideration payments, $30.9 million of dividends and $18.5 million of debt repayments.
- Management said cash, operating cash flow and revolving-credit availability should fund operating needs, capital expenditures and debt obligations for the next 12 months and the foreseeable future. The company reported compliance with its credit-agreement covenants at quarter-end.
Material changes, outlook and risks
- Restructuring: A European footprint realignment began May 1, 2018, involving manufacturing relocation, distribution outsourcing and workforce reductions. Q2 charges were $55.4 million and first-half charges were $58.4 million, primarily termination benefits. The plan is expected to be substantially complete by the end of 2024. Estimated total restructuring and related charges are $102–$133 million; expected annual pretax savings once fully implemented are $25–$30 million. Management expects $55–$72 million of charges in 2018.
- Acquisitions and contingent consideration: Teleflex acquired certain QT Vascular assets for $20.6 million in June. NeoTract-related contingent consideration was valued at $227.7 million; the company paid $75.0 million after sales milestones were achieved. The increase in the fair value of contingent consideration raised SG&A expense and contributed to lower earnings.
- Segment trends: Surgical North America revenue declined 9.0% in Q2 and 10.2% in the first half, mainly due to lower sales volumes. “All other” operating profit declined substantially, primarily reflecting NeoTract operating expenses and contingent-consideration expense. EMEA, Asia, OEM and Interventional North America revenue increased.
- Taxes: The Q2 effective tax rate was 136.3%, versus 13.4% a year earlier; the first-half rate was 23.2%, versus 7.4%. Management cited nondeductible restructuring costs and contingent-consideration expense, partly offset by the lower U.S. corporate tax rate under the Tax Cuts and Jobs Act. The company noted that its accounting for certain tax-law effects remained subject to completion and could change.
- Risks and contingencies: Management highlighted risks including acquisition integration and realization of synergies, execution of restructuring savings, customer demand and pricing, reimbursement changes, raw-material costs, currency and economic conditions. Receivables from Greece, Italy, Spain and Portugal were $52.6 million, or 15.0% of net trade receivables; delayed payment or economic deterioration could lead to credit losses. Environmental liabilities accrued were $6.7 million. Litigation reserves were $1.7 million; management did not expect current claims to be material, but unfavorable developments could have a material adverse effect.
- No significant changes to the company’s previously disclosed risk factors were reported. No full-year revenue or earnings guidance is stated in the filing text provided.
Important facts for investors to verify
- How much of revenue growth reflects organic demand, versus acquisitions and currency effects, particularly NeoTract and Vascular Solutions.
- Whether the European footprint plan meets its charge, timing and annual savings estimates, and whether execution affects product supply or margins.
- How NeoTract sales milestones affect future contingent-consideration payments and reported SG&A and earnings.
- Whether cash conversion improves after first-half working-capital outflows and whether debt, interest costs and covenant headroom remain manageable.
- Trends in Surgical North America volumes and collections from public healthcare customers in Greece, Italy, Spain and Portugal.