Teleflex Incorporated — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 28, 2020; comparisons are with the periods ended June 30, 2019. Amounts below are in millions except per-share data.
Business context and results
Teleflex is a global medical technology company, primarily selling single-use devices. COVID-19 reduced elective procedures and demand for several product categories, while increasing demand for respiratory and vascular access products. Management reported that elective procedures began increasing toward the end of Q2, but said the trend and the pandemic’s duration remained uncertain.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $567.0 | $652.5 | $1,197.7 | $1,266.1 |
| Gross profit | $278.4 | $352.2 | $612.0 | $676.2 |
| Gross margin | 49.1% | 54.0% | 51.1% | 53.4% |
| Income from continuing operations | $11.4 | $83.3 | $142.6 | $125.2 |
| Net income | $11.5 | $83.4 | $142.6 | $124.3 |
| Diluted EPS | $0.24 | $1.77 | $3.02 | $2.64 |
Cash flow, balance sheet and debt
- Operating cash flow from continuing operations was $134.0 for the first six months, versus $157.3 a year earlier. The decrease primarily reflected changes in contingent consideration liabilities and a $10.0 pension contribution; working-capital changes partly offset it.
- Investing cash outflow was $294.6, including the $260.0 HPC acquisition and $39.1 of capital expenditures. Financing cash inflow was $412.4, reflecting increased borrowing, partly offset by contingent consideration payments and dividends.
- At June 28, cash and equivalents were $553.5; total borrowings were $2,433.0, including $83.0 current borrowings. Approximate net debt was $1,879.5.
- Total borrowings increased from $1,923.0 at year-end 2019. Teleflex issued $500.0 of 4.25% senior notes due 2028 and used the net proceeds to repay its revolving facility. The company said it was in compliance with debt covenant requirements.
- Management said cash, operating cash flow and available revolving credit were expected to fund operating needs, capital expenditures and debt obligations for the next 12 months and the foreseeable future, while noting pandemic-related uncertainty.
Material changes and unusual items
- Q2 revenue fell 13.1%; first-half revenue fell 5.4%. First-half existing-product volume was down $72.9, primarily due to COVID-19, with partial offsets from HPC and new products; foreign exchange was also unfavorable.
- Q2 gross margin declined 490 basis points, mainly from lower sales volume and higher manufacturing costs related to the pandemic. SG&A fell year over year, partly due to spending controls and lower incentive costs. First-half SG&A also benefited from a $55.4 reduction in estimated contingent consideration, largely reflecting adverse pandemic-related projections.
- First-half income from continuing operations rose despite lower revenue, supported in part by the contingent-consideration revaluation benefit and lower interest expense. Q2 included $19.0 of restructuring and impairment charges, versus $1.7 a year earlier. The Q2 effective tax rate was 50.9%, which the filing attributes in part to nondeductible workforce-reduction termination benefits.
- HPC was acquired for $260.0 in February 2020. It contributed $14.0 of first-half OEM revenue.
- A new workforce-reduction plan is expected to incur $10–$13 of pretax charges, mostly in 2020, and produce $11–$13 of annual pretax savings when fully implemented.
Outlook, risks and contingencies
- Management expects COVID-19 to continue to negatively affect revenue and operations in the near term, but provided no clear numerical revenue or earnings guidance in the filing. The company cited possible renewed declines in elective procedures, manufacturing inefficiencies, supply and distribution disruptions, higher costs, delayed customer payments and restricted access to capital.
- In July 2020, the DOJ informed Teleflex that it had opened a civil False Claims Act investigation into NeoTract’s operations, in addition to an investigation concerning one customer and related communications and rebate programs. Teleflex said it could not predict the scope or outcome or estimate potential liabilities; an adverse outcome could materially affect results and financial condition.
- Environmental liabilities recorded were $6.6 in total. Other litigation reserves were $0.2; the company said ordinary-course litigation was not expected to be material based on information then available, while noting that unfavorable developments could have a material effect.
- The filing also highlights uncertainty in contingent-consideration fair values, tax audits, foreign exchange and the ability to realize planned restructuring savings. A Germany tax examination was identified as the most significant tax examination in process.
Important facts for investors to verify
- Whether elective procedures and demand in affected product categories recover, and whether respiratory and vascular access demand remains elevated.
- Whether gross margins improve as volumes and manufacturing utilization change, and whether the reported cost reductions persist.
- Operating cash generation, working capital, contingent-consideration payments and debt levels following the HPC acquisition and 2028 notes issuance.
- Developments in the DOJ investigation, including any potential scope expansion, findings or financial exposure.
- Whether restructuring charges and estimated annual savings remain within management’s stated ranges, and how contingent-consideration revaluations affect reported earnings.