Teleflex Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter ended June 27, 2021; comparisons are with the quarter ended June 28, 2020. Financial statements are unaudited. Teleflex develops and sells medical technology products, principally single-use devices for hospitals and healthcare providers.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $713.5 million | $567.0 million | $1,347.4 million | $1,197.7 million |
| Gross profit | $397.6 million | $278.4 million | $742.1 million | $612.0 million |
| Gross margin | 55.7% | 49.1% | 55.1% | 51.1% |
| Operating income from continuing operations | $128.6 million | $38.8 million | $232.1 million | $195.9 million |
| Net income | $83.2 million | $11.5 million | $158.1 million | $142.6 million |
| Diluted EPS | $1.76 | $0.24 | $3.33 | $3.02 |
Q2 revenue rose 25.8%; management attributed the increase mainly to recovery in existing-product volumes versus pandemic-depressed Q2 2020, favorable currency movements, and Z-Medica sales. Six-month revenue grew 12.5%. Q2 gross margin improved 660 basis points, reflecting higher volume, cost initiatives, currency, and Z-Medica, partly offset by higher logistics and distribution costs. Six-month gross margin increased 400 basis points.
Q2 included a $13.0 million loss on extinguishment of debt after redemption of $400 million of 4.875% notes; this contributed to the difference between operating income growth and net income. Six-month effective tax rate was 15.4%, versus 13.8% in the prior-year period.
Cash flow, debt and liquidity
- For the first six months, operating cash flow from continuing operations was $265.1 million, up from $134.0 million. Management cited improved operating results and lower contingent-consideration and payroll-related payments, partly offset by working-capital movements and higher taxes.
- Investing cash use was $31.8 million, including $36.7 million of capital expenditures. Financing cash use was $240.7 million; borrowings were reduced by $175.0 million, and dividends paid were $31.8 million.
- Cash was $361.8 million at June 27, 2021, versus $375.9 million at December 31, 2020. Borrowings totaled $2.323 billion principal ($2.308 billion net of issuance costs), including $92.5 million current and $2.216 billion long-term on the balance sheet.
- On July 6, after quarter-end, Teleflex used proceeds mainly from the respiratory-business sale to repay $259 million under its revolving credit facility. Management said cash, operating cash flow, and revolver availability should fund operating needs, capital expenditures, and debt obligations for the next 12 months and foreseeable future.
Material changes and developments
- On June 28, the first day of Q3, Teleflex completed the initial phase of its sale of certain respiratory product lines to Medline, receiving $259 million. The company estimated a pre-tax gain of about $100 million. A further $15 million is contingent on transfer of additional manufacturing assets, expected before the end of 2023.
- The respiratory divestiture plan is expected to incur $24–$30 million in restructuring and related charges and $22–$28 million in capital expenditures, mostly in 2022–2023. The company expects the plan to be substantially completed by the end of 2023.
- Q2 restructuring and impairment charges were $11.5 million, including $6.7 million of impairment charges on respiratory-related intellectual property and other assets. Six-month charges were $19.5 million.
- Teleflex redeemed its 2026 notes on June 1 at 102.438% of principal plus accrued interest. As of June 27, it reported compliance with applicable debt covenants.
Outlook, risks and contingencies
The filing provides no specific consolidated revenue or earnings guidance. Management said COVID-19 could continue to affect business, particularly if infections rise, vaccination rates fail to increase, or new variants emerge. The company reported some lengthened delivery times and backorders, while noting no significant disruption to supplies of products in high demand. Results remain exposed to elective-procedure trends, supply-chain constraints, currency, pricing and competition, acquisition integration, and execution of restructuring plans.
CMS proposed 2022 reimbursement reductions of 19%–21% for UroLift procedures performed in physician offices, while proposed rates for hospital outpatient and ambulatory surgical center settings were 3% higher than 2021. Teleflex planned to advocate for higher office-setting reimbursement; if the proposals were adopted, UroLift sales to office-based urologists could be adversely affected.
The company disclosed a continuing DOJ civil False Claims Act investigation concerning NeoTract, including its broader operations. Teleflex said it could not predict the scope or outcome or estimate potential liability, which could materially affect results or financial condition. It also reported environmental contingencies, with $6.5 million accrued, and routine legal matters; management did not consider outstanding claims likely to be material based on information then available. A separate Essential Medical acquisition-related lawsuit was settled for $17.4 million, with claims released and the case dismissed with prejudice.
Investor verification points
- Assess how much revenue and margin growth reflects recovery from the unusually weak 2020 comparison, rather than sustained underlying growth.
- Track completion of the respiratory divestiture, the estimated gain, the contingent $15 million proceeds, related transition arrangements, and restructuring costs and capital spending.
- Monitor UroLift reimbursement rulemaking and any resulting effect on procedure location and demand.
- Follow the NeoTract DOJ investigation and any updates to contingencies, along with COVID-19 and supply-chain impacts.
- Reconcile debt and liquidity after the post-quarter $259 million revolver repayment and assess cash generation against restructuring and investment needs.