Teleflex Incorporated — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; comparisons are to the quarter and six months ended July 1, 2018. Amounts are in U.S. dollars.
Business context
Teleflex develops and sells medical technology, primarily single-use devices used in clinical and surgical procedures. It reported four segments: Americas, EMEA, Asia and OEM. Management described priorities including profitable growth, operating efficiency, acquisitions and distributor-to-direct conversions.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $652.5 million | $609.9 million | $1,266.1 million | $1,197.1 million |
| Gross profit / margin | $372.9 million / 57.1% | $344.8 million / 56.5% | $717.7 million / 56.7% | $676.0 million / 56.5% |
| Income from continuing operations | $83.3 million | $(2.6) million | $125.2 million | $52.4 million |
| Net income | $83.4 million | $(2.5) million | $124.3 million | $53.7 million |
| Diluted EPS | $1.77 | $(0.05) | $2.64 | $1.15 |
| Operating income from continuing operations | $107.5 million | $33.5 million | $182.7 million | $120.3 million |
Q2 revenue rose 7.0%; six-month revenue rose 5.8%. Revenue growth was principally driven by existing-product volume, partly offset by unfavorable currency impacts of $14.6 million in Q2 and $31.6 million year to date. Q2 operating margin was approximately 16.5%, versus 5.5% a year earlier; the comparison reflects significantly lower restructuring and impairment charges. Q2 net income included a 4.4% effective tax rate; six-month rate was 10.6%.
Six-month operating cash flow from continuing operations was $157.3 million, down from $181.6 million. Capital expenditures were $56.1 million, making operating cash flow less capital expenditures approximately $101.2 million. Cash declined to $303.9 million from $357.2 million at year-end. Six-month cash used in financing was $167.6 million, including $111.9 million of contingent-consideration payments, $31.3 million of dividends and a net $27.5 million reduction in borrowings.
At June 30, 2019, total assets were $6.31 billion, current assets $1.25 billion and current liabilities $493.9 million. Borrowings were $2.149 billion gross principal ($2.131 billion carrying value after issuance costs), compared with $2.177 billion gross at year-end. Cash-adjusted gross borrowings were approximately $1.85 billion. The company reported compliance with its debt covenants. Its $1.0 billion revolving facility and $700 million term loan mature in 2024; covenant limits include maximum net leverage of 4.50x and minimum interest coverage of 3.50x.
Material changes and segment trends
- Americas revenue grew 12.8% in Q2 and 9.6% year to date; operating profit increased 74.4% and 39.5%, respectively.
- EMEA revenue declined 4.2% in Q2 and 3.7% year to date, with foreign exchange a principal headwind; operating profit also declined.
- Asia revenue increased 3.9% in Q2 and 4.1% year to date, while operating profit declined in both periods.
- OEM revenue grew 7.3% in Q2 and 12.4% year to date; operating profit increased 2.4% and 20.5%, respectively.
- The company reorganized its reportable segments in Q1 2019 around geography for non-OEM operations; comparative segment figures were restated.
Outlook, risks and unusual items
- No specific company-wide revenue or earnings guidance is provided in the supplied filing text. Management said cash, operating cash flow and revolving-credit availability should fund operating needs, capital expenditures and debt obligations for the foreseeable future.
- The 2019 footprint realignment plan is expected to be substantially complete in 2022, with total restructuring and related charges of $56–$70 million. Management expects annual pre-tax savings of $12–$14 million once fully implemented, beginning in 2021. The plan also entails estimated capital expenditures of $29–$35 million.
- Across ongoing restructuring programs and a separate OEM initiative, management estimates total annual pre-tax savings of $69–$80 million when complete; realization and cost estimates remain subject to change.
- Q2 included a $3.9 million impairment charge for abandoned interventional-product intellectual property and related assets, partially offset by restructuring credits. Six-month results also included a $2.7 million pre-tax gain on the sale of the vein-catheter reprocessing business.
- A July 3, 2019 merger of two non-U.S. subsidiaries is likely to reduce deferred tax liabilities by approximately $130 million within 12 months; the tax impact was still under evaluation.
- Key disclosed risks include customer or supplier changes, product demand and acceptance, acquisition integration, restructuring execution and savings, reimbursement and healthcare policy, competition and pricing, input-cost inflation, foreign exchange, interest rates, trade disputes and general economic conditions.
- Environmental liabilities accrued were $7.3 million. Litigation accruals were $0.2 million; management did not expect current claims to be material, but noted unfavorable developments could have a material adverse effect. Tax audits, including a significant German examination, could also affect tax liabilities and results.
Important facts for investors to verify
- Whether revenue and earnings growth persists after separating volume, product mix, foreign exchange and the prior-year restructuring-charge comparison.
- Whether EMEA and Asia operating-profit declines stabilize, and whether Americas growth and interventional-urology investment deliver expected returns.
- Actual cash costs, capital spending, timing and realized savings from the footprint plans versus management estimates.
- Contingent-consideration obligations, including remaining payments and sensitivity to revenue assumptions; the liability was $191.7 million at June 30.
- Debt covenant headroom, refinancing terms and cash generation after capital expenditures, dividends and contingent payments.
- The eventual tax consequences of the subsidiary merger and developments in tax examinations, environmental matters and litigation.