Teleflex Incorporated — Q1 2018 Form 10-Q
Reporting period: Three months ended April 1, 2018; comparison is with the three months ended April 2, 2017. Financial statements are unaudited. Teleflex is a global medical-technology company focused primarily on single-use devices for hospitals and healthcare providers.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 or prior balance-sheet date |
|---|---|---|
| Net revenues | $587.2 million | $487.9 million |
| Gross profit / margin | $331.3 million / 56.4% | $255.6 million / 52.4% |
| Income from continuing operations before interest, debt extinguishment and taxes | $86.8 million | $60.8 million |
| Net income | $56.2 million | $40.2 million |
| Diluted earnings per share | $1.20 | $0.86 |
| Operating cash flow from continuing operations | $86.8 million | $90.9 million |
| Capital expenditures | $15.7 million | $12.9 million |
| Cash and cash equivalents | $378.9 million | $333.6 million at Dec. 31, 2017 |
| Total borrowings | $2,231.7 million | $2,249.6 million at Dec. 31, 2017 |
| Shareholders’ equity | $2,560.5 million | $2,430.5 million at Dec. 31, 2017 |
Revenue increased 20.4% year over year; management attributed $65.6 million of the increase to acquired businesses and $24.5 million to favorable currency movements. Gross margin rose 4.0 percentage points. Operating cash flow less capital expenditures was approximately $71.1 million, compared with $78.0 million in the prior-year quarter. The company paid $15.4 million in dividends, or $0.34 per share. The effective tax rate was 10.2%, versus a tax benefit rate of 7.1% in Q1 2017.
At April 1, 2018, current assets were $1.205 billion and current liabilities were $551.8 million. Cash less total borrowings implies net debt of approximately $1.853 billion. Contingent consideration liabilities totaled $281.9 million, including $162.1 million classified as current. The filing states that Teleflex was in compliance with its credit agreement’s financial covenants.
Material changes versus the prior-year quarter
- Revenue growth reflected acquisitions and currency, alongside organic performance. Vascular Solutions contributed $18.7 million of Interventional North America revenue; NeoTract contributed to the $41.1 million increase in “all other” segment revenue.
- Segment revenue was notably higher in Interventional North America (+50.7%), EMEA (+19.7%) and Asia (+16.1%); Surgical North America declined 11.5%. “All other” operating profit fell to a loss of $12.0 million, primarily due to NeoTract operating expenses.
- SG&A increased $51.3 million to $215.3 million, principally reflecting acquired-business expenses and higher contingent consideration expense; R&D increased $8.2 million. SG&A and R&D as a share of revenue were 36.7% and 4.4%, respectively.
- Restructuring charges declined to $3.1 million from $12.9 million. Interest expense increased to $25.9 million from $17.7 million, attributed to higher average debt and interest rates. Q1 2017 included a $5.6 million loss on debt extinguishment; none was recorded in Q1 2018.
Outlook, risks and unusual items
- Restructuring announced after quarter-end: On May 1, 2018, Teleflex initiated a footprint realignment plan expected to be substantially complete by the end of 2024. Estimated restructuring and related charges are $102–$133 million, with $99–$127 million expected to result in cash outlays; planned capital expenditures are $19–$23 million. The company expects $25–$30 million in annual pretax savings once fully implemented. These are estimates, not guaranteed results.
- Existing restructuring programs also remain underway. Management estimated $116–$166 million in remaining charges across ongoing programs and related initiatives, with $62–$82 million in estimated remaining pretax savings; estimates may change.
- The Tax Cuts and Jobs Act lowered the U.S. corporate rate to 21%, but GILTI and other tax changes partly offset the benefit. Teleflex expects to pay $154 million over eight years for the deemed repatriation tax; its tax accounting remained subject to refinement.
- Credit and collection risk persists in Greece, Italy, Portugal and Spain. Receivables from those countries were 16.3% of total net trade receivables; the company cited payment delays and warned that deterioration could increase credit losses and affect results and cash flows.
- Other disclosed exposures include environmental matters, litigation and tax examinations. The company recorded $1.8 million of litigation reserves and environmental liabilities of $6.7 million; it cautioned that unfavorable developments could exceed recorded amounts. It did not consider outstanding litigation likely to be material based on information available at filing.
- Management said available cash, operating cash flow and revolving-credit availability should fund operations, capital spending and debt obligations for the next 12 months and foreseeable future. Key risks include acquisition integration, restructuring execution and savings, product demand and acceptance, pricing and competition, reimbursement changes, currency and economic conditions.
Important facts for investors to verify
- How much reported revenue growth and margin improvement persist after separating acquisition effects, currency movements and prior-year acquisition-related inventory charges.
- NeoTract’s sales and operating costs, and the assumptions behind its sales-milestone contingent consideration, which can total up to $375 million.
- Execution costs, timing and realized savings from the new and ongoing restructuring plans, including the expected $25–$30 million annual savings.
- Debt repayment capacity, covenant headroom, interest-rate exposure and the timing of contingent consideration payments.
- Collection trends and allowance adequacy for European public-healthcare customers, as well as updates on tax, environmental and litigation contingencies.