Business context and reporting period
Teleflex Incorporated is a global medical-technology company focused primarily on single-use devices for hospital and healthcare procedures. This unaudited Form 10-Q covers the quarter and six months ended July 2, 2017; comparisons are with the periods ended June 26, 2016.
Financial performance and position
- Revenue: Second-quarter revenue was $528.6 million, up 11.6%; first-half revenue was $1,016.5 million, up 13.1%. Management attributed much of the increase to acquisitions, principally Vascular Solutions, along with new products and higher existing-product volumes. The six-month comparison also benefited from four additional shipping days.
- Profit and margins: Second-quarter income from continuing operations was $78.4 million, versus $59.4 million; diluted continuing-operations EPS was $1.67, versus $1.25. First-half net income was $118.2 million, versus $110.5 million; diluted EPS was $2.53, versus $2.29. Gross margin was 54.9% for the quarter (up 0.8 percentage point) and 53.7% for the first half (up 0.1 point). First-half results included $10.4 million of acquired-inventory fair-value step-up expense and $13.8 million in restructuring charges.
- Cash flow and investment: First-half operating cash flow from continuing operations was $197.7 million, compared with $181.5 million. Capital expenditures were $36.8 million. Investing activities used $1,024.0 million, principally for acquisitions; financing activities provided $917.7 million. Cash rose to $676.2 million from $543.8 million at year-end, including a $42.0 million favorable currency-translation effect.
- Debt and liquidity: Borrowings totaled $2,012.3 million at July 2, including $112.0 million current and $1,887.7 million long-term; cash was $676.2 million. The company entered a five-year credit agreement with a $1.0 billion revolver and $750 million term loan, primarily to finance Vascular Solutions. Teleflex said it was compliant with its financial covenants and believed cash, operating cash flow and available facilities would meet foreseeable needs.
- Other indicators: The quarterly dividend was $0.34 per share. The effective tax rate was 13.4% for the quarter and 7.4% for the first half, affected by share-based-payment tax benefits and acquisition-related tax benefits.
Material changes versus the prior comparable period
- Vascular Solutions, acquired February 17 for approximately $975.5 million net of cash acquired, contributed $45.0 million of second-quarter revenue and $66.7 million for the post-acquisition first-half period. Its reported first-half operating loss was $11.6 million. Pyng Medical was acquired April 3 for approximately $17.9 million net of cash acquired.
- Debt and interest expense increased materially following financing for Vascular Solutions: quarterly interest expense was $19.9 million versus $11.9 million; first-half interest expense was $37.6 million versus $25.7 million.
- Quarterly revenue growth was also supported by acquired businesses; management cited $49.8 million in acquired-business revenue. For the first half, acquired businesses contributed $74.0 million.
- First-half segment results were mixed: Asia operating profit fell 15.4%, while Vascular North America, Surgical North America and OEM operating profit increased. “All Other” first-half operating profit declined, largely reflecting Vascular Solutions-related expenses.
Outlook, commentary, risks and unusual items
- No company-wide revenue or earnings guidance is stated in the provided filing text. Management expects restructuring programs to generate annual pre-tax savings of $29–$40 million, and Vascular Solutions/Pyng integration synergies of $21–$27 million; these are estimates subject to execution and other uncertainties.
- Teleflex expects its Vascular Solutions integration program to be substantially complete by the end of Q2 2018, and the EMEA administrative restructuring by the end of 2018. Substantially all costs for ongoing restructuring plans are expected before the end of 2018; estimated savings and synergies are expected to be substantially realized by 2019.
- China distributor-to-direct conversion is causing sales and profit pressure in Asia. The former distributor seeks RMB 51.2 million ($7.5 million) in damages and a product repurchase; Teleflex contests the claim and seeks RMB 61.2 million ($9.0 million) in receivables. The company cannot estimate a possible loss.
- Credit risk remains tied to delayed payments by publicly funded hospitals in Greece, Italy, Spain and Portugal. Receivables from customers in those countries were $51.9 million, or 17.5% of net trade receivables, at quarter-end. Teleflex warns deterioration could cause losses or cash-flow harm.
- Other matters include environmental liabilities of $6.6 million accrued in total and ongoing litigation. A discontinued marine-product wrongful-death case has a $23 million punitive-damages verdict under review by the Louisiana Supreme Court; Teleflex says uncovered liability will not exceed $10 million. The company states outstanding matters are not expected to be material, but adverse developments could be.
- Unusual items include $5.6 million of first-half debt-extinguishment losses, a $6.4 million gain from a favorable insurance-litigation ruling that benefited operating results, acquisition transaction and integration costs, and substantial foreign-currency translation gains in other comprehensive income.
Important facts for investors to verify
- How much reported growth and earnings improvement is sustainable organically versus attributable to acquisitions, shipping-day differences, tax benefits and one-time gains or charges.
- Vascular Solutions’ ongoing profitability, integration progress, final purchase-price allocation and realization of projected cost savings and synergies.
- Debt reduction capacity, interest costs and continued compliance with leverage and interest-coverage covenants following the acquisition.
- Developments and potential financial exposure in the China distributor arbitration, the Louisiana product-liability case and public-hospital receivables in Southern Europe.
- Actual restructuring cash outlays, completion timing and savings compared with management estimates.