Teleflex Incorporated — Q1 2017 Form 10-Q
Reporting period: Three months ended April 2, 2017; comparative period ended March 27, 2016. Amounts below are in U.S. dollars.
Business context and financial performance
Teleflex is a global medical technology company focused primarily on single-use devices used in critical care and surgical procedures. On February 17, 2017, it acquired Vascular Solutions for approximately $975.5 million, net of cash acquired.
| Metric | Q1 2017 | Prior period |
|---|---|---|
| Net revenue | $487.9 million | $424.9 million |
| Gross profit / margin | $255.6 million / 52.4% | $225.1 million / 53.0% |
| Income from continuing operations before interest, debt extinguishment and taxes | $60.8 million | $67.5 million |
| Net income attributable to common shareholders | $40.2 million | $50.7 million |
| Diluted EPS | $0.86 | $1.04 |
| Operating cash flow from continuing operations | $90.9 million | $66.8 million |
Revenue increased 14.8%, reflecting $32.8 million of higher sales volume—partly attributed to more shipping days—and $24.2 million from acquired businesses. Vascular Solutions contributed $21.6 million in revenue and reported an operating loss of $14.8 million from acquisition through quarter-end. Gross margin declined 60 basis points, primarily due to acquired-inventory step-up costs. SG&A rose to $164.0 million (33.6% of revenue) from $136.3 million (32.1%), including $8.9 million of Vascular Solutions transaction expenses. R&D increased to $17.8 million from $12.4 million.
Cash, debt and liquidity
Cash and cash equivalents were $689.1 million at April 2, up from $543.8 million at year-end. Operating cash flow was $90.9 million; capital expenditures were $12.9 million. Investing activities used $982.1 million, principally for the acquisition. Financing activities provided $1,021.3 million, primarily reflecting new borrowings.
Reported borrowings, net of discounts and issuance costs, were $2.089 billion, versus $1.033 billion at December 31, 2016. The company entered a five-year credit agreement providing a $1.0 billion revolver and a $750 million term loan; reported balances included $608 million drawn on the revolver and $750 million on the term loan. Teleflex stated it was in compliance with credit covenants and believed cash, operating cash flow and borrowing capacity would fund requirements for the next 12 months and foreseeable future. The remaining $44.3 million principal of convertible notes was due in August 2017 and classified as current.
Changes, outlook and notable items
- Reported earnings declined despite revenue growth: higher SG&A, R&D, interest and restructuring costs, plus a $5.6 million debt-extinguishment loss, weighed on results. The effective tax rate was negative 7.1%, reflecting share-based-payment and acquisition-related tax benefits; adoption of share-based payment guidance increased net income by $3.4 million, or $0.07 per diluted share.
- Segment revenue grew in most areas; Asia revenue declined 0.4% and operating profit fell 17.0%. OEM revenue increased 27.6%. “All other” operating results were a $6.3 million loss, substantially affected by Vascular Solutions acquisition expenses.
- Management expected continued declines in Asia sales and operating profit during 2017 as the former Chinese distributor liquidated inventory and Teleflex implemented a direct-sales structure. No consolidated revenue or earnings guidance is provided in the supplied filing text.
- Restructuring programs include the Vascular Solutions integration, with estimated annual pre-tax synergies of $20–$25 million when fully implemented, and an EMEA program expected to yield annual savings of $2.7–$3.3 million. These estimates depend on execution and may not be achieved.
- Risks include integration and restructuring execution, foreign exchange, competitive pricing and reimbursement, and collection delays from publicly funded European customers. Receivables in Greece, Italy, Spain and Portugal totaled $46.3 million, or 16.4% of net trade receivables.
- A former Chinese distributor sought $10.1 million in damages and requested a $9.1 million product-inventory repurchase; Teleflex counterclaimed for $8.9 million of receivables. The company could not estimate a potential loss. A separate product-liability case had a $23 million punitive-damages award; state supreme court review was pending, and Teleflex said uninsured liability would not exceed $10 million. Environmental liabilities accrued were $6.7 million.
Investor verification priorities
- Assess Vascular Solutions’ post-acquisition contribution, integration costs, purchase-price allocation and whether projected synergies are realized.
- Reconcile revenue growth with lower operating income and EPS, including acquisition-related charges, inventory step-up, restructuring and tax benefits.
- Track debt, the August 2017 convertible-note repayment, covenant headroom and liquidity after acquisition financing.
- Monitor the Chinese distributor arbitration and the pending product-liability appeal, including any change in potential exposure.
- Check progress in Asia’s distributor-to-direct conversion, restructuring savings and collection of European public-sector receivables.