Teleflex Incorporated — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 25, 2022; comparisons are to the periods ended September 26, 2021. Teleflex develops and sells medical technology, primarily single-use devices. Figures below are in U.S. dollars; amounts are rounded.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $686.8 million | $700.3 million | $2,033.0 million | $2,047.6 million |
| Gross profit / margin | $374.0 million / 54.4% | $387.8 million / 55.4% | $1,109.0 million / 54.5% | $1,129.9 million / 55.2% |
| Income from continuing operations | $101.9 million | $199.5 million | $284.8 million | $357.7 million |
| Diluted EPS | $2.16 | $4.20 | $6.01 | $7.53 |
| Operating cash flow, continuing operations | Not stated for quarter | Not stated for quarter | $244.4 million | $450.5 million |
Q3 revenue fell 1.9%; nine-month revenue fell 0.7%. Gross margin declined 100 basis points in Q3 and 70 basis points year to date, chiefly from higher logistics, raw-material and labor costs, partly offset by price increases. SG&A was $209.6 million in Q3 and $630.4 million year to date; R&D was $37.8 million and $111.1 million, respectively.
Reported earnings comparisons were affected by unusual prior-year gains: 2021 included a $91.2 million gain on the Respiratory business divestiture, compared with a $6.5 million building-sale gain in 2022. Nine-month 2021 also included a $13.0 million debt-extinguishment loss. These items contributed to lower 2022 reported income.
Segments and drivers
Q3 revenue increased in Asia (9.4%) and OEM (11.2%), but declined in Americas (2.9%) and EMEA (10.7%). EMEA’s decline reflected unfavorable currency movements; Asia and OEM growth reflected higher product sales. For the nine months, OEM revenue grew 11.4% and Asia grew 3.9%, while Americas declined 1.0% and EMEA declined 7.2%. Currency headwinds and lower existing-product volumes weighed on results; new-product sales and price increases partly offset the declines.
Management cited staffing constraints at healthcare facilities and lower elective-procedure volumes, supply constraints and transport challenges contributing to backorders, and inflation and currency volatility. Management said these factors could continue to affect the business, particularly in the near term, but the filing provides no quantified revenue or earnings guidance.
Cash, debt and liquidity
At September 25, 2022, cash and cash equivalents were $397.3 million, versus $445.1 million at December 31, 2021. Current assets were $1.459 billion and current liabilities $610.9 million. Current and long-term borrowings totaled $1.708 billion, down from $1.850 billion at year-end; the filing reports $13.4 million of Q3 interest expense and an average debt interest rate of 3.0% for the quarter.
Nine-month operating cash flow declined by $206.1 million year over year, primarily due to weaker operating results, higher tax and payroll-related payments, and working-capital use, including increased inventory purchases. Investing activities used $57.2 million, including $52.6 million of capital expenditures. Financing activities used $200.4 million, including $144.3 million of debt repayments and $47.8 million of dividends. Management believes operating cash flow, cash and revolving-credit availability will fund operating needs, capital expenditures and debt obligations for the next 12 months and foreseeable future. The company was in compliance with its disclosed debt covenants at quarter-end.
Material developments, outlook and risks
- On September 27, after quarter-end, Teleflex acquired Standard Bariatrics for $170 million cash, with up to $130 million of sales-based milestone payments over three years. Funding used revolving-credit borrowings and cash.
- In June 2022, Teleflex acquired catheter-related intellectual property for $22.8 million, with up to $26.2 million in potential additional payments.
- Ongoing restructuring plans carry estimated total charges of $24–$30 million for the Respiratory divestiture plan, $56–$60 million for the 2019 footprint plan, and $108–$116 million for the 2018 plan. The 2019 and 2018 plans are expected to generate annual pretax savings of $20–$22 million and $27–$30 million, respectively, when fully implemented.
- The second phase of the Respiratory business divestiture is expected before the end of 2023; remaining consideration and any related gain will be recognized when realizable.
- Environmental liabilities accrued were $6.0 million. A China customs matter remains unresolved: Teleflex paid requested additional tariffs but has not received confirmation the case is closed; potential penalties were estimated at $3–$20 million, with interest also possible.
- Routine legal matters had $0.2 million accrued. The DOJ closed its previously disclosed civil False Claims Act investigation of subsidiary NeoTract in August 2022. Management did not consider outstanding litigation likely to be material, while noting unfavorable developments could have a material adverse effect.
- Management said the 2022 U.S. R&D capitalization rules and EU medical-device regulation costs increased tax expense; it did not expect the Inflation Reduction Act minimum tax to have a material financial-statement effect. COVID-related procedure and supply-chain effects, inflation, geopolitical conflict, foreign exchange, product demand and execution of acquisitions and restructuring remain risks.
Important facts for investors to verify
- Underlying revenue, margins and earnings excluding the 2021 divestiture gain and other comparability items, and the extent to which pricing offsets inflation.
- Whether inventory growth, backorders and working-capital demands improve, and whether operating cash flow recovers.
- Standard Bariatrics’ integration, cash and revolver funding, and the likelihood and timing of milestone payments.
- Progress, remaining costs and savings realization for restructuring plans and the Respiratory divestiture’s second phase.
- Resolution of the China tariff matter and any changes in environmental, tax or other contingent liabilities.