Teleflex Incorporated (NYSE: TFX) — Q1 2022 Form 10-Q
Reporting period: Three months ended March 27, 2022; unaudited. Teleflex designs, manufactures and sells medical technology products, primarily single-use devices for hospitals and healthcare providers.
Financial performance
Amounts in millions, except per-share data and percentages.
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net revenues | $641.7 | $633.9 | +1.2% |
| Gross profit / margin | $346.2 / 54.0% | $344.5 / 54.3% | Margin down 0.3 percentage points |
| Operating income from continuing operations | $103.5 | $103.4 | Approximately flat |
| Income from continuing operations | $77.4 | $74.9 | +3.3% |
| Net income | $77.1 | $74.9 | +3.0% |
| Diluted EPS | $1.63 | $1.58 | +3.2% |
| Operating cash flow, continuing operations | $62.1 | $110.8 | Down $48.7 |
| Capital expenditures | $13.1 | $19.3 | Down $6.2 |
Gross margin pressure reflected higher logistics, distribution, raw-material and labor costs associated largely with inflation and supply-chain disruption; price increases partly offset these costs. R&D expense rose to $36.4 million from $29.9 million, mainly due to EU Medical Device Regulation costs. Restructuring and impairment charges declined to $2.4 million from $8.0 million; Q1 2022 included a $1.5 million asset impairment charge.
Revenue and segment trends
Revenue growth was primarily driven by $18.5 million of higher new-product sales and $8.5 million of price increases, partly offset by $12.2 million of unfavorable foreign-exchange effects and a $9.5 million net decrease in volumes attributed to the respiratory business divestiture. Q1 2021 included $31.1 million of revenue from the divested respiratory business; Q1 2022 included $21.1 million of transition services revenue from Medline.
| Segment | Revenue | Revenue change | Operating profit | Profit change |
|---|---|---|---|---|
| Americas | $378.0 million | +0.7% | $96.9 million | +15.9% |
| EMEA | $136.9 million | -3.1% | $9.1 million | -60.5% |
| Asia | $69.2 million | +8.6% | $17.4 million | +16.8% |
| OEM | $57.7 million | +7.8% | $10.9 million | -13.0% |
EMEA profit fell primarily from higher EU MDR R&D costs and unfavorable currency movements. OEM profit declined on higher manufacturing and operating expenses. Other product-category revenue decreased to $69.5 million from $81.7 million, in part reflecting respiratory portfolio divestitures; surgical revenue increased to $89.7 million from $80.4 million.
Cash, debt and liquidity
Cash and cash equivalents were $466.7 million at March 27, 2022, up from $445.1 million at year-end 2021. Total borrowings were $1.851 billion ($110.0 million current and $1.741 billion long-term), for approximate net debt of $1.384 billion. Current assets were $1.494 billion and current liabilities $656.2 million. Operating cash flow fell mainly because of unfavorable working-capital movements, including higher payroll and benefit payments and increased receivables. Investing cash use was $12.8 million; financing cash use was $21.0 million, including $15.9 million of dividends. Management stated available cash, operating cash flow and revolving-credit availability should fund operating needs, capital spending and debt obligations for the next 12 months and foreseeable future. The company reported compliance with debt covenants.
Outlook, risks and contingencies
- The filing provides no specific quarterly or full-year revenue or earnings guidance.
- Management said COVID-19 effects may continue in the near term. Potential impacts include procedure-volume changes, supply-chain and freight disruption, backorders, facility or launch delays, and cost inflation; the duration and scale are uncertain.
- Ongoing restructuring plans carry estimated aggregate restructuring and related charges of $24–$30 million for the respiratory divestiture plan, $54–$60 million for the 2019 footprint plan, and $110–$128 million for the 2018 plan. Once fully implemented, the latter plans are expected to generate annual pretax savings of $20–$22 million and $25–$30 million, respectively.
- The respiratory divestiture’s second phase, involving transfer of additional manufacturing assets to Medline, was expected before the end of 2023; remaining consideration and any gain were to be recognized when realizable.
- A DOJ civil False Claims Act investigation involving NeoTract remains unresolved. Teleflex said it cannot reasonably estimate potential liabilities or penalties; an unfavorable outcome could materially affect results or financial condition.
- Teleflex reported environmental liabilities of $6.2 million in total and noted uncertainty that eventual costs could exceed accruals. A Chinese tariff matter could result in penalties estimated at $3–$20 million, plus possible interest; the company said it had paid requested increased tariffs but had not received confirmation the case was closed.
- Other cited risks include currency movements, raw-material and labor inflation, supply disruptions, competition and pricing, healthcare reimbursement changes, tax-law changes, restructuring execution, and Russia-Ukraine conflict-related economic effects.
Most important facts for investors to verify
- Whether sales growth and pricing can offset inflation, currency headwinds and the ongoing effects of the respiratory divestiture.
- Whether EMEA operating profitability recovers as EU MDR costs and foreign-exchange effects evolve.
- Working-capital trends and conversion of earnings into operating cash flow.
- Progress, remaining costs and expected savings from restructuring plans, and completion and proceeds of the Medline divestiture’s second phase.
- Developments in the DOJ investigation, Chinese tariff matter, environmental exposures and tax examinations.
- Debt levels, covenant compliance and liquidity as operating conditions and cash generation change.