Teleflex Incorporated — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 27, 2020; comparisons are to the periods ended September 29, 2019. Teleflex is a global medical technology company focused mainly on single-use devices used in hospital procedures.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $628.3 million | $648.3 million | $1,826.0 million | $1,914.4 million |
| Gross profit / margin | $329.3 million / 52.4% | $355.1 million / 54.8% | $941.3 million / 51.6% | $1,031.3 million / 53.9% |
| Operating income from continuing operations | $132.1 million | $117.6 million | $328.0 million | $300.3 million |
| Net income | $116.6 million | $228.9 million | $259.2 million | $353.2 million |
| Diluted EPS | $2.46 | $4.85 | $5.48 | $7.51 |
- Cash flow: Nine-month operating cash flow was $241.5 million, down from $289.2 million. Investing cash outflow was $318.8 million, including the $260.0 million HPC acquisition and $62.4 million of capital spending. Financing cash inflow was $116.2 million. Cash increased to $347.5 million from $301.1 million at year-end 2019.
- Liquidity and debt: Current assets were $1.421 billion and current liabilities $475.2 million. Borrowings were $2.148 billion gross principal ($2.128 billion carrying value), versus $1.923 billion gross at year-end 2019. The company reported compliance with debt covenants.
- Dividends: $47.4 million was paid during the first nine months; quarterly dividends were $0.34 per share.
Changes and drivers
- Revenue declined 3.1% in Q3 and 4.6% year to date. Management attributed the declines primarily to COVID-19-related reductions in existing-product volumes as elective procedures fell. Vascular access revenue grew, while anesthesia, interventional and surgical revenue declined in Q3.
- Gross margin fell 240 basis points in Q3 and 230 basis points year to date, principally from lower volume and higher pandemic-related manufacturing costs; unfavorable foreign exchange also weighed on Q3.
- Operating income increased despite lower revenue, supported by reduced SG&A. SG&A included a $95.5 million year-to-date benefit from remeasurement of contingent consideration, mainly reflecting adverse revenue projections associated with COVID-19, as well as spending controls.
- Net income comparisons are affected by unusual tax benefits: Q3 2019 included a $130.4 million income tax benefit, while Q3 2020 had a $1.0 million tax benefit. The nine-month 2019 period included a $115.6 million tax benefit; 2020 recorded $22.0 million of tax expense.
- Segment trends diverged: Q3 Americas revenue was essentially flat, while EMEA, Asia and OEM revenue declined. Americas operating profit benefited materially from the contingent-consideration remeasurement; operating profit declined in the other three segments.
Outlook, risks and notable items
- COVID-19: Management said revenue trends in some elective-procedure categories began improving in Q3 and into Q4, but had not returned to pre-pandemic growth. It expected near-term negative effects to continue and said renewed procedure declines remained possible. Respiratory and vascular access products saw increased demand; elective-procedure categories faced weaker demand. The company cited operational inefficiencies, longer delivery times and some backorders, but no significant disruption to supply of high-demand products to date.
- Liquidity outlook: Management believed operating cash flow, cash and revolving-credit availability would fund operating needs, capital expenditures and debt obligations for the next 12 months and foreseeable future, while continuing to monitor pandemic-related uncertainty.
- Acquisitions and financing: Teleflex acquired HPC for $260 million in February 2020, financed with revolving-credit borrowings. After quarter-end, it agreed to acquire Z-Medica for $500 million plus up to $25 million in commercial milestone payments; in October it drew an additional $500 million under its revolver in anticipation of the deal.
- Restructuring: A 2020 workforce plan was expected to incur $10–$13 million in pretax charges and generate $11–$13 million in annual pretax savings once implemented. Broader ongoing restructuring programs and related initiatives were estimated to yield $85–$98 million in total annual pretax savings when complete; timing and results remain subject to execution and other uncertainties.
- Contingency: DOJ investigations involving NeoTract include a customer inquiry and a broader civil False Claims Act investigation. The company could not estimate the scope, outcome or potential liability, which could be material. Environmental liabilities accrued were $6.4 million; ordinary-course legal matters had $0.2 million accrued. Management said it did not expect existing litigation and claims to be material, while noting unfavorable developments could change that assessment.
- No formal revenue or earnings guidance is provided in the filing. Management’s forward-looking statements are subject to pandemic, demand, supply-chain, reimbursement, currency, acquisition-integration and restructuring risks.
Important facts for investors to verify
- Whether elective-procedure volumes recover or deteriorate again, and how this affects revenue and manufacturing margins.
- How much reported operating-profit improvement depends on contingent-consideration remeasurement and temporary cost controls.
- Funding, closing conditions and integration outcomes for the Z-Medica acquisition, alongside the increased revolver borrowing.
- Developments in the DOJ investigation, potential exposure and any changes to recorded contingencies.
- Progress against restructuring costs, completion schedules and projected annual savings.