Teleflex Incorporated — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 29, 2019; comparisons are with the corresponding 2018 periods. Teleflex is a global medical technology company focused primarily on single-use medical devices. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $648.3 | $609.7 | $1,914.4 | $1,806.8 |
| Gross profit | $375.7 | $342.6 | $1,093.3 | $1,018.6 |
| Gross margin | 57.9% | 56.2% | 57.1% | 56.4% |
| Operating income from continuing operations | $117.6 | $82.1 | $300.3 | $202.4 |
| Net income | $228.9 | $56.5 | $353.2 | $110.2 |
| Diluted EPS | $4.85 | $1.21 | $7.51 | $2.36 |
Revenue grew 6.3% in Q3 and 6.0% year to date, led mainly by higher volumes of existing products. Q3 gross margin rose 170 basis points, reflecting volume, product mix and cost initiatives, partly offset by tariffs. Year-to-date margin improved 70 basis points; higher logistics costs, tariffs and currency effects were offsets.
Reported earnings include a discrete $129 million tax benefit from a non-U.S. legal-entity restructuring that removed a future foreign-withholding-tax provision. This drove the unusually low effective tax rates of (132.3)% for Q3 and (48.4)% year to date; net income growth therefore should not be read as equivalent operating growth. Interest expense declined to $19.5 million in Q3 and $63.0 million year to date, partly due to lower average borrowing rates associated with cross-currency swaps.
For the first nine months, continuing-operations operating cash flow was $289.2 million, versus $302.9 million. Capital expenditures were $83.8 million, versus $55.8 million; operating cash flow less capital expenditures was approximately $205.4 million, compared with $247.2 million. Cash declined to $257.5 million from $357.2 million at year-end 2018. Cash used in financing included $160.5 million of net debt repayments, $112.0 million of contingent-consideration payments and $47.1 million of dividends.
At September 29, 2019, reported borrowings were $2.016 billion gross principal ($1.999 billion net of unamortized issuance costs), against cash of $257.5 million. Current assets were $1.238 billion and current liabilities $530.4 million. The company stated that cash, operating cash flow and revolving-credit availability should fund operating needs, capital expenditures and debt obligations for the foreseeable future. It was in compliance with debt covenants at quarter-end.
Material changes and operating trends
- Q3 segment revenue growth was strongest in Americas, up 10.6%; EMEA rose 0.7%, Asia 1.7%, and OEM 1.1%. For the nine months, EMEA revenue declined 2.4%, while Americas grew 10.0%, Asia 3.2% and OEM 8.4%.
- Year-to-date segment operating profit rose 13.1% overall. Americas increased 31.3% and OEM 14.9%; EMEA declined 13.2% and Asia declined 7.7%.
- Restructuring and impairment charges were $20.3 million year to date, down from $77.6 million. 2019 charges included $11.8 million of termination benefits and $6.9 million of impairment related to abandoned interventional-product intellectual property and other assets.
- Inventories increased $44.8 million from year-end to $472.6 million. Management attributed the year-to-date inventory build to business growth and desired safety-stock levels.
- The company adopted lease accounting in January 2019, recognizing operating-lease assets and liabilities; prior-period figures were not restated. The change added $105.3 million of net lease assets and $106.6 million of lease liabilities at adoption.
Outlook, risks and unusual items
- Sterilization disruption: Suspension of Sterigenics’ Smyrna, Georgia facility disrupted supply of some surgical, intermittent-catheter and OEM products. Teleflex estimated approximately $9 million of revenue impact in Q4 2019 and warned that effects could continue into 2020 if alternative capacity is not available. Regulatory approvals and capacity constraints may delay transition to other facilities; further ethylene-oxide restrictions could add risk.
- Restructuring: The 2019 footprint plan is expected to incur total restructuring and related charges of $56–$70 million, including $21 million expected in 2019, and $29–$35 million of capital expenditures. Savings are expected to begin in 2021, reaching $12–$14 million annually when fully implemented. Across ongoing restructuring programs and the OEM initiative, estimated annual pretax savings are $69–$80 million when complete; management cautioned estimates may change.
- Debt refinancing event: After quarter-end, Teleflex gave notice to redeem its $250 million 5.25% notes due 2024 on November 15, 2019, at 102.625% of principal plus accrued interest, subject to sufficient revolving-credit borrowing capacity. It anticipated an $8.8 million fourth-quarter loss on extinguishment.
- Contingencies: Environmental liabilities accrued were $7.2 million; the company noted potential exposure could exceed accrued amounts if circumstances worsen. Litigation accruals were $0.2 million; management did not expect current claims to be material but noted unfavorable outcomes could be adverse. German tax examinations and other uncertain tax positions could affect results.
- The filing provides no specific company-wide revenue or EPS guidance. Forward-looking outcomes are subject to demand, pricing and competition, customer and supplier relationships, acquisition integration, restructuring execution, tariffs, foreign exchange, healthcare reimbursement and other risks.
Most important facts for investors to verify
- Whether the $129 million tax benefit is clearly separated from recurring earnings when assessing underlying profitability and EPS.
- Whether sterilization alternatives are approved and available, and whether the expected $9 million Q4 revenue impact or possible 2020 disruption changes.
- Progress and cash costs of the footprint plans, including whether projected savings and timelines remain achievable.
- Funding and completion of the 2024-note redemption, its actual extinguishment cost, and subsequent borrowing levels and covenant headroom.
- Whether working-capital investment, especially inventories, converts to sales and cash flow, and whether capital spending remains elevated.