Teleflex Incorporated — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparative period ended April 1, 2018. Teleflex is a global medical technology company. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Q1 2019 | Prior period |
|---|---|---|
| Revenue | $613.6 million | $587.2 million |
| Gross profit / margin | $344.7 million / 56.2% | $331.3 million / 56.4% |
| Operating income from continuing operations | $75.2 million | $86.8 million |
| Income from continuing operations | $41.9 million | $54.9 million |
| Net income | $40.9 million | $56.2 million |
| Diluted EPS | $0.87 | $1.20 |
| Cash from continuing operations | $60.2 million | $86.8 million |
- Revenue increased 4.5%, primarily on higher existing-product volumes and new-product sales; unfavorable foreign exchange reduced revenue by $17.1 million.
- Gross margin slipped 0.2 percentage points. Operating income declined despite higher revenue, with higher restructuring charges and unallocated expenses among the factors affecting results. The filing reports $17.4 million of restructuring and impairment charges, versus $3.1 million.
- Cash and equivalents were $271.2 million at March 31, down from $357.2 million at year-end 2018. Continuing investing activities used $23.5 million, mainly capital expenditures; continuing financing activities used $124.4 million, including $111.0 million of contingent-consideration payments and $15.7 million of dividends.
- Borrowings totaled $2.16 billion ($86.6 million current and $2.07 billion long-term). The filing reports no borrowing reduction in the quarter. Current assets were $1.18 billion and current liabilities $520.9 million.
- Interest expense was $22.7 million, down from $25.9 million; the reported average interest rate on debt was 3.9%, compared with 4.2%.
Material changes versus the prior period
- Americas revenue rose 6.4% and operating profit 11.4%; OEM revenue rose 18.3% and operating profit 47.7%. EMEA revenue declined 3.3% and operating profit 14.9%; Asia revenue increased 4.3% while operating profit fell 25.4%.
- SG&A increased to $227.7 million from $215.3 million, reflecting acquired-business costs, higher contingent-consideration expense, selling and marketing, and administrative costs. R&D rose to $27.2 million from $26.0 million.
- The effective tax rate increased to 20.7% from 10.2%, partly reflecting nondeductible termination benefits associated with the new restructuring plan.
- The company adopted lease accounting guidance on January 1, 2019, recognizing additional lease assets of $105.3 million and lease liabilities of $106.6 million at adoption. Prior-period figures were not restated.
- Teleflex changed its segment presentation to Americas, EMEA, Asia and OEM; comparative segment information was restated.
Outlook, management commentary and risks
- No earnings or revenue guidance is provided in the filing. Management said operating cash flow, cash balances and available revolving-credit borrowings should fund operating needs, capital expenditures and debt obligations for the next 12 months and foreseeable future.
- The 2019 Footprint realignment plan is expected to be substantially completed in 2022. Estimated total restructuring and related charges are $56–$70 million; annual pretax savings of $12–$14 million are expected when fully implemented, with savings expected to begin in 2021. The plan also entails estimated capital expenditures of $29–$35 million.
- Across ongoing restructuring programs and a related OEM initiative, the company estimated total charges of $205–$255 million and eventual annual pretax savings of $69–$80 million; estimates may change and savings are not assured.
- On February 4, 2019, Teleflex sold substantially all assets of its vein catheter reprocessing business for $12.6 million and recorded a $2.7 million pretax gain. Consideration included a secured promissory note; its March 31 recorded receivable value was $7.8 million.
- On April 5, 2019, after quarter-end, Teleflex entered a new credit agreement with a $1.0 billion revolving facility and a $700 million term-loan facility, both maturing in 2024. It includes maximum net leverage of 4.50-to-1.00 and minimum interest coverage of 3.50-to-1.00.
- Currency exposure remains notable. A 10% adverse dollar/euro move could require payments of approximately $50 million under the 2018 swaps and $25 million under the 2019 swaps at maturity or earlier termination. The filing also cites risks involving customer and supplier relationships, product demand and acceptance, acquisitions, restructuring execution and savings, reimbursement and healthcare policy, competition, input costs, currency and broader economic conditions.
- Environmental liabilities accrued were $7.5 million; litigation accruals were $0.4 million. Management did not expect outstanding litigation to be material based on information available, but noted unfavorable developments could have a material adverse effect. The most significant tax examination in process was in Germany.
Important facts for investors to verify
- Whether revenue growth and segment profit trends persist, particularly the deterioration in EMEA and Asia operating profit.
- Actual cash conversion and the timing and amounts of contingent-consideration payments, restructuring cash costs and planned capital expenditures.
- Progress against restructuring savings and charge estimates, including the expected start of savings in 2021.
- Debt terms, covenant headroom and liquidity after the April 5 credit-agreement refinancing; the filing does not state actual covenant ratios.
- Exposure to foreign exchange and the potential cash settlement of cross-currency swaps, along with developments in environmental, litigation and tax matters.