Teleflex Incorporated — Q3 2018 Form 10-Q
Business context and reporting period
Teleflex is a global medical technology company, primarily selling single-use devices for hospital and healthcare procedures. This unaudited quarterly report covers the three and nine months ended September 30, 2018; comparisons are to the periods ended October 1, 2017. Results include acquired businesses, notably NeoTract, acquired in October 2017.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $609.7m | $534.7m | $1,806.8m | $1,551.2m |
| Gross profit / margin | $342.6m / 56.2% | $295.2m / 55.2% | $1,018.6m / 56.4% | $841.1m / 54.2% |
| Operating income from continuing operations | $82.1m | $110.4m | $202.4m | $281.4m |
| Net income | $56.5m | $77.0m | $110.2m | $195.2m |
| Diluted EPS | $1.21 | $1.65 | $2.36 | $4.18 |
| Operating cash flow | Not separately presented for the quarter | $302.9m | $319.7m |
Q3 revenue grew 14.0%, while net income fell about 26.6%. Gross margin increased 100 basis points, but operating income declined about 25.6%. For the first nine months, revenue rose 16.5%, while operating income fell about 28.1% and net income about 43.5%. These profitability comparisons include substantial acquisition-related and restructuring costs.
At September 30, 2018, cash and equivalents were $356.3m, current assets $1,240.8m, and current liabilities $549.3m. Current and long-term borrowings totaled $2,153.1m, down from $2,249.6m at year-end 2017; cash less borrowings was approximately $1,796.8m net debt. Nine-month capital expenditures were $55.8m, implying approximate operating-cash-flow-minus-capex of $247.2m. The company paid $46.5m in dividends during the period; quarterly dividends were $0.34 per share.
Material changes versus prior period
- Revenue growth was driven substantially by acquisitions: acquired businesses contributed $49.9m in Q3 and $163.2m year to date. Existing-product volume also increased; nine-month growth additionally benefited from $33.8m of favorable currency movements.
- Gross margin improved, reflecting acquired-business contributions, favorable currency and pricing, partly offset by unfavorable mix and higher manufacturing costs.
- SG&A rose to $214.9m in Q3 from $163.8m and to $660.1m year to date from $486.7m. The company cited higher acquired-business expenses, amortization and contingent-consideration remeasurement, among other operating costs.
- Nine-month operating cash flow declined $16.8m, principally from working-capital effects, including higher receivables and tax payments. Financing used $199.7m, including $98.5m of debt repayments and $73.2m of contingent-consideration payments.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance is stated. Management said available cash, operating cash flow and revolving-credit capacity are expected to fund operating needs, capital expenditures and debt obligations for the next 12 months and foreseeable future.
- The 2018 Footprint realignment plan is expected to be substantially complete by end-2024. Estimated total restructuring and related charges are $102m–$133m, with annual pretax savings of $25m–$30m once fully implemented. The company expected $55m–$72m of plan charges in 2018.
- Year-to-date restructuring and impairment charges were $77.6m, including $57.2m of termination benefits and a $17.2m pretax impairment for abandoned interventional-product assets. Q3 impairment was $17.2m pretax ($9.2m after tax).
- The NeoTract contingent-consideration liability was estimated at $229.4m, with up to $300m payable if specified sales goals through 2020 are met. The total contingent-consideration liability was $244.6m; its fair value depends on significant estimates, including projected sales and payment probabilities.
- On October 4, 2018, after quarter-end, Teleflex acquired Essential Medical for $60m cash, subject to adjustments, with up to $100m in additional payments tied to sales and regulatory goals. It also entered into five-year cross-currency swaps with $500m notional value. Management estimated a $13.4m annual pretax interest benefit if exchange rates remain constant, but a 10% euro-related exchange-rate decline could require an approximately $50m net settlement at expiration or earlier termination.
- Credit-agreement leverage and interest-coverage covenants were met at September 30, 2018. Risks include customer payment delays and collectability, particularly in Greece, Italy, Spain and Portugal; currency and economic exposure; execution of acquisitions and restructuring; and litigation or environmental contingencies. Management did not expect existing litigation outcomes to be material, but noted unfavorable developments could be adverse.
- The Q3 effective tax rate was negative 2.3%, including tax effects of the Tax Cuts and Jobs Act, impairment, share-based payment tax benefits and contingent-consideration expense. The company continued to evaluate provisional tax-law accounting.
Important facts for investors to verify
- How much reported revenue growth reflects acquired businesses, versus organic volume, pricing and currency effects.
- Whether acquisition-related contingent-consideration charges and amortization continue to weigh on operating profit and cash generation.
- Progress, remaining cash costs and realized savings from the footprint plans, especially the 2018 plan’s multiyear estimates.
- Cash conversion, receivables collection and exposure to public healthcare systems in Southern Europe.
- Debt reduction, covenant headroom, and the actual cash-flow and settlement effects of the post-quarter cross-currency swaps.
- Achievement of NeoTract earn-out sales milestones and Essential Medical’s regulatory and commercial objectives.