Teleflex Incorporated — Q3 2017 Form 10-Q
Business context and period. Teleflex is a global medical-technology company focused primarily on single-use medical devices. This unaudited report covers the three and nine months ended October 1, 2017, compared with periods ended September 25, 2016. Results include Vascular Solutions following its February 2017 acquisition; the October 2 NeoTract acquisition occurred after quarter-end.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $534.7m | $455.6m | $1,551.2m | $1,354.1m |
| Gross profit / margin | $295.2m / 55.2% | $241.6m / 53.0% | $841.1m / 54.2% | $723.1m / 53.4% |
| Income from continuing operations | $79.4m | $66.2m | $198.1m | $176.8m |
| Net income attributable to common shareholders | $77.0m | $66.3m | $195.2m | $176.3m |
| Diluted EPS | $1.65 | $1.40 | $4.18 | $3.69 |
| Interest expense | $21.3m | $12.9m | $58.9m | $38.6m |
Q3 revenue rose 17.4%; nine-month revenue rose 14.6%. Q3 diluted EPS increased 17.9%, while nine-month diluted EPS increased 13.3%. Income from discontinued operations was a loss of $2.4m in Q3 and $2.9m for the nine months. The filing reports a 20.6% Q3 operating-income-before-interest, debt-extinguishment and tax margin, versus 19.0% a year earlier; the comparable nine-month margin was 18.1%, versus 18.6%.
- Cash flow: Nine-month operating cash flow from continuing operations was $319.7m, versus $301.6m. Capital expenditures were $54.0m, leaving approximately $265.7m of operating cash flow after capex, compared with approximately $265.7m in 2016. Investing activities used $1.06bn, principally for acquisitions.
- Liquidity and debt: At October 1, cash and equivalents were $1.02bn and gross borrowings were $2.26bn (net carrying value $2.25bn). Current borrowings were $77.3m. The company reported $374.6m of current liabilities and $1.77bn of current assets. Cash included $967.5m held at non-U.S. subsidiaries. The company said cash, operating cash flow and revolving-credit availability should fund foreseeable needs.
- Dividends and shares: Dividends were $0.34 per share for Q3 and $1.02 for the nine months. Common shares outstanding were 45.05m at October 30, 2017.
Material changes and drivers
- Management attributed most revenue growth to acquisitions—$48.2m in Q3 and $122.2m for the nine months, mainly Vascular Solutions—with additional contribution from existing-product volumes and new products.
- Gross margin improved 220 basis points in Q3 and 80 basis points year to date, reflecting product mix, manufacturing improvements and acquired businesses. The nine-month comparison included a $10.4m acquired-inventory fair-value step-up charge.
- Vascular Solutions, acquired for approximately $975.5m net of cash, contributed $43.9m of Q3 revenue and $4.8m operating profit; for the post-acquisition nine-month period it contributed $110.5m revenue and a $6.8m operating loss. Its results are included in “All Other.”
- Borrowings increased substantially to fund acquisitions. The company entered a five-year $1.0bn revolving facility and $750m term loan in January; Q3-end borrowings included $841m on the revolver and $721m on the term loan. The 3.875% convertible notes matured in August 2017.
- Foreign-currency translation contributed $156.0m to nine-month other comprehensive income, a material non-cash equity movement.
Outlook, commentary and risks
- No specific consolidated revenue or earnings guidance is provided in this filing. Management expects restructuring plans to produce annual pre-tax savings of $67m–$75m, plus $21m–$27m of Vascular Solutions and Pyng integration synergies. Substantially all estimated costs are expected before the end of 2018, with most savings and synergies expected by 2019.
- On October 2, Teleflex acquired NeoTract for $725m upfront, funded through revolver borrowings, with up to $375m in additional payments contingent on sales goals through 2020. The acquisition and related borrowing were not reflected in the October 1 balance sheet.
- China distributor dispute: the former distributor seeks RMB 51.2m ($7.5m) in damages and a product repurchase of RMB 97.5m ($14.4m); Teleflex counterclaims for RMB 61.2m ($9.0m) of receivables. The filing says it has accrued its best estimate of probable loss.
- Credit exposure remains a risk in Greece, Italy, Spain and Portugal, where public healthcare customers may delay payment. Receivables from these countries were $50.6m, or 16.9% of total net trade receivables, at October 1; management warns deterioration could increase credit losses and delay collections.
- Environmental liabilities included $6.9m accrued. Total litigation accruals were $8.6m, including $5.0m for discontinued operations. After quarter-end, the Louisiana Supreme Court reduced a punitive-damages award from $23.0m to $4.3m; Teleflex sought rehearing, and the company’s October 1 accrual was $5.0m including interest.
- Debt covenants require total leverage no greater than 4.50:1, secured leverage no greater than 3.50:1, and interest coverage at least 3.50:1. Teleflex reported compliance at October 1. Other risks include acquisition integration, restructuring execution, reimbursement and pricing changes, competition, currency and interest-rate movements, and supplier or customer disruption.
Important facts for investors to verify
- How much of reported growth and margin improvement is attributable to acquired businesses versus organic performance, and whether Vascular Solutions can deliver sustained profitability.
- The post-NeoTract pro forma debt, interest expense, covenant headroom and cash position; these are not presented as a clear updated consolidated balance-sheet value in this filing.
- Progress toward the stated restructuring savings and integration synergies, alongside remaining cash costs and execution timelines.
- Resolution and ultimate financial exposure from the China distributor arbitration and Louisiana product-liability case.
- Collectability and payment timing of European public-healthcare receivables, and any resulting allowance or cash-flow effects.