Teleflex Incorporated — Q1 2020 Form 10-Q
Reporting period: Three months ended March 29, 2020; comparisons are with the three months ended March 31, 2019. Teleflex designs, manufactures and sells medical technology products, primarily single-use devices. The quarter includes the early effects of COVID-19.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Net revenue | $630.6 million | $613.6 million | Up 2.8% |
| Gross profit / margin | $333.6 million / 52.9% | $324.0 million / 52.8% | Margin up 0.1 percentage point |
| Operating income (continuing operations, before interest and taxes) | $157.1 million | $75.2 million | Increase includes a substantial contingent-consideration valuation benefit |
| Net income | $131.2 million | $40.9 million | Includes the same valuation benefit and a lower effective tax rate |
| Diluted EPS | $2.78 | $0.87 | Continuing-operations diluted EPS was $2.78 versus $0.89 |
| Operating cash flow, continuing operations | $(11.5) million | $60.2 million | Lower mainly because of increased contingent-consideration payments |
| Capital expenditures | $19.7 million | $23.5 million |
Revenue growth reflected higher existing-product volumes, new products and the HPC acquisition, partly offset by foreign exchange and COVID-19-related demand declines. Gross margin was nearly flat: cost improvements and favorable currency effects were largely offset by pandemic impacts and acquired-inventory step-up costs. SG&A fell to $147.8 million from $206.9 million, primarily because the estimated fair value of contingent consideration declined by $59.5 million; management attributed that revaluation mainly to adverse projections related to COVID-19. This noncash valuation adjustment materially affects interpretation of reported profit growth.
Revenue and segments
- By product category, vascular access revenue was $150.3 million, anesthesia $75.7 million, interventional $99.9 million, surgical $75.4 million, interventional urology $74.2 million, OEM $63.4 million, and other $91.7 million.
- Americas revenue rose 4.1% to $358.0 million; EMEA rose 1.0% to $156.1 million; Asia fell 12.6% to $53.1 million; OEM rose 16.9% to $63.4 million. Asia was affected in part by shutdowns; OEM benefited from HPC and existing-product sales.
- Segment operating profit increased to $186.7 million from $115.9 million, with the Americas increase primarily reflecting the contingent-consideration revaluation. EMEA operating profit declined 24.4% to $20.4 million.
Liquidity, debt and capital
- Cash and cash equivalents were $406.5 million at quarter-end, versus $301.1 million at December 31, 2019. Current assets were $1.447 billion and current liabilities $402.3 million.
- Total borrowings before unamortized issuance costs were $2.408 billion, up from $1.923 billion at year-end; reported borrowings were $2.395 billion, including $53.6 million current and $2.341 billion long-term. Cash less gross borrowings was approximately $2.002 billion net debt.
- Teleflex raised $485 million through new borrowings. It used proceeds to fund the $260 million HPC acquisition, retain approximately $150 million of additional cash as a COVID-19 precaution, and help fund a NeoTract contingent-consideration payment. It paid $15.8 million in dividends.
- On March 30, 2020, the company increased its accounts-receivable securitization capacity from $50 million to $75 million. It reported compliance with applicable debt covenants at March 29.
Material changes, outlook and risks
- Teleflex acquired privately held IWG High Performance Conductors (HPC) on February 18 for $260 million, financed with revolving-credit borrowings. The preliminary allocation included $139 million of customer relationships, $40 million of intellectual property and $107.1 million of goodwill.
- COVID-19 reduced elective procedures and demand for interventional urology, interventional and surgical products, while respiratory and vascular-access demand increased during the quarter. Management reported manufacturing inefficiencies, longer delivery times and higher-than-normal absenteeism, but no significant disruption to the supply chain for high-demand products as of the filing.
- Management said the pandemic had not materially adversely affected Q1 results, but expected continued near-term negative effects on revenue and operations and said the extent and duration could not be predicted. No specific earnings or revenue guidance was provided.
- Management believed cash, operating cash flow and revolving-credit availability would fund operating needs, capital expenditures and debt obligations for the next 12 months and foreseeable future; it also noted pandemic-related uncertainty around markets, liquidity and customer collections.
- A newly identified interpretation of non-U.S. tax law could affect prior and current intercompany transactions. The impact was not estimable and could be material to results, though the company did not expect a material effect on liquidity or overall financial position.
- Environmental liabilities accrued were $6.7 million in total; the company also accrued $0.3 million for litigation and claims and did not believe outstanding matters were likely to be material, while noting unfavorable developments could be adverse. Ongoing restructuring programs were estimated to involve total charges of $205–$255 million and eventual annual pretax savings of $69–$80 million; estimates may change.
Important facts for investors to verify
- How much of reported earnings growth reflects the $59.5 million contingent-consideration revaluation, and how the estimate changes as pandemic-related forecasts evolve.
- Whether elective-procedure demand recovers and whether higher respiratory demand offsets weakness in other product categories and regions.
- Cash generation after contingent-consideration payments, the company’s debt and liquidity position, and its ability to service obligations if pandemic conditions worsen.
- The integration and returns from HPC, and the eventual outcome of the potentially material non-U.S. tax matter.
- Whether restructuring cost and savings estimates remain achievable and whether environmental or litigation exposures change.