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Text: Additionally, during this conference call, you will hear management make references to the estimated positive or negative impacts as a result of COVID-19 during the third quarter of 2020.
You'll also hear management make statements regarding intra-quarter business performance during the month of October.
Management is providing this commentary to provide the investment community with additional insights concerning trends, and these disclosures may not occur in subsequent quarters.
It's a pleasure to speak with you today, and I hope you're all keeping safe and well.
Overall, considering the environment we are operating in, we are pleased with our third quarter performance as it reflected the expected improvement in trends across many of our global product categories, led by a faster-than-expected recovery within our Interventional Urology business, and continued strength within our vascular access product sales.
While from a regional perspective, we saw particular strength within the Americas as the pace of recovery in the United States during the third quarter was encouraging.
Quarter three revenues was $628.3 million, which was down 4.1% as compared to the prior year period on a constant currency basis but far better than the 12% decline we experienced during the second quarter of the year.
The decline in year-over-year revenue is due to the impact of COVID-19, which we estimate caused a net negative impact of approximately $78 million, or approximately 12%.
If we were to normalize for the negative COVID impact, we estimate that our underlying business grew by approximately 8% on a constant currency basis, consistent with our quarter two revenue performance.
We also saw a significant sequential improvement within our adjusted gross and operating margins from the levels achieved during the second quarter.
With our adjusted earnings per share of $2.77 in the quarter meaningfully exceeded our internal expectations.
This reflects the continued recovery we saw as we moved through the quarter, coupled with prudent operating expense management.
Before I go into more detail on our quarterly financial performance, I am happy to announce that during the month of October, we signed a definitive agreement to acquire Z-Medica, a market leader in hemostatic products.
We are pleased to be able to deploy capital for a differentiated product portfolio that leverages existing Teleflex call points and is immediately accretive to our revenue growth rates, adjusted growth and operating margin profile and to our adjusted earnings per share.
Turning to a more detailed review of our third quarter results.
As I just mentioned, quarter three revenue declined 4.1% on a constant currency basis and 3.1% on an as-reported basis.
The decline in revenue was due to COVID-19, which we estimate had a negative impact of approximately $81 million across several global product categories.
This was somewhat offset by approximately $3 million of additional revenue within our vascular access and other product categories, which experienced modestly higher-than-expected demand as a result of COVID-19.
From a margin perspective, we generated adjusted gross and operating margins of 57.2% and 25.1%, respectively.
This translated into a year-over-year decline of 140 basis points at the gross margin line and 190 basis points at the operating margin line.
That said, we saw a sequential improvement of 330 basis points on both the adjusted gross and operating margin lines as compared to the levels we achieved in the second quarter.
On a year-over-year basis, reduced sales volumes due to COVID was a headwind.
However, it was partially offset by our cost containment efforts as we continue to tighten our belts where we deem appropriate in the current environment, balanced against continued investment to sustain our long-term growth aspirations.
Adjusted earnings per share was $2.77, down 6.7% year-over-year but ahead of our internal expectations as the business continued to recover during the quarter.
When excluding the negative impact of COVID-19 had on our third quarter results, we estimate that our adjusted earnings per share would have grown approximately 13% as compared to the prior year period.
Overall, I am very pleased with our financial performance as it demonstrates the resiliency of our diversified global product portfolio.
Let's turn to a discussion on our quarterly revenue trends, which will be on a constant currency basis.
The Americas delivered revenues of $375 million in the third quarter, which represents an increase of 0.4%.
Growth within the Americas was driven by vascular access and respiratory products, which both saw elevated demand driven by COVID.
In addition, Interventional Urology was a strong contributor as UroLift continues to be one of the fastest recovering procedures.
However, there were offsets with declines in other product categories.
We estimate that the Americas would have grown approximately 9%, excluding the impact that COVID-19 had on the region.
EMEA reported revenues of $135.7 million in the third quarter, representing a decline of 7%.
During the quarter, declines occurred across most product categories as increasing COVID infection rates negatively impacted procedures and results.
Adjusting for COVID, we estimate an approximately 3% underlying decline for the region.
Revenues totaled $68.2 million in the third quarter, which represents a decline of 14.2%.
However, we estimate that we would have had positive constant currency revenue growth in the high single digits, if not for the impact of COVID-19.
Additionally, during the third quarter, we began transitioning a distributor in Japan.
When normalizing for both COVID and the distributor change, growth in the region would have been closer to the low double-digit range, consistent with our longer-term outlook.
And lastly, our OEM business reported revenues of $49.4 million in the third quarter, which was down 11.8% on a constant currency basis.
As we anticipated, during the third quarter, our OEM business saw a lagged impact related to COVID relative to our other businesses.
Investors familiar with Teleflex will be aware that our OEM business supplies medical companies with complex catheters and surgical sutures, and the quarter three impact reflects reduced orders from these customers, whose business is tied to non-emergent procedures.
Excluding the estimated COVID-19 impact, the business grew roughly 28%, which includes a benefit of approximately 11% from the acquisition of HPC.
As it relates to HPC, I am pleased to report that we remain on track with our integration efforts.
Let's now move to a discussion of our revenue by global product category.
Starting with vascular access.
Due to growth within both our PICC and EZ-IO products, third quarter revenue increased 6.8% to $160 million.
We estimate that COVID-19 positively impacted the growth rates of our vascular products during the third quarter by approximately 1%.
Moving to interventional access.
Third quarter revenue was $93.2 million, or down 13.5% as compared to the prior year period.
The decrease was largely due to the delay in the recovery of certain non-emerging procedures because of COVID-19, along with the negative impact stemming from a catheter recall that occurred during the quarter.
We estimate that the recall impacted our business negatively by approximately $4 million.
The impact on the recall will continue to linger for the next several quarters as we do not expect to be back on the market with this product until September of 2021.
When normalizing for the impact that COVID had on these product lines, we estimate that underlying growth was in the low single digits.
Revenue was $75.7 million, which is lower than the prior year by 14.4%.
The revenue decline was the result of lower sales of laryngeal masks, regional anesthesia and airway management products.
We estimate that COVID had an approximately 10% negative impact in the quarter, implying mid-single-digit declines for the business on an underlying basis.
Revenue declined by 12.3% to $82.2 million, driven by lower sales of our ligation and instrument product lines.
We estimate a 13% headwind from COVID during quarter three, indicating recovery as compared to the estimated 30% COVID headwind in quarter two.
Moving to Interventional Urology.
Quarter three revenue increased by 11% to $81.8 million.
We estimate an approximate 29% COVID-19-related headwind during quarter three.
Notwithstanding the significant headwind on our growth in quarter three, we are pleased with the path of recovery for this business unit and are also happy with the early impact of our national DTC campaign, which is exceeding our expectations.
Additionally, we are encouraged that we trained 120 new urologists in quarter three, moving to a cadence that is consistent with our expectations prior to COVID.
And finally, our other category, which consists of our respiratory and urology care products, grew 0.5%, totaling $86 million.
In large part, we estimate that growth during the quarter was due to increased demand for certain humidification and breathing products resulting from COVID-19.
From a monthly perspective, we note that September outperformed July and August when normalizing for the distributor termination and the product recall within our interventional business.
Furthermore, as we have progressed through the first few weeks of October, we continue to see additional modest improvements as compared to last October.
That said, due to the significant resurgence of COVID cases globally, and when normalizing for selling days, we expect to see a modest improvement in the constant currency revenue performance during quarter four as compared to the decline of 4% we achieved in quarter three.
Tom will provide more details later.
That completes my comments on quarter three revenue performance.
Turning to some recent clinical and commercial updates.
The response to our national DTC campaign is exceeding our expectations.
The strategic role of DTC is important as about half of the 12 million men being treated for BPH believe prescription medications are their only solution.
Thus far, we are tracking well against the target to generate six times the number of impressions from the regional campaigns in the year ago period.
Web traffic has increased over 150% since the launch and another encouraging metric is that multiple urologists are now motivated to get trained on UroLift as a result of patient requests due to the campaign.
In addition, while there was likely a nominal impact on quarter three results, we expect the momentum for the campaign to continue building into quarter four and early next year as we turn down the advertising full strength starting in early September.
Turning to UroLift two.
Since the FDA clearance on July 31, we have begun a market acceptance test and received positive preliminary feedback, including the streamlining of the delivery device triggering mechanism and the reduction of waste.
We are also increasing manufacturing levels for the product ahead of the full commercial launch slated for early in 2021.
Lastly, regarding the UroLift ATC.
We know that the market acceptance test is well under way, and we have received very positive feedback, which indicates that the device is delivering on the intended benefit of enhanced tissue controls when treating challenging anatomies such as obstructive median lobe.
Taken together, we see these efforts as helping to build momentum as we seek to further expand our leadership position in BPH.
Turning to the next slide on key commercial updates.
We recently received an expanded indication for EZ-IO as the device can now be used for up to 48 hours when our alternate intravenous access is not available in both adults and pediatric patients, 12 years and older.
While we do not expect a material sales uplift from this label expansion, we are always looking to improve our portfolio based on clinician feedback, and this is a prime example of those efforts.
Lastly, I'd like to provide the investment community with a few more details of the Z-Medica acquisition we announced last night.
In mid-October, we entered into a definitive agreement to acquire Z-Medica, an industry-leading manufacturer of hemostatic products.
Under the terms of the agreement, Teleflex will acquire Z-Medica, for an upfront payments totaling $500 million and up to an additional $25 million upon the achievement of certain commercial milestones.
As part of the transaction, Teleflex will also be acquiring certain tax attributes that are expected to result in future tax benefits.
We value these tax attributes at approximately $40 million, which we considered when arriving at our purchase price.
Z-Medica's hemostatic technologies are helping reinvent hemorrhagic control with cost-effective efficient bleeding control solutions being adopted by markets worldwide.
The company offers three main brands: QuikClot, Combat Gauze and QuikClot Control+, which utilize the proprietary technology consisting of gauss impregnated with calin.
The technology activates and accelerates the body's natural clotting ability.
Z-Medica's products currently focus on the trauma surgery, EMS, military, emergency departments and interventional segments with opportunities to expand into additional indications over time.
Teleflex's strategy is to invest in innovative products and technologies that can meaningfully enhance clinical efficacy, patient safety and comfort, reduce complications and lower the overall cost of care.
The acquisition of Z-Medica enables Teleflex to leverage strength in the hospital, EMS and military call points with the differentiated products that complement our EZ-IO and EZPlas product portfolio.
We are excited to announce this acquisition given its above company average revenue growth capabilities as well as its above company average gross and operating margin profile.
Pending the receipt of certain regulatory approvals, the transaction is expected to be completed during the fourth quarter of this year.
As we look forward, the transaction is expected to contribute between $60 million and $70 million of revenue and between $0.07 and $0.15 of adjusted earnings per share in fiscal year 2021.
Beyond 2021, we expect the acquisition to deliver a high single-digit revenue growth profile and further accretion to adjusted earnings per share.
After our recent meetings with the FDA, we determined to proceed with the BLA submission rather than an EUA.
We continue to work closely with the agency in determining the timing of that submission.
Overall, we continue to invest organically in clinical and commercial catalysts that will help to sustain our revenue growth aspirations in a normalized environment.
We will also look to augment those internal efforts through the deployment of capital for inorganic growth opportunities, such as Z-Medica.
Given the previous discussion of the company's revenue performance, I'll begin at the gross profit line.
For the quarter, adjusted gross profit was $359.6 million versus $380 million in the prior year quarter or a decrease of approximately 5%.
Adjusted gross margin totaled 57.2% during the quarter, which is a decrease of 140 basis points versus the prior year period.
The decline in gross margin was primarily due to COVID-19-related impacts, including lower sales volumes and higher manufacturing costs, along with a foreign exchange headwind.
The volume impact was significant for the quarter as the adverse revenue impact from COVID-19 tended to skew toward higher gross margin products, including Interventional Urology, interventional access and Surgical.
In total, we estimate that COVID-19 negatively impacted our adjusted gross profit by approximately $59 million in the quarter.
We continue to tightly manage discretionary spending as a means to partially offset the reduced revenue and gross profit resulting from COVID-19.
And as a result of the efforts, we estimate that operating expenses were reduced in the third quarter by approximately $22 million.
While we expect the actions taken to continue to deliver opex savings through the remainder of the year, by far the largest quarterly opex reduction was realized in the second quarter.
Adjusted operating profit during the third quarter of 2020 was $157.6 million, and this compares to $175.3 million in the prior year or a decrease of approximately 10%.
Third quarter operating margin was 25.1% were down 190 basis points year-over-year, driven primarily by the gross margin decline.
And while our adjusted margins were down in the third quarter as compared to the year ago period, we are pleased to see the sequential improvement in both gross and operating margins from the lows we experienced during the second quarter.
Looking forward, we expect sequential margin improvement to continue during the fourth quarter.
Net interest expense totaled $16.4 million, which is a decrease of approximately 14% versus the prior year.
The decrease in interest expense primarily reflects reduced average interest rates associated with our variable rate debt, partially offset by higher average debt balances versus the prior year period.
For the third quarter of 2020, our adjusted tax rate was 7% as compared to 10.3% in the prior year period.
The year-over-year decrease in our third quarter adjusted tax rate is primarily due to a favorable mix of taxable income versus the prior year period as well as a higher benefit from stock-based compensation as compared to the prior year period.
At the bottom line, third quarter adjusted earnings per share decreased 6.7% to $2.77.
Included in this result is an estimated adverse impact from COVID-19 of approximately $0.60 as well as a foreign exchange headwind of approximately $0.09.
Turning to select balance sheet and cash flow highlights.
For the first nine months of 2020, cash flow from operations totaled $241.5 million as compared to $289.2 million in the prior year period.
The decrease is attributed to larger contingent consideration payments, partially offset by favorable changes in other working capital driven by higher accounts receivable collections.
Overall, the balance sheet remains in good shape.
At the end of the third quarter, our cash balance was $347.5 million versus $553.5 million at the end of the second quarter.
During the third quarter, we repaid nearly $285 million of revolver borrowings and restored revolver availability to the full $1 billion.
Net leverage at quarter end was approximately 2.6 times.
The acquisition of Z-Medica is projected to increase net leverage by less than 3/4 of one turn and net leverage pro forma the acquisition remains comfortably below our 4.5 times covenant.
Our intention is to finance the purchase of Z-Medica through revolver availability.
However, we may choose to permanently finance the acquisition through a future notes issuance.
Lastly, we have no near-term debt maturities of material size.
Given the continued uncertainty surrounding the impact of COVID-19 pandemic on business operations, we are not reinstating financial guidance at this time.
However, we will provide the following directional expectations for the fourth quarter.
Looking ahead, we continue to expect further sequential improvement in our constant currency revenue performance as compared to what we achieved in the third quarter.
However, due to the resurgence in global COVID-19 cases over the past seven to eight weeks, we expect our constant currency revenue growth to be only modestly better than what we achieved during the third quarter.
This expectation of a modest fourth quarter improvement excludes the benefit of two additional selling days that occur in the fourth quarter of 2020, which we estimate would add approximately 3% of additional revenue growth during the fourth quarter.
And this expectation also excludes any benefit from the acquisition of Z-Medica as the closing date is not yet determined.
In closing, we delivered solid third quarter results as our diversified portfolio showed continued expected improvement relative to our quarter two results on both the top and bottom line.
Excluding the impact of COVID, we see our underlying business performance is encouraging and very much in line with our initial expectations.
We continue to view the resurgence of COVID globally, combined with the willingness of the more vulnerable population to get procedures done as the primary wildcards impacting recovery.
While the next several quarters still have elements of uncertainty, we remain confident in our ability to execute as we head into 2021 and are optimistic in our long-term prospects.
We, as an organization, will continue to focus on serving our hospital customers and working with our key stakeholders.
We will manage the business prudently while staying focused to capitalize on the long-term potential of our global product portfolio.

user
compname reports q3 adjusted earnings per share $2.77 from continuing operations.
q3 adjusted earnings per share $2.77 from continuing operations.
q3 revenue $628.3 million versus refinitiv ibes estimate of $619.3 million.
not reinstating 2020 financial guidance due to covid-19 pandemic.

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