Teleflex Incorporated — FY2018 Form 10-K
Business context and reporting period. Teleflex is a global medical-technology company focused primarily on single-use devices used in critical-care and surgical procedures. This annual report covers the fiscal year ended December 31, 2018; quarterly data are also provided. The company reported seven segments for 2018 and reorganized to four geographic/product segments in the first quarter of 2019.
Key financial results
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net revenue | $2,448.4 million | $2,146.3 million | +14.1% |
| Gross profit / margin | $1,384.4 million / 56.5% | $1,171.8 million / 54.6% | Margin +1.9 percentage points |
| Income from continuing operations before interest, debt-extinguishment loss and taxes | $321.7 million | $372.3 million | -13.6% |
| Income from continuing operations | $196.4 million | $155.3 million | +26.5% |
| Net income attributable to common shareholders | $200.8 million | $152.5 million | +31.7% |
| Diluted EPS, continuing operations | $4.20 | $3.33 | +26.1% |
| Operating cash flow, continuing operations | $435.1 million | $426.3 million | +$8.8 million |
| Free cash flow (non-GAAP) | $354.3 million | $355.4 million | -$1.1 million |
Revenue growth reflected $165.1 million from acquired businesses, primarily NeoTract, $60.4 million of higher sales volume from existing products, and, to a lesser extent, new products and favorable foreign exchange. Gross-margin expansion reflected acquisition mix, currency effects and the prior-year Vascular Solutions inventory step-up. SG&A rose to $878.7 million, or 35.9% of revenue, from $700.0 million, or 32.6%; increases included NeoTract-related contingent consideration expense, amortization and other operating costs. R&D increased to $106.2 million, or 4.3% of revenue.
Reported operating income before interest, debt-extinguishment loss and taxes fell despite revenue and gross-profit growth, in part amid higher SG&A, restructuring and impairment charges. Restructuring and impairment charges totaled $79.2 million in 2018, including $19.1 million of impairment charges, principally for abandoned interventional-product intellectual property. Interest expense increased to $103.0 million from $82.5 million.
The effective tax rate was 10.6%, versus 45.5% in 2017, when the Tax Cuts and Jobs Act drove a net $107.9 million tax expense. The 2018 rate reflected the lower U.S. corporate tax rate, share-based compensation tax benefits and a tax cost related to non-deductible contingent consideration expense.
Fourth-quarter information
FY2018 fourth-quarter revenue was $641.6 million, gross profit was $365.8 million, income from continuing operations was $87.5 million, and diluted EPS from continuing operations was $1.87. In FY2017’s fourth quarter, revenue was $595.1 million and continuing operations reported a $42.8 million loss, including the period’s tax effects.
Liquidity, debt and financial position
- Cash and cash equivalents were $357.2 million at year-end, including $299.2 million held at non-U.S. subsidiaries. Current assets were $1,236.2 million and current liabilities were $582.5 million.
- Total borrowings were $2.18 billion; net debt was $1.82 billion. Net debt to total capital improved to 41.7% from 44.3%. Long-term borrowings were $2.07 billion.
- Cash from operating activities was $435.1 million; capital expenditures were $80.8 million. Investing activities used $196.4 million and financing activities used $206.4 million. Financing cash use included $128.5 million of debt repayments, $73.2 million of contingent-consideration payments and $62.2 million of dividends.
- The company had a $1.0 billion revolving credit facility, with $293.0 million drawn, and a $50.0 million accounts-receivable securitization facility, fully drawn. It reported compliance with debt covenants at year-end.
- Contingent consideration liabilities were $304.2 million, up from $272.1 million, primarily related to acquisition milestones. $136.9 million was classified current; the company expected most of that current amount to be paid in the first quarter of 2019.
Material changes, outlook and risks
- Acquisitions and product expansion: 2018 acquisitions included Essential Medical, QT Vascular assets and Specialty Surgical Instrumentation assets. The company made a $75 million NeoTract milestone payment during 2018. NeoTract’s UroLift product contributed to the strong increase in interventional-urology revenue.
- Restructuring: The 2018 footprint plan relocates certain European manufacturing and outsources some distribution operations. Estimated total pre-tax charges are $102–$133 million; annual pre-tax savings are expected to reach $25–$30 million when fully implemented. A separate plan initiated in February 2019 estimates charges of $56–$70 million, capital expenditures of $29–$35 million, and annual savings of $12–$14 million once fully implemented. The filing says the plans are expected to be substantially completed by 2024 and 2022, respectively.
- Management outlook: Management said operating cash flow, available cash and borrowing capacity should fund operating requirements, capital expenditures and debt obligations for the next 12 months and the foreseeable future. The supplied filing text does not provide a clear numerical revenue or earnings forecast.
- Cash collection and international exposure: Receivables from Greece, Italy, Portugal and Spain totaled $39.0 million at year-end, down from $49.1 million. Average days outstanding improved to 121 from 154, but payment delays, currency movements and economic weakness remain risks.
- Foreign-exchange hedge: A five-year cross-currency swap exchanges notional amounts of $500 million and €433.9 million. Management estimated a $13.4 million annual pre-tax interest benefit assuming exchange rates remain constant; a 10% dollar decline versus the euro at settlement could require an approximately $50 million payment.
- Other key risks and contingencies: Medical-device regulation and product liability; reimbursement and pricing pressure; competition and product adoption; acquisition integration and contingent milestone payments; restructuring execution; raw-material costs and supply continuity; cybersecurity; debt and covenant restrictions; and potential tax changes or examination outcomes. Litigation reserves were $0.6 million; management did not consider pending claims likely to be material, while noting outcomes could differ.
Most important facts for investors to verify
- How much future revenue and profit growth is organic versus acquisition-driven, and whether UroLift and other new products meet expectations.
- Whether restructuring charges, capital spending, timing and projected savings remain on plan.
- The assumptions and potential cash timing behind the $304.2 million contingent-consideration liability.
- Debt repayment capacity, covenant headroom and the effects of interest rates and the euro-dollar exchange rate.
- Collection trends for European public-hospital receivables and the adequacy of the doubtful-account allowance.
- Whether the elevated SG&A and amortization burden, and the lower tax rate, are sustainable; the filing does not establish that either will persist at the 2018 level.