Teleflex Incorporated — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Teleflex is a global medical-technology company focused primarily on single-use devices for critical care and surgical procedures. The filing also reports fourth-quarter results.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net revenue | $2,146.3 million | $1,868.0 million |
| Gross profit / margin | $1,171.8 million / 54.6% | $996.2 million / 53.3% |
| Income from continuing operations before interest, debt-extinguishment loss and taxes | $372.3 million | $319.5 million |
| Net income | $152.5 million | $237.8 million |
| Diluted EPS | $3.27 | $4.98 |
| Cash from continuing operating activities | $426.3 million | $410.6 million |
| Free cash flow (company-defined) | $355.4 million | $357.5 million |
| Cash and cash equivalents at year-end | $333.6 million | $543.8 million |
| Total debt | $2,270.0 million | $1,046.1 million |
| Net debt / net debt to total capital | $1,936.4 million / 44.3% | $502.3 million / 19.0% |
Revenue increased 14.9%, mainly from acquisitions, including $205.8 million of acquired-business revenue, and new products. Gross margin expanded 130 basis points, supported by product mix, pricing and cost initiatives; the acquired-inventory fair-value step-up and higher distribution costs were offsets. SG&A increased to $700.0 million from $563.3 million, reflecting acquired businesses, distributor conversions and contingent-consideration remeasurement. R&D rose to $84.8 million from $58.6 million.
Net income declined despite higher operating income, principally because the 2017 effective tax rate rose to 45.5% from 3.3%. The Tax Cuts and Jobs Act generated a provisional net tax expense of $107.9 million, including $154.0 million for deemed repatriation of foreign earnings, partly offset by a $46.1 million deferred-tax benefit. The 2016 comparison also included $43.4 million of impairment and restructuring charges, versus $14.8 million in 2017.
Fourth quarter: Revenue was $595.1 million versus $513.9 million in Q4 2016. Income from continuing operations before interest, debt-extinguishment loss and taxes was $90.9 million versus $67.0 million. Teleflex recorded a net loss of $42.7 million, or $0.91 diluted loss per share, compared with net income of $61.1 million, or $1.30 diluted EPS, in Q4 2016; the annual filing attributes the 2017 tax burden largely to tax reform.
Operating cash flow improved by $15.7 million, but free cash flow was slightly lower as capital expenditures increased to $70.9 million. Investing cash outflow was $1.83 billion, mainly acquisition payments; financing cash inflow was $1.14 billion, mainly net borrowing. Cash fell by $210.2 million over the year. Management said operating cash flow, cash, the revolving facility and receivables securitization facility should fund operating needs, capital expenditures and debt obligations for the foreseeable future.
Material changes versus the prior year
- Teleflex acquired Vascular Solutions for approximately $975.5 million in February 2017 and NeoTract for approximately $975.2 million in October 2017. NeoTract consideration included $251.0 million of estimated contingent consideration, with potential payments of up to $375 million tied to sales goals through 2020.
- Acquisitions and related financing drove debt sharply higher. Teleflex entered a $750 million term-loan and $1.0 billion revolving-credit facility, issued $500 million of 4.625% notes due 2027, and repaid or settled its convertible notes at maturity.
- Goodwill rose to $2.24 billion from $1.28 billion and intangible assets, net, to $2.38 billion from $1.09 billion, primarily reflecting acquisitions. No goodwill impairment was recorded in 2017.
- The company reorganized its reportable segments following the Vascular Solutions acquisition; comparative segment results were restated. Interventional North America revenue rose to $220.6 million from $82.4 million, largely due to Vascular Solutions.
- Dividend per share remained $1.36 for the year. The board declared a further $0.34 quarterly dividend in February 2018.
Outlook, commentary, risks and unusual items
- Guidance: The filing does not provide a clear numerical revenue or earnings forecast for 2018. Management described goals of sustainable profitable growth, market-share gains, product development and operating-efficiency improvements.
- Restructuring: Management estimated $76–$90 million in annual pre-tax savings across ongoing programs once fully implemented, with $31–$45 million of incremental savings still estimated after year-end 2017. Programs include Vascular Solutions integration, European administrative centralization and manufacturing-footprint changes; savings and timing estimates remain subject to change.
- Tax uncertainty: TCJA accounting amounts were provisional and could change materially. Teleflex expected incremental U.S. tax exposure under the new GILTI rules but had not yet estimated the effect; it did not expect to be subject to BEAT in 2018.
- Acquisition and execution risks: Integration, realization of synergies, contingent-consideration payments, product acceptance and regulatory approvals may affect results. The $272.1 million contingent-consideration liability is remeasured through SG&A and may cause earnings volatility.
- Other key risks: Medical-device regulation and product liability; reimbursement and pricing pressure; competition; foreign-exchange and commodity-price movements; distributor inventory changes; manufacturing or supply interruptions; cyber and information-system disruptions; and delayed collections from public healthcare customers in Greece, Italy, Portugal and Spain. Receivables from those four countries totaled $49.1 million at year-end, with average days outstanding of 154.
- Unusual items: 2017 included a $10.4 million acquired-inventory step-up charge, a $5.6 million debt-extinguishment loss and a $6.4 million favorable insurance-related legal ruling in Anesthesia North America. A February 2018 settlement with a former Chinese distributor involved return of inventory for $11.9 million and cancellation of $9.3 million in receivables; the company recorded a $3.6 million provision.
Important facts for investors to verify
- Underlying organic revenue growth and margins, separating acquisition contributions, currency effects, pricing and distributor-to-direct conversions.
- Progress integrating Vascular Solutions and NeoTract, UroLift sales performance, and the likelihood and timing of up to $375 million in NeoTract milestone payments.
- Debt reduction, interest costs, covenant headroom and liquidity after the acquisitions; year-end net debt was $1.94 billion and net debt to total capital was 44.3%.
- Final accounting for the TCJA, the eight-year deemed-repatriation tax payments, and the company’s eventual GILTI policy and tax impact.
- Realization of restructuring savings against remaining charges, cash outlays and capital expenditures.
- Customer collections and the outcome of remaining legal, regulatory, product-liability and environmental matters. The auditor issued unqualified opinions on the financial statements and internal control, but Vascular Solutions and NeoTract were excluded from the internal-control assessment and audit.