TRINITY BIOTECH PLC annual report, Q4 FY2018

Trinity Biotech plc: FY2018 Form 20-F Summary

Business context and reporting period

Trinity Biotech develops, manufactures and markets approximately 850 diagnostic products for clinical laboratories and point-of-care use, including infectious-disease, HIV, diabetes, haemoglobin, autoimmune and clinical-chemistry tests. It also operates an autoimmune reference laboratory and supplies life-science research materials through Fitzgerald Industries. Products are sold in approximately 100 countries through direct sales teams, distributors and strategic partners.

This is an annual report for the fiscal year ended December 31, 2018, not a quarterly Q4 filing. Financial statements are presented in U.S. dollars and prepared under IFRS as issued by the IASB and adopted by the EU. ADSs trade on Nasdaq under the symbol TRIB; each ADS represents four Class A ordinary shares. The company had 96.2 million Class A ordinary shares outstanding at year-end.

Key financial metrics

US$ millions, except per-share data	2018	2017	Change
Revenue	97.0	99.1	-2.1%
Gross profit	41.4	41.9	-1.1%
Gross margin	42.7%	42.3%	+0.4 pts
Operating loss	(20.2)	(37.7)	Improved
Net financing expense	(3.0)	(2.2)	Higher expense
Loss from continuing operations	(22.7)	(38.7)	Improved
Net loss, including discontinued operations	(22.1)	(40.3)	Improved
Basic loss per ADS	$(1.06)	$(1.86)	Improved
Cash generated from operations	6.0	9.4	Lower
Net cash generated by operating activities	7.2	9.3	Lower

Reported net loss margin was approximately -22.8%. Excluding the US$26.9 million impairment and inventory-provisioning charge, management reported continuing-operations operating profit of US$6.7 million versus US$4.1 million in 2017, and profit of US$4.3 million versus US$3.1 million after tax.

Revenue and operating performance

Clinical laboratory revenue was US$71.6 million, down 2.4%, primarily because infectious-disease revenue fell 14% and a significant U.S. Lyme-disease contract was lost. HbA1c revenue increased 4%.
Point-of-care revenue was US$14.8 million, down 11.6%. Uni-Gold HIV revenue declined approximately US$1.9 million, mainly because of overstocking and erratic ordering in an African market.
Laboratory services revenue increased 17.6% to US$10.6 million, supported by stronger autoimmune testing demand.
Revenue by customer geography was US$57.6 million in the Americas, US$29.5 million in Asia/Africa and US$10.0 million in Europe. Europe declined 19.7%, while Asia/Africa increased 8.6%.
Cost savings and lower depreciation supported the gross-margin improvement. R&D expense declined 5.1% to US$5.4 million, while reported SG&A excluding impairment declined 8.6% to US$29.5 million.

Cash flow, liquidity and capital structure

Cash and cash equivalents were US$30.3 million at December 31, 2018, compared with US$23.6 million of cash plus US$34.0 million of short-term investments at year-end 2017. The reduction in total liquid resources was approximately US$27.3 million.
Net cash used in investing activities was US$17.4 million, including US$9.9 million of capitalized intangible-development expenditure and US$7.5 million of property, plant and equipment additions.
Net cash used in financing activities was US$16.9 million, including US$12.0 million to repurchase exchangeable notes and US$4.5 million of note interest.
Year-end net current assets were US$69.1 million, and management stated that existing cash and operating cash flow should fund operations for at least the next 12 months.
Carrying-value borrowings were approximately US$82.3 million, primarily US$81.4 million of exchangeable notes and US$1.0 million of finance leases. The notes have a nominal principal amount of US$99.9 million, bear interest at 4%, mature in 2045 and may first be put to the company on April 1, 2022.
Total contractual obligations, including exchangeable-note principal and interest and lease commitments, were approximately US$232.5 million. Operating-lease commitments were US$25.7 million.
No dividends were declared or paid for 2018. The company repurchased 107,740 ordinary shares during the year for approximately US$139,000.

Material changes versus the prior comparable period

Revenue decreased 2.1%, but gross margin increased from 42.3% to 42.7% and adjusted operating profitability improved because of cost reductions and lower recurring expenses.
The annual impairment charge declined to US$26.9 million from US$41.8 million in 2017. The 2018 charge included US$19.2 million for goodwill and intangible assets, US$6.1 million for property, plant and equipment and US$1.6 million for prepayments.
The 2018 impairment review identified a total estimated impairment loss of US$57.8 million across six cash-generating units, but only US$26.9 million was recorded because certain units had insufficient assets available for further write-down.
Cash generation from operations weakened despite the lower reported operating loss, mainly because receivables and payables produced a larger working-capital cash outflow.
The company repurchased US$15.1 million nominal amount of exchangeable notes for US$12.0 million, reducing the note carrying value from US$93.0 million to US$81.4 million.
IFRS 15 and IFRS 9 were adopted in 2018. IFRS 15 did not materially change revenue timing; IFRS 9 affected presentation of fair-value movements on exchangeable-note options.

Guidance, outlook, management commentary and unusual items

Management expects to continue funding existing operations, product development and capital commitments from cash resources and operating cash flow for more than 12 months, but notes that future liquidity depends on revenue growth, new-product launches, working-capital management, capital spending and development costs.
Key development programs include the Premier HbA1c platform, an HIV screening rapid test, a G6PD test and an autoimmune smart reader. Estimated completion costs disclosed for selected projects totaled approximately US$5.1 million, with completion dates ranging from 2019 to 2021.
The company expects a U.S. introduction of Premier Resolution in 2019, subject to FDA approval. A new filing for the ultra² GeneSys and Resolution indications was expected in the second quarter of 2019 after the FDA disagreed with the company’s prior clearance assessment and required withdrawal of the product from the market.
Management disclosed no material post-balance-sheet events affecting future operations, results or financial condition.
Discontinued cardiac point-of-care operations produced a US$0.6 million profit in 2018, primarily from recovery of Swedish taxes, compared with a US$1.6 million loss in 2017. The operation generated no revenue.
Major risks include declining infectious-disease and HIV demand in certain markets, distributor dependence, pricing pressure, FDA and other regulatory approvals, product recalls, clinical-development delays, competition, foreign-exchange volatility, impairment of goodwill and development assets, and the ability to refinance or repurchase exchangeable notes.
An ongoing tax audit in one jurisdiction could result in a different final tax outcome; the company has not disclosed the related provision because doing so could prejudice its interests.
The company has product-liability insurance of up to approximately US$7.4 million per accident and in the annual aggregate, but states that coverage may not be sufficient for all potential claims.
The company’s independent auditor, Grant Thornton, issued unqualified opinions on the 2018 financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective at year-end.

Most important facts for investors to verify

Whether recurring operating cash flow can improve from the US$6.0 million generated in 2018 and support approximately US$17.4 million of annual investing cash needs.
The timing and funding plan for the April 1, 2022 put option on the exchangeable notes, including the potential US$99.9 million par-value repurchase obligation.
Revenue stabilization in point-of-care HIV testing, U.S. infectious diseases and Lyme products, and the sustainability of autoimmune laboratory-services growth.
FDA clearance and commercialization timelines for Premier Resolution, TrinScreen and the refiled ultra² products.
The sensitivity of future impairment charges to revenue growth, discount rates and market capitalization; the filing estimates an additional US$3.7 million impairment from a 10% change in the discount rate.
The collectability of receivables, including the US$4.2 million allowance and the high loss rate on receivables more than 120 days past due.
The impact of IFRS 16 adoption in 2019, given US$25.7 million of operating-lease commitments and management’s statement that the exact financial impact was not yet known.
Potential dilution from approximately 10.9 million outstanding options and exchangeable-note conversion rights, as well as related-party leases and executive-service arrangements.