Teleflex Incorporated — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone fourth-quarter report; fourth-quarter figures are noted separately. Teleflex is a global medical-technology company focused primarily on single-use devices for critical-care and surgical procedures.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net revenues | $1.868 billion | $1.810 billion | +3.2% |
| Gross profit / margin | $996.2 million / 53.3% | $944.4 million / 52.2% | Margin +1.1 percentage points |
| Income from continuing operations | $237.7 million | $236.8 million | +0.4% |
| Net income attributable to common shareholders | $237.4 million | $244.9 million | -3.1% |
| Diluted EPS from continuing operations | $4.98 | $4.91 | +1.4% |
| Operating cash flow from continuing operations | $410.6 million | $303.4 million | +$107.2 million |
| Free cash flow | $357.5 million | $242.0 million | +$115.5 million |
Gross-margin improvement reflected higher sales of higher-margin products and manufacturing-cost savings. Operating cash flow benefited from improved operating results, working-capital movements and lower income-tax payments. Capital expenditures were $53.1 million. Dividends paid were $59.0 million; the annual dividend was $1.36 per share.
At year-end, cash and cash equivalents were $543.8 million, total debt was $1.046 billion and net debt was $502.3 million. Net debt to total capital was 19.0%, versus 27.2% in 2015. Cash included $527.5 million held at foreign subsidiaries. Current assets were $1.183 billion and current liabilities were $427.6 million.
Fourth quarter: Revenue was $513.9 million versus $484.5 million in Q4 2015. Income from continuing operations was $60.9 million versus $90.8 million. The filing presents quarterly results but does not provide a clear standalone explanation for the full year-over-year quarterly earnings difference.
Material changes versus the prior period
- Revenue growth in 2016 came mainly from existing-product sales volumes (+$37.3 million) and new products (+$24.2 million), partly offset by unfavorable currency movements. EMEA revenue declined 0.7%, and EMEA operating profit fell 8.6%; other reportable segments increased revenue.
- Gross margin rose to 53.3% from 52.2%. SG&A declined $5.7 million, partly due to the 2016 suspension of the medical-device excise tax. R&D spending increased to $58.6 million from $52.1 million.
- Reported earnings included $59.2 million of restructuring and impairment charges, including a $41.0 million pre-tax impairment of Semprus in-process R&D after Teleflex concluded further development was not commercially reasonable. The company also recorded a $19.3 million loss on extinguishment of debt.
- Interest expense fell to $54.9 million from $61.3 million, primarily reflecting lower average debt and lower borrowing costs. The effective tax rate was unusually low at 3.3%, versus 3.2% in 2015, with tax benefits from filings, audit and reserve developments, statute expirations and the Semprus impairment.
Outlook, management commentary, risks and contingencies
- The filing provides no consolidated 2017 revenue or earnings guidance. For the China distributor transition, Teleflex estimated 2017 Asia-segment revenue could decline $4 million to $8 million and operating profit $6 million to $9 million versus 2016, while warning that the effects were difficult to predict.
- Management expects the 2016 manufacturing-footprint plan to generate annualized savings of $12 million to $16 million once fully implemented, with savings beginning in 2017. The plan is estimated to incur $34 million to $44 million in pre-tax charges and $17 million to $19 million in capital expenditures. Separate 2016 restructuring programs are expected to yield annualized savings of $6.9 million to $8.5 million.
- Teleflex acquired Vascular Solutions on February 17, 2017, after year-end, for approximately $1.0 billion in cash. Management expects the deal to accelerate vascular and interventional-access growth and expand cross-selling. It was financed with borrowings under a new $750 million term loan and an increased $1.0 billion revolving facility, both maturing in 2022. Accordingly, year-end debt and liquidity figures do not reflect the acquisition financing.
- Convertible notes due August 2017 were substantially exchanged or converted; $44.3 million principal remained outstanding as of February 13, 2017. The company intended to repay it with cash and revolving-credit availability.
- Key risks include distributor inventory destocking (which affected U.S. purchases in Q3 2016), pricing and reimbursement pressure, foreign-exchange and raw-material cost changes, regulatory and product-liability exposure, acquisition integration, restructuring execution, and substantial debt and covenant restrictions.
- Receivables from Greece, Italy, Portugal and Spain were $51.1 million at year-end, with average collection time of 182 days. Teleflex cautioned that worsening economic conditions could increase credit losses or delay collections.
- A legacy product-liability case involving a divested marine business included a $23.0 million punitive-damages award affirmed by the Louisiana Court of Appeal. The Louisiana Supreme Court granted Teleflex’s review application in January 2017; the company stated uncovered liability would not exceed $10.0 million. General litigation accruals were $2.5 million at year-end.
- The independent auditor reported that the financial statements were fairly presented under U.S. GAAP and that internal control over financial reporting was effective.
Important facts for investors to verify
- Whether the Vascular Solutions acquisition delivers the expected growth and how its roughly $1.0 billion purchase price and financing affect leverage, interest expense and cash generation.
- Actual results of the China distributor transition versus the disclosed 2017 Asia-segment decline estimates.
- Progress, costs, timing and realized savings from the 2014 and 2016 footprint realignment and other restructuring plans, including the revised 2020 completion timetable for the 2014 plan.
- Collections and credit-loss allowances for European public-healthcare customers, and whether prolonged receivable days create additional cash-flow or impairment pressure.
- Resolution and potential exposure in the Louisiana litigation, along with other product-liability and regulatory matters.
- How much of 2016 earnings and cash-flow improvement is recurring, given the Semprus impairment, debt-extinguishment loss, unusually low tax rate and working-capital effects.