Teleflex Incorporated (NYSE: TFX) — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also provides unaudited quarterly data, including fourth-quarter results. Teleflex is a global medical-technology company focused mainly on single-use devices for critical-care and surgical procedures. In 2019 it reported four segments: Americas, EMEA, Asia and OEM.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net revenue | $2,595.4 million | $2,448.4 million | +6.0% |
| Gross profit / margin | $1,491.6 million / 57.5% | $1,384.4 million / 56.5% | Margin +1.0 percentage point |
| Operating income before interest, debt-extinguishment loss and taxes | $427.3 million | $321.7 million | +32.8% |
| Income from continuing operations | $462.0 million | $196.4 million | +135.2% |
| Net income | $461.5 million | $200.8 million | +129.8% |
| Diluted EPS from continuing operations | $9.81 | $4.20 | +133.6% |
| Operating cash flow | $437.1 million | $435.1 million | +$2.0 million |
| Free cash flow | $334.4 million | $354.3 million | -$19.9 million |
Revenue growth was primarily driven by $142.8 million of higher existing-product sales volume and increased new-product sales, partly offset by $46.8 million of unfavorable foreign-exchange effects. Gross-margin improvement reflected product mix, volume and cost initiatives, partly offset by tariffs and higher logistics and distribution costs. SG&A rose to $934.4 million from $878.7 million, and R&D rose to $113.9 million from $106.2 million.
The sharp increase in reported earnings was substantially affected by tax items: the company recorded a $122.1 million income tax benefit in 2019, including a $129 million benefit from a non-U.S. legal-entity restructuring. The effective tax rate was negative 35.9%, versus 10.6% in 2018. Earnings therefore should not be viewed as solely reflecting operating improvement.
Fourth-quarter results
Q4 2019 revenue was $681.0 million, compared with $641.6 million in Q4 2018. Income from continuing operations was $107.8 million, versus $87.5 million; diluted EPS from continuing operations was $2.28, versus $1.87. Q4 2019 included an estimated $7 million revenue impact from the suspension of a contract sterilizer’s Smyrna, Georgia facility.
Segments and material changes
- Americas: Revenue $1,492.3 million, up 10.4%; operating profit $319.9 million, up 25.1%. Higher existing-product volume and new-product sales were key drivers.
- EMEA: Revenue $588.1 million, down 2.6%; operating profit $94.4 million, down 11.0%. Foreign exchange reduced revenue by $31.1 million; higher EU MDR and IT costs also weighed on profit.
- Asia: Revenue $294.3 million, up 2.6%; operating profit $73.1 million, down 6.5%. Growth was offset by currency effects, higher operating costs and China tariffs.
- OEM: Revenue $220.7 million, up 7.2%; operating profit $58.0 million, up 15.3%, supported by volume and favorable product mix.
Management changed its segment reporting in 2019 to focus on geographic location for non-OEM operations. The 2019 and 2018 segment comparisons are presented on the revised basis.
Cash, debt and liquidity
- Cash and cash equivalents were $301.1 million at year-end, including $231.4 million held by non-U.S. subsidiaries, compared with $357.2 million a year earlier.
- Total debt was $1.923 billion and net debt was $1.622 billion, down from $2.177 billion and $1.819 billion, respectively. Net debt to total capital declined to 35.2% from 41.7%.
- Cash from operations was nearly flat. Higher receivables and inventory, partly related to fourth-quarter sales, safety stock and growth, were working-capital headwinds. Capital expenditure increased to $102.7 million from $80.8 million.
- Financing cash outflow was $418.8 million, including $253.5 million net debt reduction, $112.1 million of contingent-consideration payments and $62.8 million in dividends.
- The company prepaid $250 million of 5.25% notes due 2024 in November 2019, recording an $8.8 million extinguishment loss. It had $300 million drawn under its $1.0 billion revolving facility and $50 million outstanding under its receivables securitization facility. It reported compliance with credit-agreement and note covenants at year-end.
- Management stated that operating cash flow, cash, the revolving facility and securitization facility should fund operating needs, capital expenditures and debt obligations for the next 12 months and foreseeable future.
Outlook, risks and unusual items
- No general 2020 revenue or earnings guidance is provided in the supplied filing text. Teleflex estimated that the sterilization disruption would reduce 2020 revenue by $5 million to $7 million, with further downside possible if alternate sterilization capacity is delayed or constrained.
- The Smyrna sterilization facility suspension disrupted supply of some surgical, intermittent-catheter and OEM products. The company secured alternatives but highlighted ongoing capacity and regulatory risks related to ethylene oxide sterilization.
- COVID-19 was identified as an emerging risk in early 2020, with potential to disrupt employees, suppliers, customers and operations. The filing does not quantify a financial impact.
- Restructuring plans involve estimated total charges of $205 million to $255 million and expected annual pretax savings of $69 million to $80 million when completed; these estimates remain subject to execution and other uncertainties. The 2019 and 2018 footprint plans are expected to be substantially completed in 2022 and 2024, respectively.
- Contingent consideration liabilities were $219.9 million at year-end, mostly tied to acquisitions including NeoTract. Their fair values depend on estimates of future revenue, probabilities of payment and discount rates; remeasurement affected 2019 operating results. Most of the $148.1 million current portion was expected to be paid in Q1 2020 following sales milestones.
- On February 18, 2020, Teleflex acquired IWG High Performance Conductors for $260 million, financed with revolving-credit borrowings.
- Other key risks include medical-device regulation and EU MDR compliance, reimbursement and pricing pressure, product liability and recalls, competition and product development, foreign currency and commodity costs, acquisition integration, and substantial indebtedness. A 10% decline in the dollar/euro rate from the cross-currency swaps’ inception rates could require approximately $75 million of net settlement payments at expiry or earlier termination.
Most important facts for investors to verify
- How much of the 2019 earnings increase is sustainable operating performance versus the $129 million tax benefit and other discrete tax effects.
- Whether reported growth and margin gains persist, particularly in Americas, and whether EMEA and Asia operating-profit declines stabilize.
- Whether alternate sterilization capacity prevents additional supply disruption and whether the projected $5 million to $7 million 2020 revenue impact proves accurate.
- Actual contingent-consideration payments and revaluations, including NeoTract milestones, and their effect on cash flow and earnings.
- Progress, cash costs and realized savings from restructuring, along with post-acquisition integration and financing of the IWG acquisition.
- Debt repayment capacity, covenant headroom, working-capital trends and the availability of cash held outside the U.S.