Note 5 - Restructuring and Impairment Charges (Credits)
Note 6 - Inventories, Net
Note 7 - Goodwill and Other Intangible Assets, Net
Note 8 - Financial Instruments
Note 9 - Fair Value Measurement
Note 10 - Shareholders' Equity
Note 11 - Taxes on Income From Continuing Operations
Note 12 - Pension and Other Postretirement Benefits
Note 13 - Commitments and Contingent Liabilities
Note 14 - Segment Information
Note 15 - Condensed Consolidating Guarantor Financial Information
Note 16 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Exhibits
EX-31.1
tfx-2018930xex311.htm
EX-31.2
tfx-2018930xex312.htm
EX-32.1
tfx-2018930xex321.htm
EX-32.2
tfx-2018930xex322.htm
Teleflex Earnings 2018-09-30
TFX 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 tfx-2018930x10q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 1-5353
TELEFLEX INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware
23-1147939
(State or other jurisdiction of
incorporation or organization)
(I.R.S. employer
identification no.)
550 E. Swedesford Rd., Suite 400, Wayne, PA
19087
(Address of principal executive offices)
(Zip Code)
(610) 225-6800
(Registrant’s telephone number, including area code)
(None)
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The registrant had 45,982,120 shares of common stock, par value $1.00 per share, outstanding as of October 30, 2018.
(Dollars and shares in thousands, except per share)
Net revenues
$
609,672
$
534,703
$
1,806,768
$
1,551,197
Cost of goods sold
267,099
239,476
788,147
710,126
Gross profit
342,573
295,227
1,018,621
841,071
Selling, general and administrative expenses
214,894
163,771
660,148
486,674
Research and development expenses
26,365
21,194
78,410
59,299
Restructuring and impairment charges (credits)
19,209
(92
)
77,625
13,723
Income from continuing operations before interest, loss on extinguishment of debt and taxes
82,105
110,354
202,438
281,375
Interest expense
27,171
21,264
79,763
58,884
Interest income
(320
)
(286
)
(776
)
(616
)
Loss on extinguishment of debt
—
—
—
5,593
Income from continuing operations before taxes
55,254
89,376
123,451
217,514
(Benefit) taxes on income from continuing operations
(1,286
)
9,978
14,532
19,404
Income from continuing operations
56,540
79,398
108,919
198,110
Operating income (loss) from discontinued operations
(83
)
(3,749
)
1,246
(4,597
)
Tax (benefit) on income (loss) from discontinued operations
(67
)
(1,366
)
(47
)
(1,675
)
Income (loss) from discontinued operations
(16
)
(2,383
)
1,293
(2,922
)
Net income
$
56,524
$
77,015
$
110,212
$
195,188
Earnings per share:
Basic:
Income from continuing operations
$
1.23
$
1.76
$
2.39
$
4.40
Income (loss) from discontinued operations
—
(0.05
)
0.03
(0.06
)
Net income
$
1.23
$
1.71
$
2.42
$
4.34
Diluted:
Income from continuing operations
$
1.21
$
1.70
$
2.33
$
4.24
Income (loss) from discontinued operations
—
(0.05
)
0.03
(0.06
)
Net income
$
1.21
$
1.65
$
2.36
$
4.18
Dividends per share
$
0.34
$
0.34
$
1.02
$
1.02
Weighted average common shares outstanding
Basic
45,851
45,035
45,587
44,975
Diluted
46,815
46,587
46,785
46,673
The accompanying notes are an integral part of the condensed consolidated financial statements.
2
TELEFLEX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, 2018
October 1, 2017
September 30, 2018
October 1, 2017
(Dollars in thousands)
Net income
$
56,524
$
77,015
$
110,212
$
195,188
Other comprehensive (loss) income, net of tax:
Foreign currency translation, net of tax of $(3,505), $(8,429), $0, and $(26,910), for the three and nine months periods, respectively
14,387
43,345
(30,130
)
156,012
Pension and other postretirement benefit plans adjustment, net of tax of $(363), $(479), $(1,253), and $(1,476) for the three and nine month period, respectively
1,215
743
4,111
2,337
Derivatives qualifying as hedges, net of tax of $(308), $141, $(419) and $(1,029) for the three and nine month period, respectively
1,651
(243
)
1,943
4,918
Other comprehensive (loss) income, net of tax:
17,253
43,845
(24,076
)
163,267
Comprehensive income
$
73,777
$
120,860
$
86,136
$
358,455
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
TELEFLEX INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 2018
December 31, 2017
(Dollars in thousands)
ASSETS
Current assets
Cash and cash equivalents
$
356,276
$
333,558
Accounts receivable, net
374,341
345,875
Inventories, net
411,066
395,744
Prepaid expenses and other current assets
55,173
47,882
Prepaid taxes
40,715
5,748
Assets held for sale
3,239
—
Total current assets
1,240,810
1,128,807
Property, plant and equipment, net
421,265
382,999
Goodwill
2,223,429
2,235,592
Intangible assets, net
2,262,818
2,383,748
Deferred tax assets
2,305
3,810
Other assets
50,093
46,536
Total assets
$
6,200,720
$
6,181,492
LIABILITIES AND EQUITY
Current liabilities
Current borrowings
$
77,250
$
86,625
Accounts payable
97,628
92,027
Accrued expenses
105,584
96,853
Current portion of contingent consideration
102,664
74,224
Payroll and benefit-related liabilities
94,132
107,415
Accrued interest
20,623
6,165
Income taxes payable
13,347
11,514
Other current liabilities
38,065
9,053
Total current liabilities
549,293
483,876
Long-term borrowings
2,075,834
2,162,927
Deferred tax liabilities
606,082
603,676
Pension and postretirement benefit liabilities
99,350
121,410
Noncurrent liability for uncertain tax positions
13,170
12,296
Noncurrent contingent consideration
141,910
197,912
Other liabilities
208,016
168,864
Total liabilities
3,693,655
3,750,961
Commitments and contingencies
Total shareholders' equity
2,507,065
2,430,531
Total liabilities and shareholders' equity
$
6,200,720
$
6,181,492
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
TELEFLEX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30, 2018
October 1, 2017
(Dollars in thousands)
Cash flows from operating activities of continuing operations:
Net income
$
110,212
$
195,188
Adjustments to reconcile net income to net cash provided by operating activities:
(Income) loss from discontinued operations
(1,293
)
2,922
Depreciation expense
44,517
42,390
Amortization expense of intangible assets
111,974
63,976
Amortization expense of deferred financing costs and debt discount
3,548
3,940
Loss on extinguishment of debt
—
5,593
Fair value step up of acquired inventory sold
—
10,442
Changes in contingent consideration
47,344
(109
)
Impairment of long-lived assets
19,110
—
Stock-based compensation
16,469
14,519
Deferred income taxes, net
8,664
(15,682
)
Other
(13,028
)
(13,559
)
Changes in operating assets and liabilities, net of effects of acquisitions and disposals:
Accounts receivable
(29,830
)
6,428
Inventories
(19,665
)
(20,257
)
Prepaid expenses and other current assets
(6,468
)
(4,009
)
Accounts payable, accrued expenses and other liabilities
54,581
24,128
Income taxes receivable and payable, net
(43,191
)
3,798
Net cash provided by operating activities from continuing operations
302,944
319,708
Cash flows from investing activities of continuing operations:
Expenditures for property, plant and equipment
(55,751
)
(53,977
)
Proceeds from sale of assets
—
6,332
Payments for businesses and intangibles acquired, net of cash acquired
(22,550
)
(1,010,711
)
Net cash used in investing activities from continuing operations
(78,301
)
(1,058,356
)
Cash flows from financing activities of continuing operations:
Proceeds from new borrowings
—
1,963,500
Reduction in borrowings
(98,500
)
(747,576
)
Debt extinguishment, issuance and amendment fees
(188
)
(19,114
)
Net proceeds from share based compensation plans and the related tax impacts
18,666
4,739
Payments for contingent consideration
(73,152
)
(245
)
Dividends paid
(46,526
)
(45,905
)
Net cash provided by (used in) financing activities from continuing operations
(199,700
)
1,155,399
Cash flows from discontinued operations:
Net cash used in operating activities
(701
)
(1,140
)
Net cash used in discontinued operations
(701
)
(1,140
)
Effect of exchange rate changes on cash and cash equivalents
(1,524
)
58,173
Net increase in cash and cash equivalents
22,718
473,784
Cash and cash equivalents at the beginning of the period
333,558
543,789
Cash and cash equivalents at the end of the period
$
356,276
$
1,017,573
Non cash investing activities of continuing operations:
Property, plant and equipment additions due to build-to-suit lease transaction
$
28,147
$
—
Non cash financing activities of continuing operations:
Settlement and exchange of convertible notes with common or treasury stock
$
—
$
53,207
Acquisition of treasury stock associated with settlement and exchange of convertible note hedge and warrant agreements
$
56,075
$
127,158
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
TELEFLEX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
Common Stock
Additional
Paid In
Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock
Total
Shares
Dollars
Shares
Dollars
(Dollars and shares in thousands, except per share)
Balance at December 31, 2017
46,871
$
46,871
$
591,721
$
2,285,886
$
(265,091
)
1,704
$
(228,856
)
$
2,430,531
Cumulative effect adjustment resulting from the adoption of new accounting standards
3,076
3,076
Net income
110,212
110,212
Cash dividends ($1.02 per share)
(46,526
)
(46,526
)
Other comprehensive loss
(24,076
)
(24,076
)
Settlements of warrants
(56,115
)
(412
)
56,075
(40
)
Shares issued under compensation plans
321
321
29,315
(47
)
3,384
33,020
Deferred compensation
398
(10
)
470
868
Balance as of September 30, 2018
47,192
$
47,192
$
565,319
$
2,352,648
$
(289,167
)
1,235
$
(168,927
)
$
2,507,065
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Basis of presentation
The accompanying unaudited condensed consolidated financial statements of Teleflex Incorporated and its subsidiaries (“we,” “us,” “our,” “Teleflex” and the “Company”) are prepared on the same basis as its annual consolidated financial statements.
In the opinion of management, the financial statements reflect all adjustments, which are of a normal recurring nature, necessary for the fair presentation of financial statements for interim periods in accordance with accounting principles generally accepted in the United States of America ("GAAP") and with Rule 10-01 of Securities and Exchange Commission ("SEC") Regulation S-X, which sets forth the instructions for financial statements included in Form 10-Q. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the periods reported are not necessarily indicative of those that may be expected for a full year.
In accordance with applicable accounting standards and as permitted by Rule 10-01 of Regulation S-X, the accompanying condensed consolidated financial statements do not include all of the information and footnote disclosures that are required to be included in the Company's annual consolidated financial statements. Accordingly, the Company's quarterly condensed consolidated financial statements should be read in conjunction with the Company's consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2017.
Note 2 — New accounting standards
In May 2014, the Financial Accounting Standards Board ("FASB"), in a joint effort with the International Accounting Standards Board ("IASB"), issued new accounting guidance to clarify the principles for recognizing revenue. This new guidance, as amended by additional guidance issued in 2015 and 2016, is encompassed in FASB Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”) and is designed to enhance the comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets, and affects any entity that enters into contracts with customers or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards. The new guidance establishes principles for reporting information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity's contracts with customers. The core principle of the new guidance is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The Company adopted the new standard on January 1, 2018, applying the modified retrospective method to all of its contracts; as a result, the Company recognized the cumulative effect of adopting the guidance as a $1.2 million increase to the Company's opening balance of retained earnings on the adoption date. In addition, in connection with its adoption of the new guidance, the Company reclassified the reserve for product returns from a reduction of receivables to a liability. The reserve for returns and allowances was $4.6 million at September 30, 2018. The adoption of this guidance did not have a material impact on the Company's consolidated results of operations, cash flows and financial position. Additional information and disclosures required by this new standard are contained in Note 3.
In February 2016, the FASB issued guidance that will change the requirements for accounting for leases. Under the new guidance, lessees (including lessees under both leases classified as finance leases, which are to be classified based on criteria similar to that applicable to capital leases under current guidance, and leases classified as operating leases) will recognize a right-to-use asset and a lease liability on the balance sheet, initially measured as the present value of lease payments under the lease. Under current guidance, operating leases are not recognized on the balance sheet. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition approach for leases, subject to an option to elect certain practical expedients. As a result, companies can elect to apply the transition approach either for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements or for leases existing at, or entered into after, the adoption date. The Company is currently evaluating this guidance to determine its impact on the Company’s consolidated results of operations, cash flows and financial position.
7
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
In October 2016, the FASB issued new guidance requiring companies to recognize the income tax effects of intra-entity sales and transfers of assets, other than inventory, in the income statement as income tax expense (or benefit) in the period in which the transfer occurs. Previously, recognition was prohibited until the assets were sold to an outside party or otherwise utilized. The Company adopted the new standard on January 1, 2018 using the modified retrospective method of adoption; as a result, the Company recognized the cumulative effect of adopting the guidance as a $1.8 million increase to the Company's opening balance of retained earnings on the adoption date. The adoption of this guidance did not have a material impact on the Company's consolidated results of operations, cash flows and financial position.
In March 2017, the FASB issued guidance for employers that sponsor defined benefit pension or other postretirement benefit plans. The guidance requires that these employers disaggregate specified components of net periodic pension cost and net periodic postretirement benefit cost (collectively, "net benefit cost"). Specifically, the guidance generally requires employers to present in the income statement the service cost component of net benefit cost in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The Company adopted this guidance on January 1, 2018; the impact was not material to the consolidated financial statements.
In August 2017, the FASB issued guidance with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. The new guidance provides for changes to current designation and measurement guidance for qualifying hedging relationships and to the method of presenting hedge results. In addition, the new guidance includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The new guidance is effective for reporting periods beginning after December 15, 2018, but the guidance permits early adoptions, and the Company adopted the guidance effective October 1, 2018; the adoption did not result in any cumulative-effect adjustments to retained earnings.
In February 2018, the FASB issued new guidance to address a narrow-scope financial reporting issue that arose as a consequence of the Tax Cuts and Jobs Act ("the TCJA"). Existing guidance requires that deferred tax liabilities and assets be adjusted for a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. The guidance is applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income (rather than in net income), such as amounts related to benefit plans and hedging activity. As a result, the tax effects of items within accumulated other comprehensive income (referred to as stranded tax effects) do not reflect the appropriate tax rate. The new guidance permits a reclassification of these amounts from accumulated other comprehensive income to retained earnings, thereby eliminating the stranded tax effects. The new guidance also requires certain disclosures about the stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The new guidance can be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate under the TCJA is recognized. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
From time to time, new accounting guidance is issued by the FASB or other standard setting bodies that is adopted by the Company as of the effective date or, in some cases where early adoption is permitted, in advance of the effective date. The Company has assessed the recently issued guidance that is not yet effective and, unless otherwise indicated above, believes the new guidance will not have a material impact on the its consolidated results of operations, cash flows or financial position.
Note 3 - Net revenues
The Company primarily generates revenue from the sale of medical devices including single use disposable devices and, to a lesser extent, reusable devices, instruments and capital equipment. Revenue is recognized when obligations under the terms of a contract with the Company’s customer are satisfied; this occurs upon the transfer of control of the products. Generally, transfer of control to the customer occurs at the point in time when the Company’s products are shipped from the manufacturing or distribution facility. For the Company’s OEM segment, most revenue is recognized over time because the OEM segment generates revenue from the sale of custom products that have no
8
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
alternative use and the Company has an enforceable right to payment to the extent that performance has been completed. The Company markets and sells products through its direct sales force and distributors to customers within the following end markets: (1) hospitals and healthcare providers; (2) other medical device manufacturers; and (3) home care providers such as pharmacies, which comprised 86%, 10% and 4% of consolidated net revenues, respectively, for the nine months ended September 30, 2018. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. With respect to the custom products sold in the OEM segment, revenue is measured using the units produced output method. Payment is generally due 30 days from the date of invoice.
The Company has made the following accounting policy elections and elected to use certain practical expedients, as permitted by the FASB, in applying ASC 606: (1) the Company accounts for amounts collected from customers for sales and other taxes, net of related amounts remitted to tax authorities; (2) the Company does not adjust the promised amount of consideration for the effects of a significant financing component because, at contract inception, the Company expects the period between the time when the Company transfers a promised good or service to the customer and the time when the customer pays for that good or service will be one year or less; (3) the Company expenses costs to obtain a contract as they are incurred if the expected period of benefit, and therefore the amortization period, is one year or less; (4) the Company accounts for shipping and handling activities that occur after control transfers to the customer as a fulfillment cost rather than an additional promised service; (5) the Company classifies shipping and handling costs within cost of goods sold; and (6) with respect to the OEM segment, the Company has applied the practical expedient to exclude disclosure of remaining performance obligations as the contracts typically have a term of one year or less.
The amount of consideration the Company receives and revenue the Company recognizes varies as a result of changes in customer sales incentives, including discounts and rebates, and returns offered to customers. The estimate of revenue is adjusted upon the earlier of the following events: (i) the most likely amount of consideration expected to be received changes or (ii) the consideration becomes fixed. The Company’s policy is to accept returns only in cases in which the product is defective and covered under the Company’s standard warranty provisions. When the Company gives customers the right to return products, the Company estimates the expected returns based on an analysis of historical experience. The reserve for returns and allowances was $4.6 million and $4.4 million as of September 30, 2018 and October 1, 2017, respectively. In estimating customer rebates, the Company considers the lag time between the point of sale and the payment of the customer’s rebate claim, customer-specific trend analyses, contractual commitments, including stated rebate rates, historical experience with respect to specific customers (as the Company has a history of providing similar rebates on similar products to similar customers) and other relevant information. The reserve for customer incentive programs, including customer rebates, was $17.1 million and $10.2 million at September 30, 2018 and October 1, 2017, respectively. The Company expects the amounts subject to the reserve as of September 30, 2018 to be paid within 90 days subsequent to period-end.
9
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The following table disaggregates revenue by global product category for the three and nine months ended September 30, 2018 and October 1, 2017.
Three Months Ended
Nine Months Ended
September 30, 2018
October 1, 2017
September 30, 2018
October 1, 2017
Revenue by global product category (1) (2)
(Dollars in thousands)
Vascular access
$
142,712
$
133,521
$
427,557
$
396,866
Anesthesia
87,973
87,964
263,202
255,107
Interventional
79,404
69,186
228,262
181,577
Surgical
89,910
85,210
266,049
263,254
Interventional urology
48,995
—
138,969
—
OEM
54,838
48,589
153,286
137,067
Other (3)
105,840
110,233
329,443
317,326
Net revenues
$
609,672
$
534,703
$
1,806,768
$
1,551,197
(1)
The product categories listed above are presented on a global basis; in contrast, the Company’s North American reportable segments generally are defined largely based on the particular products sold by the segments, and its non-North American reportable segments are defined exclusively based on the geographic location of segment operations (with the exception of the Original Equipment and Development Services ("OEM") reportable segment, which operates globally). The Company’s EMEA and Asia reportable segments, as well as its Latin America operating segment, include net revenues from each of the product categories listed above.
(2)
The methodology used to determine the product revenues included within certain of the product categories listed in the table above differs from the methodology used to classify revenues in our reportable segments, including the similarly named North American reportable segments. The differences are due to the fact that segment classification generally is determined based on the call point within the customer's organization from which the purchase order resulting in the sale originated, while the classification of products within the product categories listed in the table above includes all sales of products within the listed product category, regardless of the call point within the customer's organization from which the sale originated.
(3) Other revenues in the table above include revenues related to sales of the Company’s respiratory, urology and cardiac products.
Note 4 — Acquisitions
On October 4, 2018, the Company acquired Essential Medical, Inc., a medical device company that developed the CE marked MANTA Vascular Closure Device, which is designed for closure of large bore arteriotomies and complements the Company's interventional product portfolio. See Note 16 for additional details.
On June 21, 2018, the Company acquired certain assets of QT Vascular LTD ("QT Vascular"), a medical device company that developed and marketed coronary balloon catheters, which complement the Company's interventional product portfolio. The aggregate consideration transferred for the assets, which primarily consisted of intellectual property, was $20.6 million. The acquisition was accounted for as a business combination.
2017 Acquisitions
During 2017, the Company completed several acquisitions; the largest of which were NeoTract, Inc. ("NeoTract") and Vascular Solutions, Inc. ("Vascular Solutions"), which are summarized below. The fair value of the consideration transferred for the 2017 acquisitions was $2.0 billion.
NeoTract
On October 2, 2017, the Company acquired NeoTract, a medical device company that developed and commercialized the UroLift System, a minimally invasive medical device for treating lower urinary tract symptoms due to benign prostatic hyperplasia, or BPH. The Company made initial payments of $725.6 million in cash less a favorable working capital adjustment of $1.4 million. Additionally, the estimated fair value of contingent consideration related to NeoTract sales-based milestones as of September 30, 2018 was $229.4 million. The contingent consideration liability represents the estimated fair value of the Company’s obligations, under the acquisition agreement, to make additional payments of up to $300 million in the aggregate if specified sales goals through the end of 2020 are achieved. The Company made a payment of $75.0 million during 2018 as a result of the achievement of a sales goal for the period from January 1, 2018 to April 30, 2018. NeoTract financial information is primarily presented within the Interventional U
10
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
rology North America operating segment, which is included in the "all other" category in the Company's presentation of segment information.
Vascular Solutions
On February 17, 2017, the Company acquired Vascular Solutions, a medical device company that developed and marketed products for use in minimally invasive coronary and peripheral vascular procedures. The aggregate consideration paid by the Company in connection with the acquisition was $975.5 million.
Pro forma combined financial information
The following unaudited pro forma combined financial information for the three and nine months ended October 1, 2017 gives effect to the Vascular Solutions and NeoTract acquisitions as if they had occurred on January 1, 2016. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have occurred under the ownership and management of the Company.
Three Months Ended
Nine Months Ended
October 1, 2017
October 1, 2017
(Dollars and shares in thousands, except per share)
Net revenue
$
568,437
$
1,660,591
Net income
$
52,909
$
157,249
Basic earnings per common share:
Net income
$
1.17
$
3.50
Diluted earnings per common share:
Net income
$
1.14
$
3.37
Weighted average common shares outstanding:
Basic
45,035
44,975
Diluted
46,587
46,673
The unaudited pro forma combined financial information presented above includes the accounting effects of the Vascular Solutions and NeoTract acquisitions, including, to the extent applicable, amortization charges from acquired intangible assets; adjustments for depreciation of property, plant and equipment; interest expense; and the related tax effects.
Note 5 — Restructuring and impairment charges (credits)
The following tables provide information regarding restructuring and impairment charges (credits) recognized by the Company for the three and nine months ended September 30, 2018 and October 1, 2017:
Three Months Ended September 30, 2018
Termination benefits
Other costs (1)
Total
(Dollars in thousands)
2018 Footprint realignment plan
$
1,119
$
145
$
1,264
Other restructuring programs (2)
468
232
700
Restructuring charges
$
1,587
$
377
$
1,964
Asset impairment charges
—
17,245
17,245
Restructuring and impairment charges
$
1,587
$
17,622
$
19,209
11
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Three Months Ended October 1, 2017
Termination benefits
Other costs (1)
Total
(Dollars in thousands)
Restructuring (credits) charges (3)
$
(554
)
$
462
$
(92
)
Nine Months Ended September 30, 2018
Termination benefits
Other costs (1)
Total
(Dollars in thousands)
2018 Footprint realignment plan
$
53,463
$
275
$
53,738
2016 Footprint realignment plan
2,379
417
2,796
Other restructuring programs (4)
1,318
663
1,981
Restructuring charges
$
57,160
$
1,355
$
58,515
Asset impairment charges
—
19,110
19,110
Restructuring and impairment charges
$
57,160
$
20,465
$
77,625
Nine Months Ended October 1, 2017
Termination benefits
Other costs (1)
Total
(Dollars in thousands)
2017 Vascular Solutions integration program
$
4,534
$
92
$
4,626
2017 EMEA restructuring program
5,822
84
5,906
2016 Footprint realignment plan
1,099
233
1,332
Other restructuring programs (5)
1,352
507
1,859
Restructuring charges
$
12,807
$
916
$
13,723
(1)
Other costs include facility closure, contract termination, and other exit costs.
(2) Other restructuring programs include the 2016 and 2014 Footprint realignment plans, the 2017 Vascular Solutions integration program, the 2017 EMEA restructuring program and the other 2016 restructuring programs.
(3)
Restructuring charges (credits) include activity related to the 2017 Vascular Solutions integration program, the 2017 EMEA restructuring program, the 2016 and 2014 footprint realignment plans, the 2017 Pyng integration program and the other 2016 restructuring programs. The Company committed to the 2017 Pyng integration program, which relates to the integration of Pyng Medical Corp. (“Pyng”) into the Company, during the second quarter of 2017, following the Company’s acquisition of Pyng in April 2017.
(4) Other restructuring programs include the 2014 Footprint realignment plan, the 2017 Vascular Solutions integration program, the 2017 EMEA restructuring program and the other 2016 restructuring programs.
(5) Other restructuring programs include the 2014 Footprint realignment plan, the 2017 Pyng integration program and the other 2016 restructuring programs.
2018 Footprint Realignment Plan
On May 1, 2018, the Company initiated a restructuring plan involving the relocation of certain European manufacturing operations to existing lower-cost locations, the outsourcing of certain of the Company’s European distribution operations and related workforce reductions (the “2018 Footprint realignment plan"). These actions are expected to be substantially completed by the end of 2024. The following table provides a summary of the Company’s cost estimates by major type of expense associated with the 2018 Footprint realignment plan:
Type of expense
Total estimated amount expected to be incurred
Termination benefits
$60 million to $70 million
Other exit costs (1)
$2 million to $4 million
Restructuring charges
$62 million to $74 million
Restructuring related charges (2)
$40 million to $59 million
Total restructuring and restructuring related charges
$102 million to $133 million
12
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
(1)
Includes contract termination, facility closure, employee relocation, equipment relocation and outplacement costs.
(2)
Consists of pre-tax charges related to accelerated depreciation and other costs directly related to the plan, primarily project management costs and costs to transfer manufacturing operations to the new locations, as well as a charge associated with the Company’s exit from the facilities that is expected to be imposed by the taxing authority in the affected jurisdiction. Excluding this tax charge, substantially all of the charges are expected to be recognized within costs of goods sold.
In addition to the restructuring charges shown in the tables above, the Company recorded restructuring related charges with respect to the 2018 Footprint realignment plan of $1.8 million and $2.8 million for the three and nine months ended September 30, 2018, respectively, within cost of goods sold.
As of September 30, 2018, the Company has a restructuring reserve of $51.6 million related to this plan, all of which related to termination benefits.
2016 Footprint Realignment Plan
In 2016, the Company initiated a restructuring plan (the “2016 Footprint realignment plan") involving the relocation of certain manufacturing operations, the relocation and outsourcing of certain distribution operations and a related workforce reduction at certain of the Company's facilities. These actions commenced in the first quarter of 2016 and are expected to be substantially completed by the end of 2018.
In addition to the restructuring charges shown in the tables above, the Company recorded restructuring related charges with respect to the 2016 Footprint realignment plan of $1.7 million and $5.1 million for the three and nine months ended September 30, 2018 and $1.4 million and $5.5 million for the three and nine months ended October 1, 2017, respectively. The majority of these restructuring related charges in both periods constituted accelerated depreciation and other costs arising principally as a result of the transfer of manufacturing operations to new locations.
The Company estimates that it will incur aggregate pre-tax restructuring and restructuring related charges in connection with the 2016 Footprint realignment plan of approximately $43 million. As of September 30, 2018, the Company has incurred aggregate restructuring charges in connection with the 2016 Footprint realignment plan of $17.4 million. Additionally, as of September 30, 2018, the Company has incurred aggregate restructuring related charges of $19.8 million with respect to the 2016 Footprint realignment plan, consisting of accelerated depreciation and certain other costs that principally resulted from the transfer of manufacturing operations to new locations. The restructuring related charges primarily were included in cost of goods sold. As of September 30, 2018, the Company has a restructuring reserve of $5.9 million related to this plan, all of which related to termination benefits.
2014 Footprint Realignment Plan
In 2014, the Company initiated a restructuring plan (“the 2014 Footprint realignment plan”) involving the consolidation of operations and a related reduction in workforce at certain facilities, and the relocation of manufacturing operations from certain higher-cost locations to existing lower-cost locations. These actions commenced in the second quarter 2014 and are expected to be substantially completed by the end of the first half of 2020.
In addition to the restructuring charges set forth in the tables above, the Company recorded restructuring related charges with respect to the 2014 Footprint realignment plan of $0.8 million and $1.8 million for the three and nine months ended September 30, 2018, respectively, and $1.0 million and $3.1 million for the three and nine months ended October 1, 2017, respectively. The majority of these restructuring related charges in both periods constituted accelerated depreciation and other costs arising principally as a result of the transfer of manufacturing operations to new locations.
The Company estimates that it will incur aggregate pre-tax restructuring and restructuring related charges in connection with the 2014 Footprint realignment plan of $46 million to $51 million. As of September 30, 2018, the Company has incurred aggregate restructuring charges of $12.4 million in connection with the 2014 Footprint realignment plan. Additionally, as of September 30, 2018, the Company has incurred aggregate restructuring related charges of $28.7 million related to the 2014 Footprint realignment plan, consisting of accelerated depreciation and certain other costs that principally resulted from the transfer of manufacturing operations from the existing locations to new locations. These restructuring related charges primarily were included in cost of goods sold. As of September 30, 2018, the Company has a restructuring reserve of $3.8 million in connection with the plan, all of which related to termination benefits.
13
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
As the restructuring programs progress, management will reevaluate the estimated expenses and charges set forth above, and may revise its estimates, as appropriate, consistent with GAAP. For additional information related to the Company's restructuring programs, see Note 4 to the Company's consolidated financial statements included in its annual report on Form 10-K for the year ended December 31, 2017.
Restructuring charges (credits) by reportable operating segment, and by all other operating segments in the aggregate, for the three and nine months ended September 30, 2018 and October 1, 2017 are set forth in the following table:
Three Months Ended
Nine Months Ended
September 30, 2018
October 1, 2017
September 30, 2018
October 1, 2017
(Dollars in thousands)
Vascular North America
$
203
$
582
$
725
$
1,663
Interventional North America
(26
)
(228
)
881
4,178
Anesthesia North America
38
220
164
1,031
EMEA
1,520
(632
)
54,310
6,483
All other
229
(34
)
2,435
368
Restructuring charges
$
1,964
$
(92
)
$
58,515
$
13,723
Asset Impairment Charges
During the third quarter 2018, the Company decided to abandon certain intellectual property and other assets associated with products that will be eliminated from the Company's interventional product portfolio. As a result, the Company recognized pre-tax impairment charges of $17.2 million ($9.2 million after tax) for the three months ended September 30, 2018.
Note 6 — Inventories, net
Inventories as of September 30, 2018 and December 31, 2017 consisted of the following:
September 30, 2018
December 31, 2017
(Dollars in thousands)
Raw materials
$
105,600
$
98,451
Work-in-process
65,291
62,381
Finished goods
240,175
234,912
Inventories, net
$
411,066
$
395,744
Note 7 — Goodwill and other intangible assets, net
The following table provides information relating to changes in the carrying amount of goodwill by reportable operating segment, and by all other operating segments in the aggregate, for the nine months ended September 30, 2018:
Vascular North America
Interventional North America
Anesthesia North America
Surgical North America
EMEA
Asia
OEM
All Other
Total
(Dollars in thousands)
December 31, 2017
$
264,869
$
433,049
$
157,289
$
250,912
$
494,548
$
209,200
$
4,883
$
420,842
$
2,235,592
Goodwill related to acquisitions
—
1,027
—
—
(27
)
(9
)
—
(413
)
578
Currency translation adjustment
—
(1,934
)
(634
)
—
(7,778
)
(3,079
)
—
684
(12,741
)
September 30, 2018
$
264,869
$
432,142
$
156,655
$
250,912
$
486,743
$
206,112
$
4,883
$
421,113
$
2,223,429
14
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The Company's gross carrying amount of, and accumulated amortization relating to, intangible assets as of September 30, 2018 and December 31, 2017 were as follows:
Gross Carrying Amount
Accumulated Amortization
September 30, 2018
December 31, 2017
September 30, 2018
December 31, 2017
(Dollars in thousands)
Customer relationships
$
1,020,603
$
1,023,837
$
(314,051
)
$
(281,263
)
In-process research and development
29,377
34,672
—
—
Intellectual property
1,273,503
1,287,487
(305,350
)
(258,580
)
Distribution rights
23,637
23,697
(17,756
)
(16,996
)
Trade names
569,570
571,510
(33,001
)
(22,069
)
Non-compete agreements
23,672
23,429
(7,386
)
(1,976
)
$
2,940,362
$
2,964,632
$
(677,544
)
$
(580,884
)
During the third quarter 2018, the Company recognized a $16.9 million pre-tax ($8.9 million after tax) impairment charge related to the abandonment of certain intellectual property intangible assets. Refer to Note 5 for additional details.
Note 8 — Financial instruments
On October 4, 2018, the Company executed cross-currency interest rate swaps to hedge against the effect of variability in the U.S. dollar to euro exchange rate. See Note 16 for additional details.
Foreign Currency Forward Contracts
The Company uses derivative instruments for risk management purposes. Foreign currency forward contracts designated as cash flow hedges are used to manage exposure related to foreign currency transactions. Foreign currency forward contracts not designated as hedges for accounting purposes are used to manage exposure related to near term foreign currency denominated monetary assets and liabilities. For the three and nine months ended September 30, 2018 the Company recognized a gain related to non-designated foreign currency forward contracts of $1.0 million and $0.3 million, respectively. For the three and nine months ended October 1, 2017, the Company recognized a loss related to non-designated foreign currency forward contracts of $0.6 million and $3.7 million, respectively.
The following table presents the locations in the condensed consolidated balance sheet and fair value of derivative financial instruments as of September 30, 2018 and December 31, 2017:
September 30, 2018
December 31, 2017
Fair Value
(Dollars in thousands)
Asset derivatives:
Designated foreign currency forward contracts
$
2,158
$
914
Non-designated foreign currency forward contracts
175
307
Prepaid expenses and other current assets
$
2,333
$
1,221
Total asset derivatives
$
2,333
$
1,221
Liability derivatives:
Designated foreign currency forward contracts
$
572
$
1,373
Non-designated foreign currency forward contracts
1,064
53
Other current liabilities
$
1,636
$
1,426
Total liability derivatives
$
1,636
$
1,426
15
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The total notional amount for all open foreign currency forward contracts designated as cash flow hedges as of September 30, 2018 and December 31, 2017 was $127.5 million and $88.5 million, respectively. The total notional amount for all open non-designated foreign currency forward contracts as of September 30, 2018 and December 31, 2017 was $124.6 million and $110.6 million, respectively. All open foreign currency forward contracts as of September 30, 2018 have durations of twelve months or less.
There was no ineffectiveness related to the Company’s cash flow hedges during the three and nine months ended September 30, 2018 and October 1, 2017.
Concentration of Credit Risk
Concentrations of credit risk with respect to trade accounts receivable are generally limited due to the Company’s large number of customers and their diversity across many geographic areas. However, a portion of the Company’s trade accounts receivable outside the United States include sales to government-owned or supported healthcare systems in several countries, which are subject to payment delays. Payment is dependent upon the creditworthiness of the healthcare systems in those countries and the financial stability of those countries' economies.
Certain of the Company’s customers, particularly in Greece, Italy, Spain and Portugal, have extended or delayed payments for products and services already provided, raising collectability concerns regarding the Company’s accounts receivable from these customers. As a result, the Company continues to closely monitor the allowance for doubtful accounts with respect to these customers. The following table provides information regarding the Company's allowance for doubtful accounts, the aggregate net current and long-term trade accounts receivable related to customers in Greece, Italy, Spain and Portugal and the percentage of the Company’s total net current and long-term trade accounts receivable represented by these customers' trade accounts receivable at September 30, 2018 and December 31, 2017:
September 30, 2018
December 31, 2017
(Dollars in thousands)
Allowance for doubtful accounts (1)
$
9,657
$
10,255
Current and long-term trade accounts receivable, net in Greece, Italy, Spain and Portugal (2)
$
51,468
$
49,054
Percentage of total net current and long-term trade accounts receivable - Greece, Italy, Spain and Portugal
14.1
%
14.6
%
(1) The current portion of the allowance for doubtful accounts was $3.9 million and $3.5 million as of September 30, 2018 and December 31, 2017, respectively, and was recognized in accounts receivable, net.
(2)
The long-term portion of trade accounts receivable, net from customers in Greece, Italy, Spain and Portugal at September 30, 2018 and December 31, 2017 was $4.2 million and $3.3 million, respectively.
For the nine months ended September 30, 2018 and October 1, 2017, net revenues from customers in Greece, Italy, Spain and Portugal were $107.7 million and $96.0 million, respectively.
Note 9 — Fair value measurement
For a description of the fair value hierarchy, see Note 10 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2017.
The following tables provide information regarding the Company's financial assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017:
Total carrying value at September 30, 2018
Quoted prices in active markets (Level 1)
Significant other observable Inputs (Level 2)
Significant unobservable Inputs (Level 3)
(Dollars in thousands)
Investments in marketable securities
$
9,849
$
9,849
$
—
$
—
Derivative assets
2,333
—
2,333
—
Derivative liabilities
1,636
—
1,636
—
Contingent consideration liabilities
244,574
—
—
244,574
16
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Total carrying value at December 31, 2017
Quoted prices in active markets (Level 1)
Significant other observable Inputs (Level 2)
Significant unobservable Inputs (Level 3)
(Dollars in thousands)
Investments in marketable securities
$
9,045
$
9,045
$
—
$
—
Derivative assets
1,221
—
1,221
—
Derivative liabilities
1,426
—
1,426
—
Contingent consideration liabilities
272,136
—
—
272,136
There were no transfers of financial assets or liabilities reported at fair value among Level 1, Level 2 or Level 3 within the fair value hierarchy during the nine months ended September 30, 2018.
Valuation Techniques
The Company’s financial assets valued based upon Level 1 inputs are comprised of investments in marketable securities held in trust, which are available to satisfy benefit obligations under Company benefit plans and other arrangements. The investment assets of the trust are valued using quoted market prices.
The Company’s financial assets and liabilities valued based upon Level 2 inputs are comprised of foreign currency forward contracts. The Company uses foreign currency forward contracts to manage foreign currency transaction exposure as well as exposure to foreign currency denominated monetary assets and liabilities. The Company measures the fair value of the foreign currency forward contracts by calculating the amount required to enter into offsetting contracts with similar remaining maturities as of the measurement date, based on quoted market prices, and taking into account the creditworthiness of the counterparties.
The Company’s financial liabilities valued based upon Level 3 inputs are comprised of contingent consideration arrangements pertaining to the Company’s acquisitions, which are discussed immediately below.
Contingent consideration
As of September 30, 2018, the Company estimates that contingent consideration payments will occur in 2018 through 2029, and the maximum amount of undiscounted payments the Company could make under contingent consideration arrangements is $325 million. The contingent consideration liabilities, which primarily consist of Company obligations payable if specified net sales goals are achieved, are remeasured to fair value each reporting period using assumptions including estimated revenues (based on internal operational budgets and long-range strategic plans), discount rates, probability of payment and projected payment dates.
The contingent consideration fair value measurement is based on significant inputs not observable in the market and therefore constitute Level 3 inputs within the fair value hierarchy. The contingent consideration liability related to the NeoTract acquisition represents the estimated fair value of the Company's obligations to make additional payments of up to $300 million in the aggregate if specified sales goals are achieved. Specifically, the payments are based on net sales (as defined in the NeoTract acquisition agreement) for the years ended December 31, 2018, 2019 and 2020. The fair value of the contingent consideration related to the NeoTract acquisition was estimated using a Monte Carlo valuation approach, which simulates future revenues during the earn out-period using management's best estimates. The Company determines the value of its other contingent consideration liabilities based on a probability-weighted discounted cash flow analysis. Increases in projected revenues and probabilities of payment may result in significantly higher fair value measurements; decreases in these items may have the opposite effect. Increases in the discount rates may result in significantly lower fair value measurements; decreases in the discount rates may have the opposite effect.
17
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The table below provides additional information regarding the valuation technique and inputs used in determining the fair value of contingent consideration recognized in connection with the NeoTract acquisition.
Valuation Technique
Unobservable Input
Range
Contingent consideration
Monte Carlo simulation
Revenue volatility
24.1
%
Risk free rate
Cost of debt structure
Projected year of payment
2019 - 2021
The following table provides information regarding changes, during the nine months ended September 30, 2018, in Level 3 financial liabilities related to contingent consideration:
Contingent consideration
2018
(Dollars in thousands)
Balance - December 31, 2017
$
272,136
Additions (1)
396
Payments (2)
(75,252
)
Revaluations
47,344
Translation adjustment
(50
)
Balance - September 30, 2018
$
244,574
(1) The Company established a liability related to the estimated fair value of contingent consideration associated with the acquired assets from QT Vascular.
(2) Consists mainly of a $75.0 million payment resulting from the achievement of a sales goal associated with the NeoTract acquisition for the period from January 1, 2018 to April 30, 2018.
Note 10 — Shareholders’ equity
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed in the same manner except that the weighted average number of shares is increased to include dilutive securities. The following table provides a reconciliation of basic to diluted weighted average number of common shares outstanding:
Three Months Ended
Nine Months Ended
September 30, 2018
October 1, 2017
September 30, 2018
October 1, 2017
(Shares in thousands)
Basic
45,851
45,035
45,587
44,975
Dilutive effect of share-based awards
919
934
1,007
873
Dilutive effect of convertible notes and warrants
45
618
191
825
Diluted
46,815
46,587
46,785
46,673
The weighted average number of shares that were antidilutive and therefore excluded from the calculation of earnings per share were 0.7 million for the three and nine months ended September 30, 2018 and 0.6 million for the three and nine months ended October 1, 2017.
In connection with the issuance by the Company in 2010 of $400 million principal amount of convertible notes that matured in August 2017, and as part of hedging arrangements between the Company and two institutional counterparties, the Company issued warrants to the counterparties, entitling them to purchase Company common stock. These transactions are described in greater detail in Note 11 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017. At September 30, 2018, all of the warrants either (a) were canceled as a result of warrant unwind agreements between the Company and the counterparties or (b) were exercised by the counterparties.
18
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The following tables provide information relating to the changes in accumulated other comprehensive loss, net of tax, for the nine months ended September 30, 2018 and October 1, 2017:
Cash Flow Hedges
Pension and Other Postretirement Benefit Plans
Foreign Currency Translation Adjustment
Accumulated Other Comprehensive (Loss) Income
(Dollars in thousands)
Balance as of December 31, 2017
$
340
$
(138,808
)
$
(126,623
)
$
(265,091
)
Other comprehensive income (loss) before reclassifications
2,816
127
(30,130
)
(27,187
)
Amounts reclassified from accumulated other comprehensive income
(873
)
3,984
—
3,111
Net current-period other comprehensive income (loss)
1,943
4,111
(30,130
)
(24,076
)
Balance as of September 30, 2018
$
2,283
$
(134,697
)
$
(156,753
)
$
(289,167
)
Cash Flow Hedges
Pension and Other Postretirement Benefit Plans
Foreign Currency Translation Adjustment
Accumulated Other Comprehensive (Loss) Income
(Dollars in thousands)
Balance as of December 31, 2016
$
(2,424
)
$
(136,596
)
$
(299,697
)
$
(438,717
)
Other comprehensive (loss) before reclassifications
3,383
(1,050
)
156,012
158,345
Amounts reclassified from accumulated other comprehensive loss
1,535
3,387
—
4,922
Net current-period other comprehensive income
4,918
2,337
156,012
163,267
Balance as of October 1, 2017
$
2,494
$
(134,259
)
$
(143,685
)
$
(275,450
)
The following table provides information relating to the location in the statements of operations and amount of reclassifications of losses/(gains) in accumulated other comprehensive (loss) income into expense/(income), net of tax, for the three and nine months ended September 30, 2018 and October 1, 2017:
Three Months Ended
Nine Months Ended
September 30, 2018
October 1, 2017
September 30, 2018
October 1, 2017
(Dollars in thousands)
(Gains) losses on foreign exchange contracts:
Cost of goods sold
$
(87
)
$
(1,179
)
$
(1,038
)
$
1,769
Total before tax
(87
)
(1,179
)
(1,038
)
1,769
Taxes (benefit)
25
237
165
(234
)
Net of tax
$
(62
)
$
(942
)
$
(873
)
$
1,535
Amortization of pension and other postretirement benefit items (1):
Actuarial losses
$
1,640
$
1,723
$
5,120
$
5,176
Prior-service costs
24
20
71
79
Total before tax
1,664
1,743
5,191
5,255
Tax benefit
(388
)
(619
)
(1,207
)
(1,868
)
Net of tax
$
1,276
$
1,124
$
3,984
$
3,387
Total reclassifications, net of tax
$
1,214
$
182
$
3,111
$
4,922
(1) These accumulated other comprehensive (loss) income components are included in the computation of net benefit expense for pension
19
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
and other postretirement benefit plans (see Note 12 for additional information).
Note 11 — Taxes on income from continuing operations
Three Months Ended
Nine Months Ended
September 30, 2018
October 1, 2017
September 30, 2018
October 1, 2017
Effective income tax rate
(2.3)%
11.2%
11.8%
8.9%
The Tax Cuts and Jobs Act (the “TCJA”) was enacted on December 22, 2017. The legislation significantly changed U.S. tax law by, among other things, permanently reducing corporate income tax rates from a maximum of 35% to 21%, effective January 1, 2018; implementing a territorial tax system, by generally providing for, among other things, a dividends received deduction on the foreign source portion of dividends received from a foreign corporation if specified conditions are met; and imposing a one-time repatriation tax on undistributed post-1986 foreign subsidiary earnings and profits, which are deemed repatriated for purposes of the tax. In addition, the TCJA imposes two new U.S. tax base erosion provisions: (1) the global intangible low-taxed income ("GILTI") provisions and (2) the base erosion and anti-abuse tax ("BEAT") provisions, which are explained in more detail in Note 13 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2017.
In accordance with the applicable provisions of SEC Staff Accounting Bulletin No. 118, the Company included in its consolidated financial statements as of December 31, 2017 provisional amounts reflecting the tax impact related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities. During the third quarter of 2018, the Company recorded a $2.1 million tax benefit to adjust its initial provisional estimates for the TCJA in its provision for income taxes. The adjustment specifically related to the Company's initial estimate of the revaluation of certain deferred tax balances as a result of the reduced corporate income tax rate. To date, the Company has not made any other significant changes to its initial provisional estimates included in its consolidated financial statements as of December 31, 2017 and continues to evaluate the impact of the TCJA. Once the Company's accounting for the income tax effects of the TCJA is complete, the amounts with respect to the income tax effects of the TCJA may differ from the provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the TCJA.
The effective income tax rate for the three and nine months ended September 30, 2018 was (2.3)% and 11.8%, respectively, and was 11.2% and 8.9% for the three and nine months ended October 1, 2017, respectively. The effective income tax rate for the three and nine months ended September 30, 2018 as compared to the prior year periods reflects impacts of the TCJA, including the benefit of a lower U.S. corporate tax rate of 21.0% from the enactment of the TCJA, partially offset by a tax cost associated with GILTI. In addition, the effective tax rate for the three and nine months ended September 30, 2018 includes a tax benefit associated with the asset impairment charges described in Note 5, excess tax benefits associated with share based payments, and a non-deductible contingent consideration expense recognized in connection with an increase in the fair value of the NeoTract contingent consideration liability. The income tax rate for the nine months ended September 30, 2018 as compared to the prior year period reflects non-deductible termination benefits and other costs incurred in connection with the 2018 Footprint realignment plan. The effective tax rate for the nine months ended October 1, 2017 reflected a tax benefit associated with costs incurred in connection with the Vascular Solutions acquisition.
Note 12 — Pension and other postretirement benefits
The Company has a number of defined benefit pension and postretirement plans covering eligible U.S. and non-U.S. employees. As of September 30, 2018, no further benefits are being accrued under the Company’s U.S. defined benefit pension plans and the Company’s other postretirement benefit plans, other than certain postretirement benefit plans covering employees subject to a collective bargaining agreement.
20
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Net pension and other postretirement benefits expense (income) consist of the following:
Pension Three Months Ended
Other Postretirement Benefits Three Months Ended
Pension Nine Months Ended
Other Postretirement Benefits Nine Months Ended
September 30, 2018
October 1, 2017
September 30, 2018
October 1, 2017
September 30, 2018
October 1, 2017
September 30, 2018
October 1, 2017
(Dollars in thousands)
Service cost
$
380
$
725
$
(66
)
$
61
$
1,135
$
2,162
$
38
$
210
Interest cost
3,681
3,773
285
426
11,119
11,347
1,042
1,183
Expected return on plan assets
(7,423
)
(6,607
)
—
—
(22,260
)
(20,100
)
—
—
Net amortization and deferral
1,687
1,668
(23
)
75
5,090
5,049
101
206
Net benefits expense (income)
$
(1,675
)
$
(441
)
$
196
$
562
$
(4,916
)
$
(1,542
)
$
1,181
$
1,599
Note 13 — Commitments and contingent liabilities
Environmental: The Company is subject to contingencies as a result of environmental laws and regulations that in the future may require the Company to take further action to correct the effects on the environment of prior disposal practices or releases of chemical or petroleum substances by the Company or other parties. Much of this liability results from the U.S. Comprehensive Environmental Response, Compensation and Liability Act, often referred to as Superfund, the U.S. Resource Conservation and Recovery Act and similar state laws. These laws require the Company to undertake certain investigative and remedial activities at sites where the Company conducts or once conducted operations or at sites where Company-generated waste was disposed.
Remediation activities vary substantially in duration and cost from site to site. These activities, and their associated costs, depend on the mix of unique site characteristics, evolving remediation technologies, the regulatory agencies involved and their enforcement policies, as well as the presence or absence of other potentially responsible parties. At September 30, 2018, the Company has recorded $1.0 million and $5.5 million in accrued liabilities and other liabilities, respectively, relating to these matters. Considerable uncertainty exists with respect to these liabilities and, if adverse changes in circumstances occur, the potential liability may exceed the amount accrued as of September 30, 2018. The time frame over which the accrued amounts may be paid out, based on past history, is estimated to be 15-20 years.
Litigation: The Company is a party to various lawsuits and claims arising in the normal course of business. These lawsuits and claims include actions involving product liability, product warranty, commercial disputes, intellectual property, contract, employment, environmental and other matters. As of September 30, 2018, the Company has recorded accrued liabilities of $1.8 million in connection with such contingencies, representing its best estimate of the cost within the range of estimated possible losses that will be incurred to resolve these matters.
Based on information currently available, advice of counsel, established reserves and other resources, the Company does not believe that the outcome of any outstanding litigation and claims is likely to be, individually or in the aggregate, material to its business, financial condition, results of operations or liquidity. However, in the event of unexpected further developments, it is possible that the ultimate resolution of these matters, or other similar matters, if unfavorable, may be materially adverse to the Company’s business, financial condition, results of operations or liquidity. Legal costs such as outside counsel fees and expenses are charged to selling, general and administrative expenses in the period incurred.
Tax audits and examinations: The Company and its subsidiaries are routinely subject to tax examinations by various tax authorities. As of September 30, 2018, the most significant tax examinations in process are in Germany and Italy. The Company may establish reserves with respect to its uncertain tax positions, after which it adjusts the reserves to address developments with respect to its uncertain tax positions, including developments in these tax examinations. Accordingly, developments in tax audits and examinations, including resolution of uncertain tax positions, could result in increases or decreases to the Company’s recorded tax liabilities, which could impact the Company’s financial results.
21
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Other: The Company has various purchase commitments for materials, supplies and other items occurring in the ordinary conduct of its business. On average, such commitments are not at prices in excess of current market prices.
Note 14 — Segment information
Following the Company's acquisition of Vascular Solutions, the Company commenced an integration program under which it is combining the Vascular Solutions' business with some of its legacy businesses. As a result, effective during the fourth quarter 2017, the Company realigned its operating segments. The changes to the operating segments were also made to reflect the manner in which the Company’s chief operating decision maker assesses business performance and allocates resources. The Company now has the following seven reportable segments: Vascular North America, Interventional North America, Anesthesia North America, Surgical North America, Europe, Middle East and Africa ("EMEA"), Asia and Original Equipment and Development Services ("OEM"). In connection with the presentation of segment information, the Company will continue to present certain operating segments, which currently include the Interventional Urology North America, Respiratory North America and Latin America operating segments, in the “all other” category because separate information with regard to each of these operating segments is not material. All prior comparative periods presented have been restated to reflect these changes.
The following tables present the Company’s segment results for the three and nine months ended September 30, 2018 and October 1, 2017:
Three Months Ended
Nine Months Ended
September 30, 2018
October 1, 2017
September 30, 2018
October 1, 2017
(Dollars in thousands)
Vascular North America
$
80,719
$
75,065
$
243,829
$
232,872
Interventional North America
66,726
60,719
191,878
159,002
Anesthesia North America
53,160
50,819
154,215
148,107
Surgical North America
42,545
40,804
123,930
131,464
EMEA
139,541
137,034
452,826
409,077
Asia
76,544
74,202
207,201
190,368
OEM
54,838
48,589
153,286
137,067
All other
95,599
47,471
279,603
143,240
Net revenues
$
609,672
$
534,703
$
1,806,768
$
1,551,197
Three Months Ended
Nine Months Ended
September 30, 2018
October 1, 2017
September 30, 2018
October 1, 2017
(Dollars in thousands)
Vascular North America
$
24,287
$
17,803
$
73,585
$
54,565
Interventional North America
17,142
12,485
47,772
13,265
Anesthesia North America
16,811
15,084
48,860
48,444
Surgical North America
15,906
13,618
47,709
47,285
EMEA
21,916
24,198
80,221
69,102
Asia
20,834
20,427
54,948
50,252
OEM
15,049
12,256
37,617
31,714
All other
(5,587
)
7,290
(43,162
)
25,634
Total segment operating profit (1)
126,358
123,161
347,550
340,261
Unallocated expenses (2)
(44,253
)
(12,807
)
(145,112
)
(58,886
)
Income from continuing operations before interest, loss on extinguishment of debt and taxes
$
82,105
$
110,354
$
202,438
$
281,375
22
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
(1)
Segment operating profit includes segment net revenues from external customers reduced by the segment's standard cost of goods sold, adjusted for fixed manufacturing cost absorption variances, selling, general and administrative expenses, research and development expenses and an allocation of corporate expenses. Corporate expenses are allocated among the segments in proportion to the respective amounts of one of several items (such as net revenues, numbers of employees, and amount of time spent), depending on the category of expense involved.
(2)
Unallocated expenses primarily include manufacturing variances other than fixed manufacturing cost absorption variances, restructuring charges and gain on sale of assets.
The following table provides total net revenues by geographic region (based on the Company's selling location) for the three and nine months ended September 30, 2018 and October 1, 2017:
Three Months Ended
Nine Months Ended
September 30, 2018
October 1, 2017
September 30, 2018
October 1, 2017
(Dollars in thousands)
United States
$
365,271
$
306,763
$
1,066,095
$
903,201
Europe
160,498
148,808
500,697
434,223
Asia
60,414
59,169
170,458
156,074
All other
23,489
19,963
69,518
57,699
Net revenues
$
609,672
$
534,703
$
1,806,768
$
1,551,197
23
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Note 15 — Condensed consolidating guarantor financial information
The Company’s $250 million principal amount of 5.25% Senior Notes due 2024 (the “2024 Notes”), $400 million principal amount of 4.875% Senior Notes due 2026 (the “2026 Notes”) and $500 million principal amount of 4.625% Senior Notes due 2027 (the “2027 Notes," and collectively with the 2024 Notes and the 2026 Notes, the "Senior Notes") are issued by Teleflex Incorporated (the “Parent Company”), and payment of the Parent Company's obligations under the Senior Notes are guaranteed, jointly and severally, by certain of the Parent Company’s subsidiaries (each, a “Guarantor Subsidiary” and collectively, the “Guarantor Subsidiaries”). The 2024 Notes, 2026 Notes and 2027 Notes are guaranteed by the same Guarantor Subsidiaries. The guarantees are full and unconditional, subject to certain customary release provisions. Each Guarantor Subsidiary is directly or indirectly 100% owned by the Parent Company. The Company’s condensed consolidating statements of income and comprehensive income for the three and nine months ended September 30, 2018 and October 1, 2017, condensed consolidating balance sheets as of September 30, 2018 and December 31, 2017 and condensed consolidating statements of cash flows for the nine months ended September 30, 2018 and October 1, 2017, provide consolidated information for:
a.
Parent Company, the issuer of the guaranteed obligations;
b.
Guarantor Subsidiaries, on a combined basis;
c.
Non-Guarantor Subsidiaries (i.e., those subsidiaries of the Parent Company that have not guaranteed
payment of the Senior Notes), on a combined basis; and
d.
Parent Company and its subsidiaries on a consolidated basis.
The same accounting policies as described in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 are used by the Parent Company and each of its subsidiaries in connection with the condensed consolidating financial information, except for the use of the equity method of accounting to reflect ownership interests in subsidiaries, which are eliminated upon consolidation.
Consolidating entries and eliminations in the following condensed consolidated financial statements represent adjustments to (a) eliminate intercompany transactions between or among the Parent Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries, (b) eliminate the investments in subsidiaries and (c) record consolidating entries.
During the first quarter 2018, a Guarantor Subsidiary merged with and into Parent; the transaction was reflected as of the beginning of the earliest period presented in the condensed consolidating financial statements.
24
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
TELEFLEX INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended September 30, 2018
Parent Company
Guarantor Subsidiaries
Non-Guarantor Subsidiaries
Eliminations
Condensed Consolidated
(Dollars in thousands)
Net revenues
$
—
$
398,961
$
322,010
$
(111,299
)
$
609,672
Cost of goods sold
—
232,209
146,301
(111,411
)
267,099
Gross profit
—
166,752
175,709
112
342,573
Selling, general and administrative expenses
11,347
130,773
72,796
(22
)
214,894
Research and development expenses
378
19,482
6,505
—
26,365
Restructuring charges
—
17,128
2,081
—
19,209
(Loss) income from continuing operations before interest and taxes