Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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(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 25, 2016
OR
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¨ | 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)
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| | |
Delaware | | 23-1147939 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. employer identification no.) |
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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)
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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 ¨ |
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No ¨ |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. |
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Large accelerated filer | x | | | Accelerated filer | ¨ | |
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Non-accelerated filer | ¨ | (Do not check if a smaller reporting company) | | Smaller reporting company | ¨ | |
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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 44,053,239 shares of common stock, par value $1.00 per share, outstanding as of October 24, 2016. |
TELEFLEX INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 25, 2016
TABLE OF CONTENTS
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Item 2: | | | | |
Item 3: | | | | |
Item 4: | | | | |
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Item 1: | | | | |
Item 1A: | | | | |
Item 2: | | | | |
Item 3: | | | | |
Item 4: | | | | |
Item 5: | | | | |
Item 6: | | | | |
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
TELEFLEX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 25, 2016 | | September 27, 2015 | | September 25, 2016 | | September 27, 2015 |
| (Dollars and shares in thousands, except per share) |
Net revenues | $ | 455,648 |
| | $ | 443,714 |
| | $ | 1,354,094 |
| | $ | 1,325,189 |
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Cost of goods sold | 214,046 |
| | 215,501 |
| | 630,946 |
| | 641,102 |
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Gross profit | 241,602 |
| | 228,213 |
| | 723,148 |
| | 684,087 |
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Selling, general and administrative expenses | 139,797 |
| | 138,840 |
| | 419,128 |
| | 420,765 |
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Research and development expenses | 15,067 |
| | 12,571 |
| | 42,892 |
| | 38,898 |
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Restructuring charges | 3,027 |
| | 660 |
| | 12,876 |
| | 5,688 |
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Gain on sale of assets | (2,776 | ) | | (408 | ) | | (4,173 | ) | | (408 | ) |
Income from continuing operations before interest, extinguishment of debt and taxes | 86,487 |
| | 76,550 |
| | 252,425 |
| | 219,144 |
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Interest expense | 12,888 |
| | 14,306 |
| | 38,579 |
| | 47,685 |
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Interest income | (115 | ) | | (130 | ) | | (324 | ) | | (453 | ) |
Loss on extinguishment of debt | — |
| | — |
| | 19,261 |
| | 10,454 |
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Income from continuing operations before taxes | 73,714 |
| | 62,374 |
| | 194,909 |
| | 161,458 |
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Taxes on income from continuing operations | 7,514 |
| | 803 |
| | 18,134 |
| | 15,415 |
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Income from continuing operations | 66,200 |
| | 61,571 |
| | 176,775 |
| | 146,043 |
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Operating income (loss) from discontinued operations | 260 |
| | (788 | ) | | (116 | ) | | (1,432 | ) |
(Benefit) taxes on income (loss) from discontinued operations | 138 |
| | (69 | ) | | (119 | ) | | 180 |
|
Income (loss) from discontinued operations | 122 |
| | (719 | ) | | 3 |
| | (1,612 | ) |
Net income | 66,322 |
| | 60,852 |
| | 176,778 |
| | 144,431 |
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Less: Income from continuing operations attributable to noncontrolling interest | — |
| | 28 |
| | 464 |
| | 692 |
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Net income attributable to common shareholders | $ | 66,322 |
| | $ | 60,824 |
| | $ | 176,314 |
| | $ | 143,739 |
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Earnings per share available to common shareholders: | | | | | | | |
Basic: | | | | | | | |
Income from continuing operations | $ | 1.50 |
| | $ | 1.48 |
| | $ | 4.09 |
| | $ | 3.50 |
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Income (loss) from discontinued operations | 0.01 |
| | (0.02 | ) | | — |
| | (0.04 | ) |
Net income | $ | 1.51 |
| | $ | 1.46 |
| | $ | 4.09 |
| | $ | 3.46 |
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Diluted: | | | | | | | |
Income from continuing operations | $ | 1.40 |
| | $ | 1.27 |
| | $ | 3.69 |
| | $ | 3.03 |
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Loss from discontinued operations | — |
| | (0.02 | ) | | — |
| | (0.03 | ) |
Net income | $ | 1.40 |
| | $ | 1.25 |
| | $ | 3.69 |
| | $ | 3.00 |
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Dividends per share | $ | 0.34 |
| | $ | 0.34 |
| | $ | 1.02 |
| | $ | 1.02 |
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Weighted average common shares outstanding | | | | | | | |
Basic | 44,045 |
| | 41,597 |
| | 43,081 |
| | 41,542 |
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Diluted | 47,446 |
| | 48,532 |
| | 47,824 |
| | 47,969 |
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Amounts attributable to common shareholders: | | | | | | | |
Income from continuing operations, net of tax | $ | 66,200 |
| | $ | 61,543 |
| | $ | 176,311 |
| | $ | 145,351 |
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Income (loss) from discontinued operations, net of tax | 122 |
| | (719 | ) | | 3 |
| | (1,612 | ) |
Net income | $ | 66,322 |
| | $ | 60,824 |
| | $ | 176,314 |
| | $ | 143,739 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
TELEFLEX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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| Three Months Ended | | Nine Months Ended |
| September 25, 2016 | | September 27, 2015 | | September 25, 2016 | | September 27, 2015 |
| (Dollars in thousands) |
Net income | $ | 66,322 |
| | $ | 60,852 |
| | $ | 176,778 |
| | $ | 144,431 |
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Other comprehensive income (loss), net of tax: | | | | | | | |
Foreign currency translation, net of tax of $(327), $2,750, $(2,978) and $20,854 for the three and nine month periods, respectively | (130 | ) | | (29,329 | ) | | 11,088 |
| | (91,216 | ) |
Pension and other postretirement benefit plans adjustment, net of tax of $(737), $(609), $(2,007) and $(1,894) for the three and nine month periods, respectively | 1,430 |
| | 1,185 |
| | 3,914 |
| | 3,622 |
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Derivatives qualifying as hedges, net of tax of $(393), $420, $212 and $856 for the three and nine month periods, respectively | (223 | ) | | (730 | ) | | 761 |
| | (1,489 | ) |
Other comprehensive income (loss), net of tax: | 1,077 |
| | (28,874 | ) | | 15,763 |
| | (89,083 | ) |
Comprehensive income | 67,399 |
| | 31,978 |
| | 192,541 |
| | 55,348 |
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Less: comprehensive income (loss) attributable to noncontrolling interest | 24 |
| | (57 | ) | | 421 |
| | 613 |
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Comprehensive income attributable to common shareholders | $ | 67,375 |
| | $ | 32,035 |
| | $ | 192,120 |
| | $ | 54,735 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
TELEFLEX INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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| September 25, 2016 | | December 31, 2015 |
| (Dollars in thousands) |
ASSETS | | | |
Current assets | | | |
Cash and cash equivalents | $ | 499,459 |
| | $ | 338,366 |
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Accounts receivable, net | 261,833 |
| | 262,416 |
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Inventories, net | 341,830 |
| | 330,275 |
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Prepaid expenses and other current assets | 34,354 |
| | 34,915 |
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Prepaid taxes | 22,259 |
| | 30,895 |
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Assets held for sale | 4,137 |
| | 6,972 |
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Total current assets | 1,163,872 |
| | 1,003,839 |
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Property, plant and equipment, net | 322,019 |
| | 316,123 |
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Goodwill | 1,305,078 |
| | 1,295,852 |
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Intangible assets, net | 1,164,644 |
| | 1,199,975 |
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Investments in affiliates | 27 |
| | 152 |
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Deferred tax assets | 2,792 |
| | 2,341 |
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Other assets | 43,237 |
| | 53,492 |
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Total assets | $ | 4,001,669 |
| | $ | 3,871,774 |
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LIABILITIES AND EQUITY | | | |
Current liabilities | | | |
Current borrowings | $ | 181,895 |
| | $ | 417,350 |
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Accounts payable | 70,246 |
| | 66,305 |
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Accrued expenses | 68,972 |
| | 64,017 |
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Current portion of contingent consideration | 7,539 |
| | 7,291 |
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Payroll and benefit-related liabilities | 81,746 |
| | 84,658 |
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Accrued interest | 12,611 |
| | 7,480 |
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Income taxes payable | 11,271 |
| | 8,059 |
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Other current liabilities | 18,122 |
| | 8,960 |
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Total current liabilities | 452,402 |
| | 664,120 |
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Long-term borrowings | 849,967 |
| | 641,850 |
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Deferred tax liabilities | 311,390 |
| | 315,983 |
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Pension and postretirement benefit liabilities | 131,222 |
| | 149,441 |
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Noncurrent liability for uncertain tax positions | 26,693 |
| | 40,400 |
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Other liabilities | 60,073 |
| | 48,887 |
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Total liabilities | 1,831,747 |
| | 1,860,681 |
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Commitments and contingencies |
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Total common shareholders' equity | 2,169,922 |
| | 2,009,272 |
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Noncontrolling interest | — |
| | 1,821 |
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Total equity | 2,169,922 |
| | 2,011,093 |
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Total liabilities and equity | $ | 4,001,669 |
| | $ | 3,871,774 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
TELEFLEX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) |
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| Nine Months Ended |
| September 25, 2016 | | September 27, 2015 |
| (Dollars in thousands) |
Cash flows from operating activities of continuing operations: | | | |
Net income | $ | 176,778 |
| | $ | 144,431 |
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Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Loss (income) from discontinued operations | (3 | ) | | 1,612 |
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Depreciation expense | 40,272 |
| | 34,035 |
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Amortization expense of intangible assets | 47,486 |
| | 45,278 |
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Amortization expense of deferred financing costs and debt discount | 8,506 |
| | 12,662 |
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Loss on extinguishment of debt | 19,261 |
| | 10,454 |
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Gain on sale of assets | (4,173 | ) | | (408 | ) |
Changes in contingent consideration | 1,672 |
| | (3,260 | ) |
Stock-based compensation | 12,540 |
| | 10,379 |
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Deferred income taxes, net | (8,699 | ) | | (21,960 | ) |
Other | (15,132 | ) | | (18,329 | ) |
Changes in operating assets and liabilities, net of effects of acquisitions and disposals: | | | |
Accounts receivable | 4,316 |
| | (8,714 | ) |
Inventories | (5,617 | ) | | (19,904 | ) |
Prepaid expenses and other current assets | 1,184 |
| | 1,636 |
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Accounts payable and accrued expenses | 17,390 |
| | (2,855 | ) |
Income taxes receivable and payable, net | 5,817 |
| | (8,297 | ) |
Net cash provided by operating activities from continuing operations | 301,598 |
| | 176,760 |
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Cash flows from investing activities of continuing operations: | | | |
Expenditures for property, plant and equipment | (35,912 | ) | | (45,566 | ) |
Proceeds from sale of assets | 9,792 |
| | 408 |
|
Payments for businesses and intangibles acquired, net of cash acquired | (14,040 | ) | | (63,451 | ) |
Net cash used in investing activities from continuing operations | (40,160 | ) | | (108,609 | ) |
Cash flows from financing activities of continuing operations: | | | |
Proceeds from new borrowings | 671,700 |
| | 288,100 |
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Reduction in borrowings | (714,487 | ) | | (303,627 | ) |
Debt extinguishment, issuance and amendment fees | (8,958 | ) | | (9,017 | ) |
Net proceeds from share based compensation plans and the related tax impacts | 7,647 |
| | 4,815 |
|
Payments to noncontrolling interest shareholders | (464 | ) | | (833 | ) |
Payments for contingent consideration | (133 | ) | | (7,974 | ) |
Payments for acquisition of noncontrolling interest | (9,231 | ) | | — |
|
Dividends paid | (43,980 | ) | | (42,382 | ) |
Net cash used in financing activities from continuing operations | (97,906 | ) | | (70,918 | ) |
Cash flows from discontinued operations: | | | |
Net cash used in operating activities | (1,451 | ) | | (1,954 | ) |
Net cash used in discontinued operations | (1,451 | ) | | (1,954 | ) |
Effect of exchange rate changes on cash and cash equivalents | (988 | ) | | (22,052 | ) |
Net increase (decrease) in cash and cash equivalents | 161,093 |
| | (26,773 | ) |
Cash and cash equivalents at the beginning of the period | 338,366 |
| | 303,236 |
|
Cash and cash equivalents at the end of the period | $ | 499,459 |
| | $ | 276,463 |
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| | | |
Non cash financing activities of continuing operations: | | | |
Settlement and exchange of convertible notes with common or treasury stock | $ | 35,205 |
| | $ | 62 |
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Acquisition of treasury stock associated with settlement and exchange of convertible note hedge and warrant agreements | $ | 85,909 |
| | $ | 125 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
TELEFLEX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Accumulated Other Comprehensive Loss | | |
| Common Stock | | Additional Paid In Capital | | Retained Earnings | | | Treasury Stock | | Noncontrolling Interest | | Total Equity |
| Shares | | Dollars | | | | | Shares | | Dollars | | |
| (Dollars and shares in thousands, except per share) |
Balance at December 31, 2015 | 43,517 |
| | $ | 43,517 |
| | $ | 440,127 |
| | $ | 2,016,176 |
| | $ | (371,124 | ) | | 1,908 |
| | $ | (119,424 | ) | | $ | 1,821 |
| | $ | 2,011,093 |
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Net income | | | |
| | |
| | 176,314 |
| | |
| | |
| | |
| | 464 |
| | 176,778 |
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Cash dividends ($1.02 per share) | |
| | |
| | |
| | (43,980 | ) | | |
| | |
| | |
| | |
| | (43,980 | ) |
Other comprehensive income (loss) | |
| | |
| | |
| | |
| | 15,806 |
| | |
| | |
| | (43 | ) | | 15,763 |
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Distributions to noncontrolling interest shareholders | |
| | |
| | |
| | |
| | |
| | |
| | |
| | (464 | ) | | (464 | ) |
Acquisition of noncontrolling interest | | | | | (6,621 | ) | | | | (832 | ) | | | | | | (1,778 | ) | | (9,231 | ) |
Settlements of convertible notes | 2,168 |
| | 2,168 |
| | (31,921 | ) | | |
| | |
| | (429 | ) | | 33,051 |
| | | | 3,298 |
|
Settlements of note hedges associated with convertible notes and warrants | | | | | 85,909 |
| | | | | | 314 |
| | (85,909 | ) | | |
| | — |
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Shares issued under compensation plans | 114 |
| | 114 |
| | 15,719 |
| | |
| | |
| | (45 | ) | | 756 |
| | |
| | 16,589 |
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Deferred compensation | |
| | |
| | |
| | |
| | |
| | 2 |
| | 76 |
| | |
| | 76 |
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Balance as of September 25, 2016 | 45,799 |
| | $ | 45,799 |
| | $ | 503,213 |
| | $ | 2,148,510 |
| | $ | (356,150 | ) | | 1,750 |
| | $ | (171,450 | ) | | $ | — |
| | $ | 2,169,922 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
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 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 statement 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.
In accordance with applicable accounting standards, 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. The year-end condensed consolidated balance sheet data was derived from the Company's audited financial statements, but, as permitted by Rule 10-01 of SEC Regulation S-X, does not include all disclosures required by GAAP for complete 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, 2015.
As used in this report, the terms “we,” “us,” “our,” “Teleflex” and the “Company” mean Teleflex Incorporated and its subsidiaries, unless the context indicates otherwise. The results of operations for the periods reported are not necessarily indicative of those that may be expected for a full year.
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. The new guidance is designed to enhance the comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets, and will affect 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. In August 2015, the FASB issued an amendment to the new guidance that deferred the effective date. The amendment provides that the new guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those years; early application is permitted for annual periods beginning after December 15, 2016. The Company is currently evaluating this guidance to determine its impact on the Company’s results of operations, cash flows and financial position.
In April 2015, the FASB issued guidance for the reporting of debt issuance costs within the balance sheet. Under the new guidance, debt issuance costs related to term loans are to be presented in the balance sheet as a direct deduction from the associated debt liability, consistent with the presentation of a debt discount. Previously, debt issuance costs were presented as a deferred charge (i.e., an asset) on the balance sheet. The guidance provides uniform treatment for debt issuance costs and debt discounts and eliminates inconsistencies that previously existed with other FASB guidance. The Company retrospectively adopted this guidance as of January 1, 2016.
In February 2016, the FASB issued guidance that will change the requirements for accounting for leases. The principal change under the new accounting guidance is that lessees under leases classified as operating leases will recognize a right-of-use asset and a lease liability. Current lease accounting does not require lessees to recognize assets and liabilities arising under operating leases on the balance sheet. Under the new guidance, lessees (including lessees under leases classified as finance leases and operating leases) will recognize a right-to-use asset and a lease
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
liability on the balance sheet, initially measured as the present value of lease payments under the lease. Expense recognition and cash flow presentation guidance will be based upon whether the lease is classified as an operating lease or a finance lease (the classification criteria for distinguishing between finance leases and operating leases is substantially similar to the classification criteria for distinguishing between capital leases and operating leases under current guidance). 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 capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements; the guidance provides certain practical expedients. The Company is currently evaluating this guidance to determine its impact on the Company’s results of operations, cash flows and financial position.
In March 2016, the FASB issued new guidance designed to simplify several aspects of the accounting for share-based payment transactions, including guidance providing generally that excess tax benefits related to share-based awards should be recorded as a reduction to income tax expense (currently, excess tax benefits generally are recorded as additional-paid-in-capital) and addressing other, related guidance on accounting for income taxes with respect to share-based payment awards; providing generally that excess tax benefits related to share-based awards should be classified along with other income tax cash flows as an operating activity (currently, excess tax benefits generally are separated from other income tax cash flows and classified as a financing activity); providing that an entity may make an accounting policy election either to base compensation cost accruals on the number of awards expected to vest (as required by current guidance) or to account for forfeitures when they occur; modifying the current exception to liability classification such that partial cash settlement of an award for tax withholding purposes would not result, by itself, in liability classification of the award if the amount withheld does not exceed the maximum statutory tax rate in the employees' applicable jurisdictions (currently, an award cannot qualify for equity classification, rather than liability classification, if the amount withheld exceeds the minimum statutory withholding requirements); and providing that cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity on the statement of cash flows (currently there is no authoritative guidance addressing this classification issue). The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted (if early adoption occurs in an interim period, any adjustments will be reflected as of the beginning of the fiscal year that includes the interim period). Depending on the particular issue addressed by the guidance, application of the guidance will be made prospectively, retrospectively or subject to a retrospective transition method. We are currently evaluating the potential impact of adopting this guidance on the Company's results of operations, cash flows and financial position.
In August 2016, the FASB issued new guidance on the classification of certain cash receipts and cash payments within the statement of cash flows. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The new guidance should be adopted using a retrospective transition method for each period presented; if it is impractical to apply the new standard retrospectively for some of the issues addressed by the new guidance, application of the new guidance with respect to those issues would be made prospectively as of the earliest date practicable. The Company is currently evaluating this guidance to determine its impact on the Company’s cash flows.
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 Company’s results of operations, cash flows or financial position.
Note 3 — Acquisitions
The Company made the following acquisitions during 2016 (the "2016 acquisitions"), which, with the exception of its acquisition of the outstanding noncontrolling interest in Teleflex Medical Private Limited, were accounted for as business combinations:
| |
• | On September 2, 2016, the Company acquired certain assets of CarTika Medical, Inc., ("CarTika"), an original equipment manufacturer (OEM) of catheters and other medical devices that complement the Company's OEM product portfolio. |
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
| |
• | On July 1, 2016, the Company, which previously owned a 74% controlling interest in its Indian affiliate, Teleflex Medical Private Limited, acquired the remaining 26% ownership interest from the noncontrolling shareholders. Teleflex Medical Private Limited is part of the Company's Asia reportable operating segment. As this acquisition did not result in a change in the Company's control of the entity, the Company recognized the $7.5 million excess of the purchase price of the noncontrolling interest over its carrying value as equity. |
| |
• | During the second quarter 2016, the Company acquired certain assets of two medical device and supplies distributors in New Zealand. |
The aggregate purchase price paid in connection with the 2016 acquisitions was $22.8 million. Transaction expenses associated with the 2016 acquisitions, which are included in selling, general and administrative expenses in the condensed consolidated statement of income were $0.2 million and $0.3 million for the three and nine months ended September 25, 2016, respectively. The results of operations of the 2016 acquisitions are included in the condensed consolidated statements of income from their respective acquisition dates. For the three and nine months ended September 25, 2016, the Company recorded revenue and income from continuing operations before taxes related to the acquired businesses of $0.9 million and $0.2 million, respectively. Pro forma information is not presented, as the operations of the acquired businesses are not significant to the overall operations of the Company.
The following table presents the preliminary fair value determination of the assets acquired and liabilities assumed with respect to those 2016 acquisitions that were accounted for as a business combination:
|
| | | |
| (Dollars in thousands) |
Assets | |
|
Current assets | $ | 2,480 |
|
Property, plant and equipment | 537 |
|
Intangible assets: |
|
|
Non-compete agreements | 608 |
|
Customer relationships | 6,445 |
|
Goodwill | 3,947 |
|
Total assets acquired | 14,017 |
|
Less: | |
|
Current liabilities | 597 |
|
Liabilities assumed | 597 |
|
Net assets acquired | $ | 13,420 |
|
The Company is continuing to evaluate the 2016 acquisitions, and further adjustments may be necessary as a result of the Company's assessment of additional information related to the fair values of the assets acquired and liabilities assumed, primarily deferred tax liabilities and goodwill. Among the acquired assets, customer lists have useful lives ranging from 10 to 16 years and non-compete arrangements have useful lives of 2 years. The goodwill resulting from the acquisitions primarily reflects synergies currently expected to be realized from the integration of the acquired businesses.
The Company made the following acquisitions during 2015 (the "2015 acquisitions"), which, with the exception of the Company's acquisition of certain assets of Ace Medical US, LLC ("Ace Medical"), were accounted for as business combinations:
| |
• | On January 20, 2015, the Company acquired Human Medics Co., Ltd., (“Human Medics”), a distributor of medical devices and supplies primarily in the Korean market. |
| |
• | On March 30, 2015, the Company acquired Trintris Medical, Inc. ("Trintris"), an original equipment manufacturer (OEM) of balloons and catheters that complement the Company's OEM product portfolio. |
| |
• | On April 8, 2015, the Company acquired Truphatek Holdings (1993) Limited ("Truphatek"), a manufacturer of a broad range of disposable and reusable laryngoscope devices that complement the Company's anesthesia product portfolio. Previously, the Company held a noncontrolling, 6% interest in Truphatek. |
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
| |
• | On June 26, 2015, the Company acquired certain assets of N. Stenning & Co. Pty. Ltd. ("Stenning"), a distributor of medical devices and supplies primarily in the Australian market. |
| |
• | On June 29, 2015, the Company acquired certain assets, primarily distribution rights, of Ace Medical, a distributor of medical devices and supplies in the United States of America. |
| |
• | On August 26, 2015, the Company acquired certain assets of Atsina Surgical, LLC ("Atsina") related to the development of surgical clips that complement the Company's surgical ligation portfolio. |
| |
• | On December 22, 2015, the Company acquired all of the membership interests of, and voting equity interest in, Nostix, LLC, a developer of catheter tip confirmation systems that complement the Company's vascular product portfolio. |
The total fair value of consideration for the 2015 acquisitions was $96.5 million. The results of operations of the acquired businesses and assets are included in the consolidated statements of income from their respective acquisition dates. Pro forma information is not presented, as the operations of the acquired businesses are not significant to the overall operations of the Company.
Note 4 — Restructuring charges
2016 Other Restructuring Program
During the third quarter 2016, the Company committed to actions associated with consolidation of operations impacting three manufacturing facilities, including certain of those obtained in recent acquisitions, as well as certain global administrative functions. The actions commenced in the third quarter 2016 and are expected to be substantially complete by the end of the first quarter 2018. The Company estimates that it will record aggregate pre-tax charges of $2.5 million to $3.5 million related to these actions, substantially all of which constitute termination benefits that will result in future cash outlays. Additionally, the Company expects to incur approximately $1 million of accelerated depreciation and other costs directly related to the program and expect these costs to be recognized in cost of goods sold, of which, approximately $0.5 million is expected to result in future outlays.
The Company recorded restructuring charges, specifically, employee termination benefits, of $1.7 million during the three and nine months ended September 25, 2016 related to these actions. As of September 25, 2016, the Company has a reserve of $1.7 million related to this program.
2016 Manufacturing Footprint Realignment Plan
On February 23, 2016, the Board of Directors of the Company approved a restructuring plan (the “2016 Plan") designed to reduce costs, improve operating efficiencies and enhance the Company’s long term competitive position. The 2016 Plan, which was developed in response to continuing cost pressures in the healthcare industry, primarily involves 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 2016 and are expected to be substantially completed by the end of 2018.
The Company estimates that it will incur aggregate pre-tax charges in connection with the 2016 Plan of between approximately $34 million to $44 million, of which an estimated $27 million to $31 million are expected to result in future cash outlays. Most of these charges, and the related cash outlays, are expected to be made prior to the end of 2018.
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The following table provides a summary of the Company's current cost estimates for each major expense category associated with the 2016 Plan: |
| |
Type of expense | Total estimated amount expected to be incurred |
| |
Employee termination benefits | $14 million to $15 million |
Facility closure and other exit costs (1) | $2 million to $3 million |
Accelerated depreciation charges | $10 million to $13 million |
Other (2) | $8 million to $13 million |
| $34 million to $44 million |
(1) Includes costs to transfer product lines among facilities, legal, outplacement and employee relocation costs.
(2) Consists of other costs directly related to the 2016 Plan, including project management and other regulatory costs.
The Company recorded charges of $2.8 million during the three months ended September 25, 2016 related to the 2016 Plan, of which $0.9 million consisted mainly of employee termination benefits recorded as restructuring expense, and $1.9 million related to accelerated depreciation and other costs, which primarily were recorded as cost of goods sold.
The Company recorded $15.5 million during the nine months ended September 25, 2016 related to the 2016 Plan, of which $11.3 million consisted mainly of employee termination benefits recorded as restructuring expense, and $4.2 million related to accelerated depreciation and other costs, which primarily were recorded as cost of goods sold.
As of September 25, 2016, the Company has a reserve of $10.5 million related to this program.
As the 2016 Plan progresses, management will reevaluate the estimated expenses set forth above, and may revise its estimates, as appropriate, consistent with GAAP.
2015 Restructuring Programs
During 2015, the Company committed to programs associated with the reorganization of certain of its businesses and the consolidation of certain of its facilities in North America. For the three months ended September 25, 2016, the Company recorded charges of $0.1 million related to these programs. As of September 25, 2016, the Company has incurred net aggregate restructuring charges related to the plan of $6.4 million. As of September 25, 2016, the Company has a reserve of $0.5 million related to these programs.
2014 Manufacturing Footprint Realignment Plan
In April 2014, the Company's Board of Directors approved a restructuring plan (the "2014 Manufacturing 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.
During the third quarter 2016, the Company revised its expense and timing estimates related to the 2014 Manufacturing Footprint Realignment Plan to reflect the impact of changes the Company has implemented with respect to medication delivery devices included in certain of the kits primarily sold by the Company’s Vascular North America operating segment and, to a lesser extent, the Company's Anesthesia North America operating segment. The Company estimates that it will incur aggregate pre-tax charges in connection with the 2014 Manufacturing Footprint Realignment Plan of approximately $43 million to $48 million, compared to the Company’s prior estimate of approximately $37 million to $44 million. The Company expects aggregate cash outlays associated with the plan to be in the range of $33 million to $38 million, compared to its prior estimate of approximately $26 million to $31 million. Most of these charges and cash outlays are expected to be incurred prior to 2020. Additionally, as of September 25, 2016, the Company continues to expect to incur $24 million to $30 million in aggregate capital expenditures under the plan.
The Company currently expects that the 2014 Manufacturing Footprint Realignment Plan will be substantially complete by the end of the first half of 2020 rather than the end of 2017, which was previously estimated.
The following table provides a summary of the Company’s cost estimates by major type of expense associated with the 2014 Manufacturing Footprint Realignment Plan, which reflect the revised estimates:
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
|
| |
Type of expense | Total estimated amount expected to be incurred |
| |
Employee termination benefits | $11 million to $12 million |
Facility closure and other exit costs (1) | $1 million to $2 million |
Accelerated depreciation charges | $10 million to $10 million |
Other (2) | $21 million to $24 million |
| $43 million to $48 million |
(1) Includes costs to transfer product lines among facilities and outplacement and employee relocation costs.
(2) Consists of other costs directly related to the plan, including project management, legal and regulatory costs.
The Company recorded charges of $2.8 million and $6.8 million for the three and nine months ended September 25, 2016, respectively, related to the 2014 Manufacturing Footprint Realignment Plan. Of this amount, $2.5 million and $6.9 million for the three and nine months ended September 25, 2016, respectively, were recorded in costs of goods sold, and related to accelerated depreciation and certain other costs, primarily for the transfer of manufacturing operations from the existing locations to the new locations. For the three months ended September 25, 2016, the charges also included $0.3 million in restructuring expense. During the nine months ended September 25, 2016, the Company recorded a net reversal of previously recorded restructuring charges of $0.1 million. As of September 25, 2016, the Company has incurred net aggregate restructuring charges related to the plan of $10.8 million. Additionally, as of September 25, 2016, the Company has incurred net aggregate accelerated depreciation and certain other costs, primarily for the transfer of manufacturing operations from the existing locations to the new locations in connection with the plan of $21.3 million, which were primarily included in cost of goods sold. As of September 25, 2016, the Company has a restructuring reserve of $5.9 million in connection with the plan, all of which relates to termination benefits.
As the 2014 Manufacturing Footprint Realignment Plan progresses, management will reevaluate the estimated expenses and charges set forth above, and may revise its estimates, as appropriate, consistent with generally accepted accounting principles.
For additional information regarding 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, 2015.
The restructuring charges recognized for the three and nine months ended September 25, 2016 and September 27, 2015 consisted of the following:
|
| | | | | | | | | | | | | | | | | | | |
Three Months Ended September 25, 2016 | | | | | | | | | |
| Termination Benefits | | Facility Closure Costs | | Contract Termination Costs | | Other Exit Costs | | Total |
| (Dollars in thousands) |
2016 Other Restructuring programs | $ | 1,713 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,713 |
|
2016 Manufacturing footprint realignment plan | 851 |
| | — |
| | — |
| | 74 |
| | 925 |
|
2015 Restructuring programs | (103 | ) | | 54 |
| | 107 |
| | — |
| | 58 |
|
2014 Manufacturing footprint realignment plan | 308 |
| | — |
| | — |
| | 6 |
| | 314 |
|
2014 European restructuring plan | 15 |
| | — |
| | — |
| | 2 |
| | 17 |
|
Total restructuring charges | $ | 2,784 |
| | $ | 54 |
| | $ | 107 |
| | $ | 82 |
| | $ | 3,027 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Three Months Ended September 27, 2015 | | | | | | | | | |
| Termination Benefits | | Facility Closure Costs | | Contract Termination Costs | | Other Exit Costs | | Total |
| (Dollars in thousands) |
2015 Restructuring programs | $ | (198 | ) | | $ | 37 |
| | $ | 78 |
| | $ | 9 |
| | $ | (74 | ) |
2014 Manufacturing footprint realignment plan | 619 |
| | (3 | ) | | 163 |
| | 52 |
| | 831 |
|
2014 European restructuring plan | (97 | ) | | — |
| | — |
| | — |
| | (97 | ) |
Total restructuring charges | $ | 324 |
| | $ | 34 |
| | $ | 241 |
| | $ | 61 |
| | $ | 660 |
|
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 25, 2016 | | | | | | | | | |
| Termination Benefits | | Facility Closure Costs | | Contract Termination Costs | | Other Exit Costs | | Total |
| (Dollars in thousands) |
2016 Other Restructuring programs | $ | 1,713 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,713 |
|
2016 Manufacturing footprint realignment plan | 10,919 |
| | — |
| | — |
| | 360 |
| | 11,279 |
|
2015 Restructuring programs | (502 | ) | | 232 |
| | 200 |
| | 118 |
| | 48 |
|
2014 Manufacturing footprint realignment plan | (118 | ) | | — |
| | — |
| | 17 |
| | (101 | ) |
Other restructuring programs (1) | 15 |
| | — |
| | (86 | ) | | 8 |
| | (63 | ) |
Total restructuring charges | $ | 12,027 |
| | $ | 232 |
| | $ | 114 |
| | $ | 503 |
| | $ | 12,876 |
|
|
| | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 27, 2015 | | | | | | | | | |
| Termination Benefits | | Facility Closure Costs | | Contract Termination Costs | | Other Exit Costs | | Total |
| (Dollars in thousands) |
2015 Restructuring programs | $ | 3,361 |
| | $ | 166 |
| | $ | 723 |
| | $ | 56 |
| | $ | 4,306 |
|
2014 Manufacturing footprint realignment | 831 |
| | 241 |
| | 389 |
| | 36 |
| | 1,497 |
|
Other restructuring programs (2) | (181 | ) | | 2 |
| | 29 |
| | 35 |
| | (115 | ) |
Total restructuring charges | $ | 4,011 |
| | $ | 409 |
| | $ | 1,141 |
| | 127 |
| | $ | 5,688 |
|
| |
(1) | Other restructuring programs include the 2014 European Restructuring Plan and the 2012 Restructuring Program. For a description of these plans, 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, 2015. |
| |
(2) | Other restructuring programs include the 2014 European Restructuring Plan, the Other 2014 restructuring programs, the 2013 Restructuring programs and the LMA restructuring program. For a description of these plans, 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, 2015. |
Termination benefits include estimated employee retention, severance and benefit payments for terminated employees.
Facility closure costs include general operating costs incurred subsequent to production shutdown as well as legal costs, equipment relocation and other associated costs.
Contract termination costs include costs associated with terminating existing leases and distributor agreements.
Other costs include outplacement and employee relocation costs and other employee-related costs.
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Restructuring charges by reportable operating segment for the three and nine months ended September 25, 2016 and September 27, 2015 are set forth in the following table:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 25, 2016 | | September 27, 2015 | | September 25, 2016 | | September 27, 2015 |
| (Dollars in thousands) | | (Dollars in thousands) |
Restructuring charges | | | | | | | |
Vascular North America | $ | 960 |
| | $ | 232 |
| | $ | 5,474 |
| | $ | 2,466 |
|
Anesthesia North America | 946 |
| | (250 | ) | | 3,185 |
| | 284 |
|
Surgical North America | 277 |
| | 36 |
| | 257 |
| | 282 |
|
EMEA | 89 |
| | (64 | ) | | 3,012 |
| | (139 | ) |
Asia | — |
| | 2 |
| | — |
| | 3 |
|
OEM | 187 |
| | — |
| | 191 |
| | — |
|
All other | 568 |
| | 704 |
| | 757 |
| | 2,792 |
|
Total restructuring charges | $ | 3,027 |
| | $ | 660 |
| | $ | 12,876 |
| | $ | 5,688 |
|
Note 5 — Inventories, net
Inventories as of September 25, 2016 and December 31, 2015 consisted of the following:
|
| | | | | | | |
| September 25, 2016 | | December 31, 2015 |
| (Dollars in thousands) |
Raw materials | $ | 80,348 |
| | $ | 76,037 |
|
Work-in-process | 61,418 |
| | 60,218 |
|
Finished goods | 236,991 |
| | 230,536 |
|
| 378,757 |
| | 366,791 |
|
Less: inventory reserve | (36,927 | ) | | (36,516 | ) |
Inventories, net | $ | 341,830 |
| | $ | 330,275 |
|
Note 6 — Goodwill and other intangible assets, net
The following table provides information relating to changes in the carrying amount of goodwill by reportable operating segment for the nine months ended September 25, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Vascular North America |
| Anesthesia North America |
| Surgical North America |
| EMEA |
| Asia | | OEM |
| All Other |
| Total |
| (Dollars in thousands) |
Balance as of December 31, 2015 | $ | 345,546 |
|
| $ | 141,122 |
|
| $ | 250,912 |
|
| $ | 306,009 |
|
| $ | 141,067 |
| | $ | 1,194 |
|
| $ | 110,002 |
|
| $ | 1,295,852 |
|
Goodwill related to acquisitions | — |
|
| — |
|
| — |
|
| — |
|
| — |
| | 3,947 |
|
| — |
|
| 3,947 |
|
Currency translation adjustment | — |
|
| 318 |
|
| — |
|
| 1,363 |
|
| 6,729 |
| | — |
|
| (3,131 | ) |
| 5,279 |
|
Balance as of September 25, 2016 | $ | 345,546 |
| | $ | 141,440 |
| | $ | 250,912 |
| | $ | 307,372 |
| | $ | 147,796 |
| | $ | 5,141 |
| | $ | 106,871 |
| | $ | 1,305,078 |
|
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The following table provides information as of September 25, 2016 and December 31, 2015 regarding the gross carrying amount of, and accumulated amortization relating to, intangible assets, net:
|
| | | | | | | | | | | | | | | |
| Gross Carrying Amount | | Accumulated Amortization |
| September 25, 2016 | | December 31, 2015 | | September 25, 2016 | | December 31, 2015 |
| (Dollars in thousands) |
Customer relationships | $ | 630,127 |
| | $ | 621,078 |
| | $ | (235,074 | ) | | $ | (214,924 | ) |
In-process research and development | 58,668 |
| | 58,908 |
| | — |
| | — |
|
Intellectual property | 523,361 |
| | 522,374 |
| | (197,465 | ) | | (173,903 | ) |
Distribution rights | 23,356 |
| | 23,279 |
| | (15,294 | ) | | (14,393 | ) |
Trade names | 387,759 |
| | 384,821 |
| | (12,734 | ) | | (8,929 | ) |
Non-compete agreements | 2,853 |
| | 2,186 |
| | (913 | ) | | (522 | ) |
| $ | 1,626,124 |
| | $ | 1,612,646 |
| | $ | (461,480 | ) | | $ | (412,671 | ) |
In May 2012, the Company acquired Semprus BioSciences Corp. ("Semprus"), a biomedical research and development company that developed a polymer surface treatment technology intended to reduce thrombus related complications. As previously disclosed, the Company experienced difficulties with respect to the development of the Semprus technology, and devoted further research and testing towards attempting to resolve the issue. As a result of these efforts, the Company believes it has resolved the issue and is focused on seeking regulatory approval and engaging in additional research and development efforts to achieve commercialization of the technology. Despite the progress made since these issues were first identified, significant challenges to commercialization of the Semprus technology remain, and the Company ultimately may find it necessary to recognize impairment charges with respect to the related assets, which could be material. As of September 25, 2016, the Company has in-process research and development intangible assets of $41.0 million related to this investment, which is recorded in intangible assets, net.
Amortization expense related to intangible assets was $16.1 million and $15.5 million for the three months ended September 25, 2016 and September 27, 2015, respectively, and $47.5 million and $45.3 million for the nine months ended September 25, 2016 and September 27, 2015, respectively.
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Note 7 — Borrowings
The Company's borrowings at September 25, 2016 and December 31, 2015 are as follows:
|
| | | | | | | |
| September 25, 2016 | | December 31, 2015 |
| (Dollars in thousands) |
Senior Credit Facility: | | | |
Revolving credit facility, at a rate of 2.05% at September 25, 2016, due 2018 | $ | 210,000 |
| | $ | 396,000 |
|
3.875% Convertible Senior Subordinated Notes due 2017 | 136,154 |
| | 399,641 |
|
4.875% Senior Notes due 2026 | 400,000 |
| | — |
|
5.25% Senior Notes due 2024 | 250,000 |
| | 250,000 |
|
Securitization program, at a rate of 1.27% at September 25, 2016 | 50,000 |
| | 43,300 |
|
| 1,046,154 |
| | 1,088,941 |
|
Less: Unamortized debt discount on 3.875% Convertible Senior Subordinated Notes due 2017 | (3,833 | ) | | (22,999 | ) |
Less: Unamortized debt issuance costs | (10,459 | ) | | (6,742 | ) |
| 1,031,862 |
|
| 1,059,200 |
|
Current borrowings | (181,895 | ) | | (417,350 | ) |
Long-term borrowings | $ | 849,967 |
| | $ | 641,850 |
|
4.875% Senior Notes
On May 16, 2016, the Company issued $400.0 million of 4.875% Senior Notes due 2026 (the "2026 Notes"). The Company will pay interest on the 2026 Notes semi-annually on June 1 and December 1, commencing on December 1, 2016, at a rate of 4.875% per year. The 2026 Notes mature on June 1, 2026 unless earlier redeemed by the Company at its option, as described below, or purchased by the Company at the holder’s option under specified circumstances following a Change of Control or Asset Sale (each as defined in the Indenture related to the 2026 Notes) or upon the Company’s election to exercise its optional redemption rights, as described below. The Company incurred transaction fees of approximately $6.5 million, including underwriters’ discounts and commissions, in connection with the offering of the 2026 Notes, which were recorded as a reduction to long-term borrowings and are being amortized over the term of the 2026 Notes. The Company used the net proceeds from the offering to repay borrowings under the Company’s revolving credit facility.
The Company's obligations under the 2026 Notes are fully and unconditionally guaranteed, jointly and severally, by each of the Company’s existing and future 100% owned domestic subsidiaries that is a guarantor or other obligor under the Company’s revolving credit facility and by certain of the Company’s other 100% owned domestic subsidiaries.
At any time on or after June 1, 2021, the Company may, on one or more occasions, redeem some or all of the 2026 Notes at a redemption price of 102.438% of the principal amount of the 2026 Notes subject to redemption, declining, in annual increments of 0.813%, to 100% of the principal amount on June 1, 2024, plus accrued and unpaid interest. In addition, at any time prior to June 1, 2021, the Company may, on one or more occasions, redeem some or all of the 2026 Notes at a redemption price equal to 100% of the principal amount of the 2026 Notes redeemed, plus a “make-whole” premium and any accrued and unpaid interest. The “make-whole” premium is the greater of (a) 1.0% of the principal amount of the 2026 Notes subject to redemption or (b) the excess, if any, over the principal amount of the 2026 Notes of the present value, on the redemption date of the sum of (i) the June 1, 2021 optional redemption price plus (ii) all required interest payments on the 2026 Notes through June 1, 2021 (other than accrued and unpaid interest to the redemption date), generally computed using a discount rate equal to the yield to maturity of U.S. Treasury securities with a constant maturity for the period most nearly equal to the period from the redemption date to June 1, 2021, plus 50 basis points.
In addition, at any time prior to June 1, 2019, the Company may, on one or more occasions, redeem up to 40% of the aggregate principal amount of the 2026 Notes, using the proceeds of specified types of Company equity offerings
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
and subject to specified conditions, at a redemption price equal to 104.875% of the principal amount of the Notes redeemed, plus accrued and unpaid interest.
The 2026 Notes contain covenants that, among other things, limit or restrict the Company’s ability, and the ability of its subsidiaries, to incur additional debt, or issue preferred stock or other disqualified stock; create liens; pay dividends, make investments or make other restricted payments; sell assets; merge, consolidate, sell or otherwise disposes of all or substantially all of the Company's assets; or enter into transactions with the Company's affiliates.
3.875% Convertible Senior Subordinated Notes
For a discussion regarding the classification of the Convertible Notes as a current liability, see Note 8 to the Company's consolidated financial statements included in its annual report on Form 10-K for the year ended December 31, 2015.
Exchange Transactions
On April 4, 2016, pursuant to separate, privately negotiated agreements between the Company and certain of the holders (the "Holders") of its 3.875% Convertible Senior Subordinated Notes due 2017 (the "Convertible Notes"), the Company paid cash and common stock (the "Exchange Consideration") to the Holders in exchange for $219.2 million aggregate principal amount of the Convertible Notes (the "Exchange Transactions"). The Exchange Consideration paid to each of the Holders per $1,000 principal amount of Convertible Notes is equal to: (i) $1,000 in cash, (ii) a number of shares of the Company’s common stock equal to the amount of the conversion value of the Convertible Notes in excess of the $1,000 principal amount (the "Conversion Shares"), calculated on the basis of the average daily volume weighted average price per share of Company common stock over a specified period (the "Average Daily VWAP"), (iii) an inducement payment in additional shares of common stock (the "Inducement Shares"), calculated based on the Average Daily VWAP and (iv) cash in an amount equal to accrued and unpaid interest to, but not including, the closing date. As a result of the Exchange Transactions, the Company paid the Holders aggregate cash consideration of $220.7 million (which includes $1.5 million in accrued but previously unpaid interest) and issued and delivered to the Holders 2.17 million shares of Company common stock (including both Conversion Shares and Inducement Shares).The Company funded the $220.7 million cash payment constituting part of the Exchange Consideration through borrowings under its revolving credit agreement. The issuance of the shares of the Company’s common stock to the Holders pursuant to the Exchange Transactions was made pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), under Section 3(a)(9) of the Securities Act. As a result of the Exchange Transactions, the Company recognized a loss on extinguishment of debt of $16.3 million.
In connection with entering into the Exchange Transactions, the Company also entered into bond hedge unwind agreements (the "Hedge Unwind Agreements") with the dealer counterparties to the convertible note hedge transactions that were effected at the time of the initial issuance of the Convertible Notes. Under the Hedge Unwind Agreements, the number of call options subject to the Convertible Note hedge transactions was reduced to reflect proportionately the reduction in the outstanding principal amount of the Convertible Notes following the Exchange Transactions. In addition, the Company entered into warrant unwind agreements (the “Warrant Unwind Agreements”) with the dealer counterparties to reduce the number of warrants initially issued to the dealer counterparties, also in connection with the initial issuance of the Convertible Notes. On a net basis, after giving effect to the Hedge Unwind Agreements and Warrant Unwind Agreements, the Company received 0.3 million shares of Company common stock from such dealer counterparties.
Conversions
During the second quarter of 2016, the Company settled conversion notices previously received by the Company in respect of $44.3 million in aggregate principal amount of the Convertible Notes (the "Converted Notes"). In accordance with the terms of the supplemental indenture relating to the Convertible Notes, the Company delivered to each holder of the Converted Notes (the "Converting Holders") a combination of cash and shares of Company common stock, based on the conversion methodology set forth in the supplemental indenture. The Company provided the Converting Holders, in the aggregate, $44.3 million in cash and 0.4 million shares of Company common stock. As a result of the conversions, the Company recognized a loss on extinguishment of debt of $3.0 million.
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Under the terms of the agreements related to the Convertible Note hedge transactions, and in connection with the conversions described above, the counterparties to the Convertible Note hedge transactions delivered to the Company a number of shares of Company common stock equal to the number of shares of Company common stock delivered to the Converting Holders. Additionally, the Company entered into warrant unwind agreements with the dealer counterparties to reduce the number of warrants initially issued. The Company delivered 0.4 million shares of Company common stock to the dealer counterparties in connection with the warrant unwind agreements.
Fair Value of Long-Term Borrowings
To determine the fair value of the debt categorized as Level 2 in the table below, the Company uses a discounted cash flow technique that incorporates a market interest yield curve with adjustments for duration, optionality and risk profile. The Company’s implied credit rating is a factor in determining the market interest yield curve. The following table provides the fair value of the Company’s debt as of September 25, 2016 and December 31, 2015, categorized by the level of inputs within the fair value hierarchy used to measure fair value (see Note 10, “Fair value measurement,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for further information):
|
| | | | | | | |
| September 25, 2016 | | December 31, 2015 |
| (Dollars in thousands) |
Level 1 | $ | 390,762 |
| | $ | 858,709 |
|
Level 2 | 937,619 |
| | 687,072 |
|
Total | $ | 1,328,381 |
| | $ | 1,545,781 |
|
Note 8 — Financial instruments
Foreign Currency Forward Contracts Designated as Cash Flow Hedges
The Company uses derivative instruments for risk management purposes. Foreign currency forward contracts are used to manage foreign currency transaction exposure. These derivative instruments are designated as cash flow hedges and are recorded on the condensed consolidated balance sheet at fair market value. The effective portion of the gains or losses on derivatives is reported as a component of other comprehensive loss and thereafter is recognized in the condensed consolidated statement of income in the period or periods during which the hedged transaction affects earnings. Gains and losses on the derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, if any, are recognized in the condensed consolidated statement of income in the period in which such gains and losses occur.
Non-designated Foreign Currency Forward Contracts
The Company uses foreign currency forward contracts as part of its strategy to manage exposure related to near term foreign currency denominated monetary assets and liabilities. These currency forward contracts are not designated as cash flow, fair value or net investment hedges; therefore, the changes in fair value are recorded in the condensed consolidated statement of income as a selling, general and administrative expense. The Company enters into foreign currency forward contracts for periods consistent with its currency translation exposures, which generally approximate one month. For the three and nine months ended September 25, 2016, the Company recognized a loss related to non-designated foreign currency forward contracts of $0.1 million and $1.7 million, respectively.
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The following table presents the location and fair value of derivative financial instruments reported in the condensed consolidated balance sheet as of September 25, 2016 and December 31, 2015:
|
| | | | | | | |
| September 25, 2016 | | December 31, 2015 |
| Fair Value | | Fair Value |
| (Dollars in thousands) |
Asset derivatives: | | | |
Designated foreign currency forward contracts | $ | 615 |
| | $ | 285 |
|
Non-designated foreign currency forward contracts | 519 |
| | 44 |
|
Prepaid expenses and other current assets | $ | 1,134 |
| | $ | 329 |
|
Total asset derivatives | $ | 1,134 |
| | $ | 329 |
|
Liability derivatives: | | | |
Designated foreign currency forward contracts | $ | 2,369 |
| | $ | 807 |
|
Non-designated foreign currency forward contracts | 34 |
| | 491 |
|
Other current liabilities | $ | 2,403 |
| | $ | 1,298 |
|
Total liability derivatives | $ | 2,403 |
| | $ | 1,298 |
|
The total notional amount for all open foreign currency forward contracts designated as cash flow hedges as of September 25, 2016 and December 31, 2015 was $100.1 million and $49.5 million, respectively. The total notional amount for all open non-designated foreign currency forward contracts as of September 25, 2016 and December 31, 2015 was $77.4 million and $69.1 million, respectively. All open foreign currency forward contracts as of September 25, 2016 have durations of twelve months or less.
The following table provides information as to the gains and losses attributable to derivatives in cash flow hedging relationships that were reported in other comprehensive income (loss) (“OCI”) for the three and nine months ended September 25, 2016 and September 27, 2015:
|
| | | | | | | | | | | | | | | |
| After Tax Gain (Loss) Recognized in OCI |
| Three Months Ended | | Nine Months Ended |
| September 25, 2016 | | September 27, 2015 | | September 25, 2016 | | September 27, 2015 |
| (Dollars in thousands) |
Foreign currency forward contracts | $ | (223 | ) | | $ | (730 | ) | | $ | 761 |
| | $ | (1,489 | ) |
See Note 10 for information on the location in the condensed consolidated statements of income and amount of losses/(gains) attributable to derivatives that were reclassified from accumulated other comprehensive income (“AOCI”) to expense (income), net of tax.
There was no ineffectiveness related to the Company’s cash flow hedges during the three and nine months ended September 25, 2016 and September 27, 2015.
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. A portion of the Company’s trade accounts receivable outside the United States, however, 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 those countries and the financial stability of their economies.
An allowance for doubtful accounts is maintained for trade accounts receivable based on the Company’s historical collection experience and expected collectability of the accounts receivable, considering the time an account is outstanding, the financial position of the customer and information provided by credit rating services. The adequacy of this allowance is reviewed each reporting period and adjusted as necessary. The allowance for doubtful accounts
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
was $9.0 million and $8.0 million at September 25, 2016 and December 31, 2015, respectively. The current portion of the allowance for doubtful accounts at September 25, 2016 and December 31, 2015 of $2.1 million and $2.0 million, respectively, was reflected in accounts receivable, net. The allowance for doubtful accounts on receivables outstanding for greater than one year at September 25, 2016 and December 31, 2015 of $6.9 million and $6.0 million, respectively, was reflected in other assets.
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 aggregate net current and long-term trade accounts receivable for 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 the net current and long-term trade accounts receivable for customers in those countries at September 25, 2016 and December 31, 2015 are as follows:
|
| | | | | | | |
| September 25, 2016 |
| December 31, 2015 |
| (Dollars in thousands) |
Current and long-term trade accounts receivable (net of allowances of $8.0 million and $7.2 million at September 25, 2016 and December 31, 2015, respectively) in Greece, Italy, Spain and Portugal (1) | $ | 59,785 |
|
| $ | 62,272 |
|
Percentage of total net current and long-term trade accounts receivable - Greece, Italy, Spain and Portugal | 22.9 | % |
| 23.9 | % |
(1) The long-term portion of trade accounts receivable, net from customers in Greece, Italy, Spain and Portugal at September 25, 2016 and December 31, 2015 was $7.7 million and $8.1 million, respectively, and is reported on the condensed consolidated balance sheet in other assets.
For the nine months ended September 25, 2016 and September 27, 2015, net revenues from customers in Greece, Italy, Spain and Portugal were $95.8 million and $94.4 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, 2015.
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 25, 2016 and December 31, 2015:
|
| | | | | | | | | | | | | | | |
| Total carrying value at September 25, 2016 | | 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 | $ | 7,411 |
| | $ | 7,411 |
| | $ | — |
| | $ | — |
|
Derivative assets | 1,134 |
| | — |
| | 1,134 |
| | — |
|
Derivative liabilities | 2,403 |
| | — |
| | 2,403 |
| | — |
|
Contingent consideration liabilities | 22,368 |
| | — |
| | — |
| | 22,368 |
|
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Total carrying value at December 31, 2015 | | 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 | $ | 6,922 |
| | $ | 6,922 |
| | $ | — |
| | $ | — |
|
Derivative assets | 329 |
| | — |
| | 329 |
| | — |
|
Derivative liabilities | 1,298 |
| | — |
| | 1,298 |
| | — |
|
Contingent consideration liabilities | 20,829 |
| | — |
| | — |
| | 20,829 |
|
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 25, 2016.
The following table provides information regarding changes, during the nine months ended September 25, 2016, in Level 3 financial liabilities related to contingent consideration, which are described below in this Note 9 under "valuation techniques":
|
| | | |
| Contingent consideration |
| 2016 |
| (Dollars in thousands) |
Balance - December 31, 2015 | $ | 20,829 |
|
Payment | (133 | ) |
Revaluations | 1,672 |
|
Balance - September 25, 2016 | $ | 22,368 |
|
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, 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. In connection with several of its acquisitions, the Company agreed to pay contingent consideration upon the achievement of specified objectives, including receipt of regulatory approvals, commercialization of a product or achievement of sales targets. The Company accounts for contingent consideration in accordance with applicable accounting guidance related to business combinations, recording contingent consideration liabilities at the time of an acquisition based on the fair value of future payments under its contingent consideration arrangement. The Company determines the fair value of its contingent consideration liabilities based on a probability-weighted discounted cash flow analysis. In determining the fair value of the contingent consideration liability associated with future payments under contingent consideration arrangements, the Company considers several factors, including:
|
| |
l | estimated cash flows projected from the success of market launches; |
|
| |
l | the estimated time and resources needed to complete the development of acquired technologies; |
|
| |
l | the uncertainty of obtaining regulatory approvals within the required time periods; and |
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
|
| |
l | the risk adjusted discount rate for fair value measurement. |
As the fair value measurement is based on significant inputs not observable in the market, it represents a Level 3 measurement within the fair value hierarchy.
In connection with the Company's contingent consideration arrangements, the Company estimates that it will make payments from 2016 through 2029. As of September 25, 2016, the range of undiscounted amounts the Company could be required to pay under contingent consideration arrangements is between $7.0 million and $46.3 million. The Company is required to reevaluate the fair value of contingent consideration each reporting period based on new developments and record changes in fair value until such consideration is satisfied through payment upon the achievement of the specified objectives or is no longer payable due to failure to achieve the specified objectives.
The following table provides information regarding the valuation techniques and inputs used in determining the fair value of assets or liabilities categorized as Level 3 measurements as of September 25, 2016:
|
| | | | | |
| Valuation Technique | | Unobservable Input | | Range (Weighted Average) |
Contingent consideration | Discounted cash flow | | Discount rate | | 2.3% - 10% (8.4%) |
Contingent consideration | | | Probability of payment | | 2% - 100% (71.3%) |
As of September 25, 2016, the Company recorded $22.4 million of total liabilities for contingent consideration, of which $7.5 million was recorded as the current portion of contingent consideration and $14.9 million was recorded as other liabilities in the condensed consolidated balance sheet.
Note 10 — Changes in 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 shares outstanding:
|
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 25, 2016 | | September 27, 2015 | | September 25, 2016 | | September 27, 2015 |
| (Shares in thousands) |
Basic | 44,045 |
| | 41,597 |
| | 43,081 |
| | 41,542 |
|
Dilutive effect of share-based awards | 639 |
| | 511 |
| | 574 |
| | 483 |
|
Dilutive effect of 3.875% Convertible Notes and warrants | 2,762 |
| | 6,424 |
| | 4,169 |
| | 5,944 |
|
Diluted | 47,446 |
| | 48,532 |
| | 47,824 |
| | 47,969 |
|
Weighted average shares that were antidilutive and therefore not included in the calculation of earnings per share were 1.4 million and 3.9 million for the three and nine months ended September 25, 2016, respectively, and 5.4 million and 5.6 million for the three and nine months ended September 27, 2015, respectively.
In connection with the issuance of the Convertible Notes, the Company entered into convertible note hedge and warrant agreements. The convertible note hedge, consisting of call options held by the Company, economically reduces the dilutive impact of the Convertible Notes. However, applicable accounting guidance requires the Company to separately address the dilutive impact of the warrants issued under the warrant agreements in computing diluted weighted average shares outstanding, without giving effect to the anti-dilutive impact of the call options. The reduction in the number of diluted shares that would result from giving effect to the anti-dilutive impact of the call options would have been 1.5 million and 2.3 million for the three and nine months ended September 25, 2016, respectively, and 3.5 million and 3.3 million for the three and nine months ended September 27, 2015, respectively. The treasury stock method is applied to the warrants when the average market price of the Company's common stock during the reporting
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
period presented exceeds the warrant exercise price of $74.65 per share, and assumes the proceeds from the exercise of the warrants are used by the Company to repurchase shares based on such average market price. Shares issuable upon exercise of the warrants that were included in the total diluted shares outstanding were 1.3 million and 1.9 million for the three and nine months ended September 25, 2016 and 2.9 million and 2.6 million for the three and nine months ended September 27, 2015, respectively.
See Note 7 for information regarding the reduction in the outstanding principal amount of Convertible Notes as a result of the Company's acquisition of Convertibles Notes in exchange for cash and shares of Company common stock, as well as the conversion of a portion of the Convertible Notes, and the related reduction in the number of call options and warrants outstanding under the convertible note hedge and warrant agreements.
The following tables provide information relating to the changes in accumulated other comprehensive loss, net of tax, for the nine months ended September 25, 2016 and September 27, 2015:
|
| | | | | | | | | | | | | | | |
| 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, 2015 | $ | (2,491 | ) | | $ | (138,887 | ) | | $ | (229,746 | ) | | $ | (371,124 | ) |
Other comprehensive income (loss) before reclassifications | (2,255 | ) | | 618 |
| | 11,131 |
| | 9,494 |
|
Amounts reclassified from accumulated other comprehensive income | 3,016 |
| | 3,296 |
| | — |
| | 6,312 |
|
Net current-period other comprehensive income | 761 |
| | 3,914 |
| | 11,131 |
| | 15,806 |
|
Reclassification related to acquisition of noncontrolling interest | — |
| | — |
| | (832 | ) | | (832 | ) |
Balance as of September 25, 2016 | $ | (1,730 | ) | | $ | (134,973 | ) | | $ | (219,447 | ) | | $ | (356,150 | ) |
|
| | | | | | | | | | | | | | | |
| Cash Flow Hedges | | Pension and Other Postretirement Benefit Plans | | Foreign Currency Translation Adjustment | | Accumulated Other Comprehensive (Loss) Income |
| (Dollars in thousands) |
Balance at December 31, 2014 | $ | — |
| | $ | (141,744 | ) | | $ | (119,151 | ) | | $ | (260,895 | ) |
Other comprehensive (loss) before reclassifications | (2,599 | ) | | 465 |
| | (91,137 | ) | | (93,271 | ) |
Amounts reclassified from accumulated other comprehensive loss | 1,110 |
| | 3,157 |
| | — |
| | 4,267 |
|
Net current-period other comprehensive (loss) income | (1,489 | ) | | 3,622 |
| | (91,137 | ) | | (89,004 | ) |
Balance at September 27, 2015 | $ | (1,489 | ) | | $ | (138,122 | ) | | $ | (210,288 | ) | | $ | (349,899 | ) |
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
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 25, 2016 and September 27, 2015:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 25, 2016 | | September 27, 2015 | | September 25, 2016 | | September 27, 2015 |
| (Dollars in thousands) |
Losses on foreign exchange contracts: | | | | | | | |
Cost of goods sold | $ | 535 |
| | $ | 1,168 |
| | $ | 3,907 |
| | $ | 1,431 |
|
Total before tax | 535 |
| | 1,168 |
| | 3,907 |
| | 1,431 |
|
Tax benefit | (187 | ) | | (221 | ) | | (891 | ) | | (321 | ) |
Net of tax | $ | 348 |
| | $ | 947 |
| | $ | 3,016 |
| | $ | 1,110 |
|
Amortization of pension and other postretirement benefit items: | | | | | | | |
Actuarial losses (1) | $ | 1,829 |
| | $ | 1,571 |
| | $ | 5,071 |
| | $ | 4,782 |
|
Prior-service costs(1) | 15 |
| | — |
| | 43 |
| | — |
|
Total before tax | 1,844 |
| | 1,571 |
| | 5,114 |
| | 4,782 |
|
Tax benefit | (657 | ) | | (551 | ) | | (1,818 | ) | | (1,625 | ) |
Net of tax | $ | 1,187 |
| | $ | 1,020 |
| | $ | 3,296 |
| | $ | 3,157 |
|
| | | | | | | |
Total reclassifications, net of tax | $ | 1,535 |
| | $ | 1,967 |
| | $ | 6,312 |
| | $ | 4,267 |
|
| |
(1) | These accumulated other comprehensive (loss) income components are included in the computation of net benefit expense for pension 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 25, 2016 | | September 27, 2015 | | September 25, 2016 | | September 27, 2015 |
Effective income tax rate | 10.2% | | 1.3% | | 9.3% | | 9.5% |
The effective income tax rate for the three and nine months ended September 25, 2016 was 10.2% and 9.3%, respectively, and 1.3% and 9.5% for the three and nine months ended September 27, 2015, respectively. The effective income tax rate for the three and nine months ended September 25, 2016, as compared to the prior year period, reflects an increased tax expense associated with a shift in income to jurisdictions with higher tax rates. The effective income tax rate for the three months ended September 27, 2015 also reflects a benefit associated with a legislative tax rate change.
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. The defined benefit pension plans are noncontributory. The benefits under these plans are based primarily on years of service and employees’ pay near retirement. The Company’s funding policy for U.S. plans is to contribute annually, at a minimum, amounts required by applicable laws and regulations. Obligations under non-U.S. plans are systematically provided for by depositing funds with trustees or by book reserves. As of September 25, 2016, 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.
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The Company and certain of its subsidiaries provide medical, dental and life insurance benefits to pensioners or their survivors. The associated plans are unfunded and approved claims are paid from Company funds.
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 25, 2016 | | September 27, 2015 | | September 25, 2016 | | September 27, 2015 | | September 25, 2016 | | September 27, 2015 | | September 25, 2016 | | September 27, 2015 |
| (Dollars in thousands) |
Service cost | $ | 656 |
| | $ | 470 |
| | $ | 44 |
| | $ | 157 |
| | $ | 1,963 |
| | $ | 1,410 |
| | $ | 266 |
| | $ | 371 |
|
Interest cost | 3,948 |
| | 4,492 |
| | 383 |
| | 452 |
| | 11,797 |
| | 13,463 |
| | 1,196 |
| | 1,476 |
|
Expected return on plan assets | (6,209 | ) | | (6,606 | ) | | — |
| | — |
| | (18,606 | ) | | (19,457 | ) | | — |
| | — |
|
Net amortization and deferral | 1,781 |
| | 1,563 |
| | 63 |
| | 8 |
| | 4,937 |
| | 4,620 |
| | 177 |
| | 162 |
|
Net benefits expense (income) | $ | 176 |
| | $ | (81 | ) | | $ | 490 |
| | $ | 617 |
| | $ | 91 |
| | $ | 36 |
| | $ | 1,639 |
| | $ | 2,009 |
|
The Company’s pension contributions are expected to be approximately $12.4 million during 2016, of which $12.2 million was contributed during the nine months ended September 25, 2016.
Note 13 — Commitments and contingent liabilities
Operating leases: The Company uses various leased facilities and equipment in its operations.
In the first quarter 2016, the Company entered into a build-to-suit lease with respect to a facility in Ireland that will be used for the Company's European and global operations headquarters. Under the build-to-suit lease, the landlord is responsible for the construction and configuration of the facility to the Company's specifications, and the Company is obligated to lease the facility following construction completion. In accordance with applicable accounting principles, the Company is deemed the owner of the facility during the construction period and is required to record, during the construction period, the estimated fair value of the incurred construction costs as construction in progress, and a liability for the costs not funded by the Company. As of September 25, 2016, the Company recorded $14.6 million in property, plant and equipment representing the estimated fair value of the incurred construction costs. The construction of the building and tenant improvements were completed and the Company took occupancy of the entire building in October 2016, at which point, the Company derecognized the assets and related liabilities pertaining to the leased facility.
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 25, 2016, the Company has recorded $1.0 million and $5.3 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 25, 2016. The time frame over which the accrued amounts may be paid out, based on past history, is estimated to be 15-20 years.
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
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, intellectual property, employment, environmental and other matters. As of September 25, 2016, the Company has recorded accrued liabilities of $2.5 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. Of the amount accrued as of September 25, 2016, $1.5 million pertains to discontinued operations.
In 2006, the Company was named as a defendant in a wrongful death product liability lawsuit filed in the Louisiana State District Court for the Parish of Calcasieu, involving a product manufactured by the Company’s former marine business. In September 2014, the case was tried before a jury, which returned a verdict in favor of the Company. The plaintiff subsequently filed a motion for a new trial, which was granted, and the case was re-tried before a jury in December 2014. On December 5, 2014, the jury returned a verdict in favor of the plaintiff, awarding $0.1 million in compensatory damages and $23.0 million in punitive damages, plus pre-judgment and post-judgment interest on the compensatory damages and post-judgment interest on the punitive damages. The Company's post-trial motions seeking to overturn the verdict or reduce the amount of damages were denied in June 2015. The Company appealed to the Louisiana Court of Appeal, and the plaintiff filed a cross-appeal, seeking to overturn the trial court’s denial of pre-judgment interest on the punitive damages award. On June 29, 2016, the Louisiana Court of Appeal affirmed the trial court verdict in all respects. The Company filed a motion for rehearing with the Louisiana Court of Appeal, which was denied on August 3, 2016. The Company and the plaintiff have filed motions for writ of certiorari (a request for review) to the Louisiana Supreme Court, which are currently pending. As of September 25, 2016, the Company has accrued a liability representing its best estimate of probable loss associated with this matter, which is included in the Company’s accrued liabilities for litigation matters relating to discontinued operations discussed in the preceding paragraph. The Company believes that any liability arising from this matter in excess of $10.0 million will be covered by the Company’s product liability insurance.
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 25, 2016, the most significant tax examinations in process are in Austria and Canada. The Company may establish reserves with respect to its uncertain tax positions, after which it adjusts its reserves to address developments with respect to these uncertain tax positions. 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.
Other: The Company has various purchase commitments for materials, supplies and items of permanent investment incident to the ordinary conduct of its business. On average, such commitments are not at prices in excess of current market prices.
Note 14 — Segment information
An operating segment is a component of the Company (a) that engages in business activities from which it may earn revenues and incur expenses, (b) whose operating results are regularly reviewed by the Company’s chief operating decision maker to make decisions about resources to be allocated to the segment and to assess its performance, and (c) for which discrete financial information is available. The Company does not evaluate its operating segments using discrete asset information.
The Company has the following six reportable operating segments: Vascular North America, Anesthesia North America, Surgical North America, EMEA (Europe, Middle East and Africa), Asia and OEM (Original Equipment Manufacturer and Development Services). The Company's reportable segments, other than the OEM segment, design, manufacture and distribute medical devices primarily used in critical care, surgical applications and cardiac care and
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
generally serve two end markets: hospitals and healthcare providers, and home health. The products of these segments are most widely used in the acute care setting for a range of diagnostic and therapeutic procedures and in general and specialty surgical applications. The Company’s OEM segment designs, manufactures and supplies devices and instruments for other medical device manufacturers.
Operating segments other than the reportable operating segments are collectively presented in the “All other” category within the tabular information set forth below.
The following tables present the Company’s segment results for the three and nine months ended September 25, 2016 and September 27, 2015:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 25, 2016 | | September 27, 2015 | | September 25, 2016 | | September 27, 2015 |
| (Dollars in thousands) | | (Dollars in thousands) |
Revenue | | | | | | | |
Vascular North America | $ | 85,118 |
| | $ | 82,675 |
| | $ | 254,817 |
| | $ | 244,606 |
|
Anesthesia North America | 48,670 |
| | 47,628 |
| | 143,821 |
| | 138,656 |
|
Surgical North America | 41,827 |
| | 39,591 |
| | 123,904 |
| | 118,170 |
|
EMEA | 121,398 |
| | 120,854 |
| | 375,198 |
| | 379,268 |
|
Asia | 64,087 |
| | 61,935 |
| | 176,434 |
| | 172,506 |
|
OEM | 41,418 |
| | 38,959 |
| | 115,693 |
| | 111,592 |
|
All other | 53,130 |
| | 52,072 |
| | 164,227 |
| | 160,391 |
|
Consolidated net revenues | $ | 455,648 |
| | $ | 443,714 |
| | $ | 1,354,094 |
| | $ | 1,325,189 | |