TELEFLEX INC - Quarter Report: 2020 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| (Mark One) | |||||
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 27, 2020
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to .
Commission file number 1-5353
TELEFLEX INCORPORATED
(Exact name of registrant as specified in its charter)
| Delaware | 23-1147939 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification no.) | |||||||
550 E. Swedesford Rd., Suite 400 Wayne, PA 19087
(Address of principal executive offices and 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)
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||||||||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, par value $1.00 per share | TFX | New York Stock Exchange | ||||||||||||
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||||||||
| Emerging growth company | ☐ | |||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The registrant had 46,566,715 shares of common stock, par value $1.00 per share, outstanding as of October 27, 2020.
TELEFLEX INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 27, 2020
TABLE OF CONTENTS
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1
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
TELEFLEX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| (Dollars and shares in thousands, except per share) | |||||||||||||||||||||||
| Net revenues | $ | 628,301 | $ | 648,319 | $ | 1,825,977 | $ | 1,914,410 | |||||||||||||||
| Cost of goods sold | 298,977 | 293,244 | 884,657 | 883,127 | |||||||||||||||||||
| Gross profit | 329,324 | 355,075 | 941,320 | 1,031,283 | |||||||||||||||||||
| Selling, general and administrative expenses | 171,673 | 209,291 | 510,662 | 631,712 | |||||||||||||||||||
| Research and development expenses | 29,218 | 27,984 | 85,978 | 82,729 | |||||||||||||||||||
| Restructuring and impairment (credits) charges | (3,659) | 1,268 | 16,692 | 20,348 | |||||||||||||||||||
| Gain on sale of assets | — | (1,089) | — | (3,828) | |||||||||||||||||||
| Income from continuing operations before interest and taxes | 132,092 | 117,621 | 327,988 | 300,322 | |||||||||||||||||||
| Interest expense | 16,652 | 19,545 | 47,773 | 62,995 | |||||||||||||||||||
| Interest income | (214) | (470) | (956) | (1,281) | |||||||||||||||||||
| Income from continuing operations before taxes | 115,654 | 98,546 | 281,171 | 238,608 | |||||||||||||||||||
| (Benefit) taxes on income from continuing operations | (951) | (130,383) | 21,971 | (115,567) | |||||||||||||||||||
| Income from continuing operations | 116,605 | 228,929 | 259,200 | 354,175 | |||||||||||||||||||
| Operating loss from discontinued operations | (29) | (9) | (11) | (1,291) | |||||||||||||||||||
| Tax benefit on operating loss from discontinued operations | (11) | (9) | (4) | (317) | |||||||||||||||||||
| Loss from discontinued operations | (18) | — | (7) | (974) | |||||||||||||||||||
| Net income | $ | 116,587 | $ | 228,929 | $ | 259,193 | $ | 353,201 | |||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic: | |||||||||||||||||||||||
| Income from continuing operations | $ | 2.51 | $ | 4.95 | $ | 5.58 | $ | 7.67 | |||||||||||||||
| Loss from discontinued operations | — | — | — | (0.02) | |||||||||||||||||||
| Net income | $ | 2.51 | $ | 4.95 | $ | 5.58 | $ | 7.65 | |||||||||||||||
| Diluted: | |||||||||||||||||||||||
| Income from continuing operations | $ | 2.46 | $ | 4.85 | $ | 5.48 | $ | 7.53 | |||||||||||||||
| Loss from discontinued operations | — | — | — | (0.02) | |||||||||||||||||||
| Net income | $ | 2.46 | $ | 4.85 | $ | 5.48 | $ | 7.51 | |||||||||||||||
| Weighted average common shares outstanding | |||||||||||||||||||||||
| Basic | 46,530 | 46,248 | 46,451 | 46,156 | |||||||||||||||||||
| Diluted | 47,333 | 47,176 | 47,269 | 47,051 | |||||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
2
TELEFLEX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Net income | $ | 116,587 | $ | 228,929 | $ | 259,193 | $ | 353,201 | |||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
Foreign currency translation, net of tax of $6,957, $(7,045), $1,671, and $(8,804) for the three and nine month periods, respectively | 20,632 | (39,894) | 20,087 | (27,562) | |||||||||||||||||||
Pension and other postretirement benefit plans adjustment, net of tax of $(303), $(494), $(1,229), and $(1,330) for the three and nine months periods, respectively | 1,037 | 1,560 | 4,071 | 4,248 | |||||||||||||||||||
Derivatives qualifying as hedges, net of tax of $(184), $64, $252, and $146 for the three and nine months periods, respectively | 1,454 | (260) | (3,458) | (102) | |||||||||||||||||||
| Other comprehensive income (loss), net of tax: | 23,123 | (38,594) | 20,700 | (23,416) | |||||||||||||||||||
| Comprehensive income | $ | 139,710 | $ | 190,335 | $ | 279,893 | $ | 329,785 | |||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
TELEFLEX INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 27, 2020 | December 31, 2019 | ||||||||||
| (Dollars in thousands) | |||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 347,480 | $ | 301,083 | |||||||
| Accounts receivable, net | 390,476 | 418,673 | |||||||||
| Inventories | 526,125 | 476,557 | |||||||||
| Prepaid expenses and other current assets | 101,452 | 97,943 | |||||||||
| Prepaid taxes | 55,028 | 12,076 | |||||||||
| Total current assets | 1,420,561 | 1,306,332 | |||||||||
| Property, plant and equipment, net | 445,242 | 430,719 | |||||||||
| Operating lease assets | 102,924 | 113,160 | |||||||||
| Goodwill | 2,363,837 | 2,245,305 | |||||||||
| Intangible assets, net | 2,228,930 | 2,156,285 | |||||||||
| Deferred tax assets | 4,915 | 5,572 | |||||||||
| Other assets | 46,879 | 52,447 | |||||||||
| Total assets | $ | 6,613,288 | $ | 6,309,820 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Current borrowings | $ | 91,750 | $ | 50,000 | |||||||
| Accounts payable | 96,917 | 102,916 | |||||||||
| Accrued expenses | 117,493 | 100,466 | |||||||||
| Current portion of contingent consideration | 4,744 | 148,090 | |||||||||
| Payroll and benefit-related liabilities | 98,828 | 115,981 | |||||||||
| Accrued interest | 22,547 | 5,514 | |||||||||
| Income taxes payable | 10,873 | 6,692 | |||||||||
| Other current liabilities | 32,095 | 33,396 | |||||||||
| Total current liabilities | 475,247 | 563,055 | |||||||||
| Long-term borrowings | 2,035,823 | 1,858,943 | |||||||||
| Deferred tax liabilities | 486,350 | 439,558 | |||||||||
| Pension and postretirement benefit liabilities | 55,795 | 82,719 | |||||||||
| Noncurrent liability for uncertain tax positions | 12,562 | 10,294 | |||||||||
| Noncurrent contingent consideration | 16,872 | 71,818 | |||||||||
| Noncurrent operating lease liabilities | 91,379 | 101,372 | |||||||||
| Other liabilities | 203,057 | 202,741 | |||||||||
| Total liabilities | 3,377,085 | 3,330,500 | |||||||||
| Commitments and contingencies | |||||||||||
| Total shareholders' equity | 3,236,203 | 2,979,320 | |||||||||
| Total liabilities and shareholders' equity | $ | 6,613,288 | $ | 6,309,820 | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
TELEFLEX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended | |||||||||||
| September 27, 2020 | September 29, 2019 | ||||||||||
| (Dollars in thousands) | |||||||||||
| Cash flows from operating activities of continuing operations: | |||||||||||
| Net income | $ | 259,193 | $ | 353,201 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Loss from discontinued operations | 7 | 974 | |||||||||
| Depreciation expense | 51,329 | 47,286 | |||||||||
| Intangible asset amortization expense | 118,649 | 112,661 | |||||||||
| Deferred financing costs and debt discount amortization expense | 3,191 | 3,313 | |||||||||
| Gain on sale of assets | — | (3,828) | |||||||||
| Fair value step up of acquired inventory sold | 1,707 | — | |||||||||
| Changes in contingent consideration | (54,585) | 40,894 | |||||||||
| Impairment of long-lived assets | — | 6,911 | |||||||||
| Stock-based compensation | 14,759 | 20,037 | |||||||||
| Deferred income taxes, net | 2,600 | (140,963) | |||||||||
| Payments for contingent consideration | (79,771) | (26,092) | |||||||||
| Interest benefit on swaps designated as net investment hedges | (14,488) | (13,820) | |||||||||
| Other | (15,703) | (7,142) | |||||||||
| Changes in assets and liabilities, net of effects of acquisitions and disposals: | |||||||||||
| Accounts receivable | 35,546 | (41,221) | |||||||||
| Inventories | (38,096) | (53,259) | |||||||||
| Prepaid expenses and other assets | 9,393 | (13,184) | |||||||||
| Accounts payable, accrued expenses and other liabilities | (4,243) | 31,631 | |||||||||
| Income taxes receivable and payable, net | (48,000) | (28,232) | |||||||||
| Net cash provided by operating activities from continuing operations | 241,488 | 289,167 | |||||||||
| Cash flows from investing activities of continuing operations: | |||||||||||
| Expenditures for property, plant and equipment | (62,369) | (83,797) | |||||||||
| Proceeds from sale of assets | 400 | 3,135 | |||||||||
| Payments for businesses and intangibles acquired, net of cash acquired | (266,843) | (1,265) | |||||||||
| Net interest proceeds on swaps designated as net investment hedges | 9,986 | 8,330 | |||||||||
| Net cash used in investing activities from continuing operations | (318,826) | (73,597) | |||||||||
| Cash flows from financing activities of continuing operations: | |||||||||||
| Proceeds from new borrowings | 1,013,807 | 25,000 | |||||||||
| Reduction in borrowings | (788,807) | (185,500) | |||||||||
| Debt extinguishment, issuance and amendment fees | (8,440) | (4,964) | |||||||||
| Net proceeds from share based compensation plans and the related tax impacts | 11,177 | 14,014 | |||||||||
| Payments for contingent consideration | (64,135) | (112,006) | |||||||||
| Dividends paid | (47,384) | (47,071) | |||||||||
| Net cash provided by (used in) financing activities from continuing operations | 116,218 | (310,527) | |||||||||
| Cash flows from discontinued operations: | |||||||||||
| Net cash (used in) provided by operating activities | (540) | 2,651 | |||||||||
| Net cash (used in) provided by discontinued operations | (540) | 2,651 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 8,057 | (7,311) | |||||||||
| Net increase (decrease) in cash and cash equivalents | 46,397 | (99,617) | |||||||||
| Cash and cash equivalents at the beginning of the period | 301,083 | 357,161 | |||||||||
| Cash and cash equivalents at the end of the period | $ | 347,480 | $ | 257,544 | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
TELEFLEX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
| Common Stock | Additional Paid In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Dollars | Shares | Dollars | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars and shares in thousands, except per share) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 47,536 | $ | 47,536 | $ | 616,980 | $ | 2,824,916 | $ | (344,392) | 1,182 | $ | (165,720) | $ | 2,979,320 | |||||||||||||||||||||||||||||||||
| Cumulative effect adjustment resulting from the adoption of new accounting standards | (791) | (791) | |||||||||||||||||||||||||||||||||||||||||||||
| Net income | 131,150 | 131,150 | |||||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($0.34 per share) | (15,767) | (15,767) | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (20,327) | (20,327) | |||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under compensation plans | 24 | 24 | (3,074) | (37) | 1,748 | (1,302) | |||||||||||||||||||||||||||||||||||||||||
| Deferred compensation | 383 | (5) | 358 | 741 | |||||||||||||||||||||||||||||||||||||||||||
| Balance at March 29, 2020 | 47,560 | 47,560 | 614,289 | 2,939,508 | (364,719) | 1,140 | (163,614) | 3,073,024 | |||||||||||||||||||||||||||||||||||||||
| Net income | 11,456 | 11,456 | |||||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($0.34 per share) | (15,791) | (15,791) | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 17,904 | 17,904 | |||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under compensation plans | 35 | 35 | 10,516 | (3) | 175 | 10,726 | |||||||||||||||||||||||||||||||||||||||||
| Deferred compensation | — | (1) | 83 | 83 | |||||||||||||||||||||||||||||||||||||||||||
| Balance at June 28, 2020 | 47,595 | 47,595 | 624,805 | 2,935,173 | (346,815) | 1,136 | (163,356) | 3,097,402 | |||||||||||||||||||||||||||||||||||||||
| Net income | 116,587 | 116,587 | |||||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($0.34 per share) | (15,826) | (15,826) | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 23,123 | 23,123 | |||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under compensation plans | 102 | 102 | 14,671 | (1) | 13 | 14,786 | |||||||||||||||||||||||||||||||||||||||||
| Deferred compensation | (228) | — | 359 | 131 | |||||||||||||||||||||||||||||||||||||||||||
| Balance at September 27, 2020 | 47,697 | $ | 47,697 | $ | 639,248 | $ | 3,035,934 | $ | (323,692) | 1,135 | $ | (162,984) | $ | 3,236,203 | |||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Dollars | Shares | Dollars | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars and shares in thousands, except per share) | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | 47,248 | $ | 47,248 | $ | 574,761 | $ | 2,427,599 | $ | (341,085) | 1,232 | $ | (168,545) | $ | 2,539,978 | |||||||||||||||||||||||||||||||||
| Cumulative effect adjustment resulting from the adoption of new accounting standards | (1,321) | (1,321) | |||||||||||||||||||||||||||||||||||||||||||||
Net income | 40,897 | 40,897 | |||||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($0.34 per share) | (15,650) | (15,650) | |||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | 396 | 396 | |||||||||||||||||||||||||||||||||||||||||||||
Shares issued under compensation plans | 75 | 75 | 3,094 | (40) | 2,029 | 5,198 | |||||||||||||||||||||||||||||||||||||||||
Deferred compensation | 127 | (4) | 253 | 380 | |||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2019 | 47,323 | 47,323 | 577,982 | 2,451,525 | (340,689) | 1,188 | (166,263) | 2,569,878 | |||||||||||||||||||||||||||||||||||||||
| Net income | 83,375 | 83,375 | |||||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($0.34 per share) | (15,697) | (15,697) | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 14,782 | 14,782 | |||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under compensation plans | 77 | 77 | 12,252 | (2) | 177 | 12,506 | |||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2019 | 47,400 | 47,400 | 590,234 | 2,519,203 | (325,907) | 1,186 | (166,086) | 2,664,844 | |||||||||||||||||||||||||||||||||||||||
| Net income | 228,929 | 228,929 | |||||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($0.34 per share) | (15,724) | (15,724) | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | (38,594) | (38,594) | |||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under compensation plans | 63 | 63 | 13,400 | (2) | 58 | 13,521 | |||||||||||||||||||||||||||||||||||||||||
| Balance as of September 29, 2019 | 47,463 | $ | 47,463 | 603,634 | $ | 2,732,408 | $ | (364,501) | 1,184 | (166,028) | 2,852,976 | ||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Basis of presentation
The accompanying unaudited condensed consolidated financial statements of Teleflex Incorporated and its subsidiaries (“we,” “us,” “our" and “Teleflex”) 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 the financial statements for interim periods in accordance with accounting principles generally accepted in the United States of America ("GAAP") and Rule 10-01 of Securities and Exchange Commission ("SEC") Regulation S-X, which sets forth the instructions for the form and content of presentation of 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 particularly as it relates to estimates reliant on forecasts and other assumptions impacted by the COVID-19 pandemic, which are described in more detail in the "Risks and Uncertainties" section below. The results of operations for the periods reported are not necessarily indicative of those that may be expected for a full year.
In accordance with applicable accounting standards and as permitted by Rule 10-01 of Regulation S-X, the accompanying condensed consolidated financial statements do not include all of the information and footnote disclosures that are required to be included in our annual consolidated financial statements. Therefore, our quarterly condensed consolidated financial statements should be read in conjunction with our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019. For the three and nine months ended September 27, 2020 intangible asset amortization expense of $21.2 million and $63.2 million, respectively, is included within costs of good sold. For the three and nine months ended September 29, 2019, we reclassified intangible asset amortization expense of $20.6 million and $62.1 million, respectively, from selling, general and administrative expenses to cost of goods sold for comparability.
Risks and Uncertainties
We are subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict due to the rapidly evolving environment and continued uncertainties created by the COVID-19 pandemic. Among other things, the response to the COVID-19 pandemic has had the effect of reducing the number of elective procedures being carried out by our customers, thereby reducing demand for products used in elective procedures, while creating an increase in demand for products used in the treatment of patients with COVID-19. The COVID-19 pandemic has significantly impacted economic activity and markets around the world through government-mandated and self-imposed shut-downs in many countries, which were implemented to protect individuals and control the spread of COVID-19. If the pandemic continues and conditions worsen, it could negatively impact our business, results of operations, financial condition and liquidity in numerous ways, including, but not limited to, lower revenues in our product categories dependent on elective procedures; further disruption in the manufacture of our products including increased manufacturing and distribution costs; extended delays in or defaults on payments of outstanding receivables; and increased volatility and pricing in capital markets. Further, the COVID-19 pandemic may cause disruption to our suppliers or their suppliers and/or the distribution of our products, whether through our direct sales force or our distributors.
The severity of the impact of the COVID-19 pandemic on our business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on our employees, contractors, suppliers, customers and other business partners, all of which are uncertain and cannot be predicted. As of the date of issuance of these condensed consolidated financial statements, the extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity, or results of operations is uncertain.
Note 2 — Recently issued accounting standards
In , the Financial Accounting Standards Board ("FASB") issued new guidance that changes the methodology to be used to measure credit losses for certain financial instruments and financial assets, including trade receivables. The new guidance requires the recognition of an allowance that reflects the current estimate of
7
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
credit losses expected to be incurred over the life of the financial asset, based not only on historical experience and current conditions, but also on reasonable forecasts. The main objective of the new guidance is to provide financial statement users with more useful information in making decisions about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. Under previous guidance, an entity reflects credit losses on financial assets measured on an amortized cost basis only when it is probable that losses have been incurred, generally considering only past events and current conditions in determining the incurred loss. We adopted the new standard on January 1, 2020 using a modified retrospective transition approach by recognizing a cumulative-effect adjustment of $0.8 million to reduce our opening balance of retained earnings as of the adoption date. Prior period amounts have not been adjusted and continue to reflect our historical accounting.
In December 2019, the FASB issued new guidance that simplifies various aspects of accounting for income taxes including those related to the step-up in the tax basis of goodwill, intraperiod tax allocations and the interim period effects of changes in tax laws or rates. The new guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The majority of the modifications under the new guidance will be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings on January 1, 2021. We are currently evaluating the impact the guidance will have on our consolidated financial statements and related disclosures.
In March 2020, the SEC adopted final rules that amend the financial disclosure requirements for subsidiary issuers and guarantors of registered debt securities in Rule 3-10 of Regulation S-X. The SEC amended its financial disclosure requirements for companies that conduct registered debt offerings involving subsidiaries as either issuers or guarantors and affiliates whose securities are pledged as collateral. The SEC narrowed the circumstances that require separate financial statements of subsidiary issuers and guarantors and streamlined the alternative disclosures required in lieu of those statements. The SEC replaced the requirement for separate financial statements of affiliates whose securities are pledged as collateral for registered securities with requirements similar to those adopted for subsidiary issuers and guarantors. The new disclosures may be located, in all cases, outside of the financial statements. The rule is effective January 4, 2021, but earlier compliance is permitted. We adopted the new rule during the first quarter of 2020. The disclosures are now located within the Liquidity and Capital Resources section of Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.
From time to time, new accounting guidance is issued by the FASB or other standard setting bodies that is adopted by us as of the effective date or, in some cases where early adoption is permitted, in advance of the effective date. We have 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 consolidated results of operations, cash flows or financial position.
Note 3 - Net revenues
We primarily generate revenue from the sale of medical devices including single use disposable devices and, to a lesser extent, reusable devices, instruments and capital equipment. Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; this occurs upon the transfer of control of the products. Generally, transfer of control to the customer occurs at the point in time when our products are shipped from the manufacturing or distribution facility. For our Original Equipment and Development Services ("OEM") segment, most revenue is recognized over time because the OEM segment generates revenue from the sale of custom products that have no alternative use and we have an enforceable right to payment to the extent that performance has been completed. We market and sell products through our direct sales force and distributors to customers within the following end markets: (1) hospitals and healthcare providers; (2) other medical device manufacturers; and (3) home care providers such as pharmacies, which comprised 87%, 10% and 3% of consolidated net revenues, respectively, for the nine months ended September 27, 2020. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. With respect to the custom products sold in the OEM segment, revenue is measured using the units produced output method. Payment is generally due 30 days from the date of invoice.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The following table disaggregates revenue by global product category for the three and nine months ended September 27, 2020 and September 29, 2019.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Vascular access | $ | 160,052 | $ | 148,681 | $ | 475,252 | $ | 446,225 | |||||||||||||||
| Anesthesia | 75,647 | 87,123 | 216,204 | 253,098 | |||||||||||||||||||
| Interventional | 93,187 | 106,883 | 275,704 | 314,852 | |||||||||||||||||||
| Surgical | 82,223 | 92,621 | 224,928 | 274,911 | |||||||||||||||||||
| Interventional urology | 81,773 | 73,629 | 196,114 | 201,312 | |||||||||||||||||||
| OEM | 49,399 | 55,444 | 168,618 | 166,110 | |||||||||||||||||||
Other (1) | 86,020 | 83,938 | 269,157 | 257,902 | |||||||||||||||||||
Net revenues (2) | $ | 628,301 | $ | 648,319 | $ | 1,825,977 | $ | 1,914,410 | |||||||||||||||
(1) Includes revenues generated from sales of our respiratory and urology products (other than interventional urology products).
(2) The product categories listed above are presented on a global basis, while each of our reportable segments other than the OEM reportable segment are defined based on the geographic location of its operations; the OEM reportable segment operates globally. Each of the geographically based reportable segments include net revenues from each of the non-OEM product categories listed above.
Note 4 — Acquisitions
On February 18, 2020, we acquired IWG High Performance Conductors, Inc. (HPC), a privately-held original equipment manufacturer of minimally invasive medical products and high performance conductors, for $260.0 million. The acquisition, which complements our OEM product portfolio, was financed using borrowings under our revolving credit facility. Based on the preliminary purchase price allocation, the assets acquired principally consist of customer relationships of $139.0 million, intellectual property of $40.0 million and goodwill of $107.1 million. The intangible assets are being amortized over a useful life of 20 years. Goodwill arising from the acquisition represents costs synergies, revenue growth attributable to anticipated increased market penetration from acquired products and future customers and is not tax deductible.
Note 5 — Restructuring and impairment (credits) charges
2020 Workforce reduction plan
During the second quarter of 2020, we committed to a workforce reduction designed to improve profitability and reduce cost primarily by streamlining certain sales and marketing functions in our EMEA segment and certain manufacturing operations in our OEM segment. The workforce reduction was initiated to further align the business with our high growth strategic objectives. We estimate that we will incur aggregate pre-tax restructuring charges of $10 million to $13 million, consisting primarily of termination benefits, all of which will result in future cash outlays. This program will be substantially complete during 2020 and as a result most of these charges are expected to be incurred prior to the end of 2020.
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TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Footprint realignment plans
We have ongoing restructuring programs primarily related to the relocation of manufacturing operations to existing lower-cost locations and related workforce reductions (referred to as the 2019, 2018 and 2014 Footprint realignment plans). The following tables provide a summary of our cost estimates and other information associated with these ongoing Footprint realignment plans:
2019 Footprint realignment plan (3) | 2018 Footprint realignment plan | 2014 Footprint realignment plan (4) | |||||||||||||||
| Program expense estimates: | (Dollars in millions) | ||||||||||||||||
| Termination benefits | $16 to $20 | $60 to $70 | $12 to $13 | ||||||||||||||
Other costs (1) | 2 to 2 | 2 to 4 | 1 to 2 | ||||||||||||||
| Restructuring charges | 18 to 22 | 62 to 74 | 13 to 15 | ||||||||||||||
Restructuring related charges (2) | 40 to 45 | 40 to 59 | 38 to 40 | ||||||||||||||
| Total restructuring and restructuring related charges | $58 to $67 | $102 to $133 | $51 to $55 | ||||||||||||||
| Other program estimates: | |||||||||||||||||
| Expected cash outlays | $55 to $63 | $99 to $127 | $42 to $46 | ||||||||||||||
| Expected capital expenditures | $27 to $33 | $19 to $23 | $25 to $26 | ||||||||||||||
| Other program information: | |||||||||||||||||
| Period initiated | February 2019 | May 2018 | April 2014 | ||||||||||||||
| Estimated period of substantial completion | 2022 | 2022 (5) | 2022 | ||||||||||||||
| Aggregate restructuring charges | $14.6 | $59.1 | $13.5 | ||||||||||||||
| Restructuring reserve: | |||||||||||||||||
| Balance as of September 27, 2020 | $7.9 | $47.2 | $3.7 | ||||||||||||||
| Restructuring related charges incurred: | |||||||||||||||||
| Three Months Ended September 27, 2020 | $4.3 | $3.3 | $1.0 | ||||||||||||||
| Nine Months Ended September 27, 2020 | $10.7 | $6.0 | $2.7 | ||||||||||||||
| Aggregate restructuring related charges | $17.3 | $13.2 | $35.0 | ||||||||||||||
(1)Includes facility closure, employee relocation, equipment relocation and outplacement costs.
(2)Restructuring related charges represent costs that are directly related to the programs and principally constitute costs to transfer manufacturing operations to the existing lower-cost locations, project management costs and accelerated depreciation. The 2018 Footprint realignment plan also includes a charge associated with our exit from the facilities that is expected to be imposed by the taxing authority in the affected jurisdiction. Excluding this tax charge, substantially all of the restructuring related charges are expected to be recognized within cost of goods sold.
(3)During the second quarter of 2020, we refined the disclosed ranges for the program expense and other program estimates in consideration of the progress made to date as well as the actions remaining.
(4)During the second quarter of 2020, we delayed the timing of substantial completion from our prior estimate of 2021 due to an extension in the development and qualification timeline, identified during the second quarter of 2020, for a component to be included in certain of our kits sold by our anesthesia business in North America. The shift in timing also resulted in an increase in the total program cost estimate and related cash outlays and as a result, we increased the high end of the ranges by $3 million. With respect to capital expenditures, we have also refined the range.
(5)We accelerated the timing of substantial completion from our prior estimate of 2024 to take advantage of an opportunity we identified during the second quarter of 2020 to accelerate the recognition of estimated savings.
| Three Months Ended September 27, 2020 | |||||||||||||||||
| Termination benefits | Other costs (1) | Total | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| 2020 Workforce reduction plan | $ | (471) | $ | 255 | $ | (216) | |||||||||||
| 2019 Footprint realignment plan | (785) | 368 | (417) | ||||||||||||||
| 2018 Footprint realignment plan | (3,006) | 83 | (2,923) | ||||||||||||||
Other restructuring programs (2) | (151) | 48 | (103) | ||||||||||||||
| Restructuring (credits) charges | $ | (4,413) | $ | 754 | $ | (3,659) | |||||||||||
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TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
| Three Months Ended September 29, 2019 | |||||||||||||||||
| Termination benefits | Other costs (1) | Total | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| 2019 Footprint realignment plan | $ | 584 | $ | 38 | $ | 622 | |||||||||||
| 2018 Footprint realignment plan | 315 | 74 | 389 | ||||||||||||||
Other restructuring programs (3) | 7 | 250 | 257 | ||||||||||||||
| Restructuring charges | $ | 906 | $ | 362 | $ | 1,268 | |||||||||||
| Nine Months Ended September 27, 2020 | |||||||||||||||||
| Termination benefits | Other costs (1) | Total | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| 2020 Workforce reduction plan | $ | 10,093 | $ | 255 | $ | 10,348 | |||||||||||
| 2019 Footprint realignment plan | 367 | 459 | 826 | ||||||||||||||
| 2018 Footprint realignment plan | 4,853 | 216 | 5,069 | ||||||||||||||
Other restructuring programs (2) | (89) | 538 | 449 | ||||||||||||||
| Restructuring charges | $ | 15,224 | $ | 1,468 | $ | 16,692 | |||||||||||
| Nine Months Ended September 29, 2019 | |||||||||||||||||
| Termination benefits | Other costs (1) | Total | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| 2019 Footprint realignment plan | $ | 13,100 | $ | 68 | $ | 13,168 | |||||||||||
| 2018 Footprint realignment plan | (1,523) | 782 | (741) | ||||||||||||||
Other restructuring programs (3) | 195 | 815 | 1,010 | ||||||||||||||
| Restructuring charges | 11,772 | 1,665 | 13,437 | ||||||||||||||
| Asset impairment charges | — | 6,911 | 6,911 | ||||||||||||||
| Restructuring and impairment charges | $ | 11,772 | $ | 8,576 | $ | 20,348 | |||||||||||
(1) Other costs include facility closure, contract termination and other exit costs.
(2) Includes the program initiated during third quarter of 2019 as well as the 2016 and 2014 Footprint realignment plans.
(3) Includes the program initiated during third quarter of 2019, the Vascular Solutions integration program (initiated in 2017) as well as the 2016 and 2014 Footprint realignment plans.
Note 6 — Inventories
Inventories as of September 27, 2020 and December 31, 2019 consisted of the following:
| September 27, 2020 | December 31, 2019 | ||||||||||
| (Dollars in thousands) | |||||||||||
| Raw materials | $ | 135,059 | $ | 114,302 | |||||||
| Work-in-process | 73,375 | 71,479 | |||||||||
| Finished goods | 317,691 | 290,776 | |||||||||
| Inventories | $ | 526,125 | $ | 476,557 | |||||||
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TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Note 7 — Goodwill and other intangible assets
The following table provides information relating to changes in the carrying amount of goodwill by reportable operating segment for the nine months ended September 27, 2020:
| Americas | EMEA | Asia | OEM | Total | |||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||
| December 31, 2019 | $ | 1,550,925 | $ | 475,772 | $ | 213,725 | $ | 4,883 | $ | 2,245,305 | |||||||||||||||||||
| Goodwill related to acquisitions | — | — | — | 107,127 | 107,127 | ||||||||||||||||||||||||
| Currency translation adjustment | (2,824) | 12,636 | 1,593 | — | 11,405 | ||||||||||||||||||||||||
| September 27, 2020 | $ | 1,548,101 | $ | 488,408 | $ | 215,318 | $ | 112,010 | $ | 2,363,837 | |||||||||||||||||||
The gross carrying amount of, and accumulated amortization relating to, intangible assets as of September 27, 2020 and December 31, 2019 were as follows:
| Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||||||||
| September 27, 2020 | December 31, 2019 | September 27, 2020 | December 31, 2019 | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Customer relationships | $ | 1,169,307 | $ | 1,021,852 | $ | (408,372) | $ | (367,585) | |||||||||||||||
| In-process research and development | 28,735 | 27,940 | — | — | |||||||||||||||||||
| Intellectual property | 1,394,676 | 1,351,990 | (466,330) | (402,340) | |||||||||||||||||||
| Distribution rights | 23,604 | 23,369 | (19,829) | (18,859) | |||||||||||||||||||
| Trade names | 566,532 | 563,315 | (61,911) | (50,718) | |||||||||||||||||||
| Non-compete agreements | 23,479 | 22,618 | (20,961) | (15,297) | |||||||||||||||||||
| $ | 3,206,333 | $ | 3,011,084 | $ | (977,403) | $ | (854,799) | ||||||||||||||||
Note 8 — Borrowings
Our borrowings at September 27, 2020 and December 31, 2019 were as follows:
| September 27, 2020 | December 31, 2019 | ||||||||||
| (Dollars in thousands) | |||||||||||
| Senior Credit Facility: | |||||||||||
Revolving credit facility, at a rate of 1.65% at September 27, 2020, due 2024 | $ | — | $ | 300,000 | |||||||
Term loan facility, at a rate of 1.65% at September 27, 2020, due 2024 | 673,000 | 673,000 | |||||||||
4.875% Senior Notes due 2026 | 400,000 | 400,000 | |||||||||
4.625% Senior Notes due 2027 | 500,000 | 500,000 | |||||||||
4.25% Senior Notes due 2028 | 500,000 | — | |||||||||
Securitization program, at a rate of 1.25% at September 27, 2020 | 75,000 | 50,000 | |||||||||
| 2,148,000 | 1,923,000 | ||||||||||
| Less: Unamortized debt issuance costs | (20,427) | (14,057) | |||||||||
| 2,127,573 | 1,908,943 | ||||||||||
| Current borrowings | (91,750) | (50,000) | |||||||||
| Long-term borrowings | $ | 2,035,823 | $ | 1,858,943 | |||||||
4.25% Senior Notes due 2028
On May 27, 2020, we issued $500.0 million of 4.25% Senior Notes due 2028 (the "2028 Notes"). We will pay interest on the 2028 Notes semi-annually on June 1 and December 1, commencing on December 1, 2020, at a rate of 4.25% per year. The 2028 Notes mature on June 1, 2028 unless earlier redeemed at our option, as described below, or purchased at the holder’s option under specified circumstances following a Change of Control or Event of
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TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Default (each as defined in the indenture related to the 2028 Notes), coupled with a downgrade in the ratings of the 2028 Notes, or upon our election to exercise its optional redemption rights, as described below. We incurred transaction fees of $8.4 million, including underwriters’ discounts and commissions, in connection with the offering of the 2028 Notes, which were recorded on the consolidated balance sheet as a reduction to long-term borrowings and are being amortized over the term of the 2028 Notes. We used the net proceeds from the offering to repay borrowings under our revolving credit facility.
Our obligations under the 2028 Notes are fully and unconditionally guaranteed, jointly and severally, by each of our existing and future 100% owned domestic subsidiaries that is a guarantor or other obligor under the Credit Agreement and by certain of our other 100% owned domestic subsidiaries.
At any time on or after June 1, 2023, we may, on one or more occasions, redeem some or all of the 2028 Notes at a redemption price of 102.125% of the principal amount of the 2028 Notes subject to redemption, declining, in annual increments of 1.0625%, to 100% of the principal amount on June 1, 2025, plus accrued and unpaid interest. In addition, at any time prior to June 1, 2023, we may, on one or more occasions, redeem some or all of the 2028 Notes at a redemption price equal to 100% of the principal amount of the 2028 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 2028 Notes subject to redemption or (b) the excess, if any, over the principal amount of the 2028 Notes, of the present value, on the redemption date, of the sum of (i) the June 1, 2023, optional redemption price plus (ii) all required interest payments on the 2028 Notes through June 1, 2023, (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, 2023 (unless the period is less than one year, in which case the weekly average yield on traded U.S. Treasury securities adjusted to a constant maturity of one year will be used), plus 50 basis points.
In addition, at any time prior to June 1, 2023, we may, on one or more occasions, redeem up to 40% of the aggregate principal amount of the 2028 Notes, using the proceeds of specified types of our equity offerings and subject to specified conditions, at a redemption price equal to 104.25% of the principal amount of the Notes redeemed, plus accrued and unpaid interest.
The indenture relating to the 2028 Notes contains covenants that, among other things, limit or restrict our ability, and the ability of our subsidiaries, to create liens; merge, consolidate, sell or otherwise dispose of all or substantially all of our assets; and enter into sale leaseback transactions.
Securitization program
On March 30, 2020, we amended our accounts receivable securitization facility to increase the maximum available capacity from $50 million to $75 million.
Note 9 — Financial instruments
Foreign currency forward contracts
We use derivative instruments for risk management purposes. Foreign currency forward contracts designated as cash flow hedges are used to manage foreign currency transaction exposure. Foreign currency forward contracts not designated as hedges for accounting purposes are used to manage exposure related to near term foreign currency denominated monetary assets and liabilities. We enter into the non-designated foreign currency forward contracts for periods consistent with our currency translation exposures, which generally approximate one month. For the three and nine months ended September 27, 2020 we recognized a loss of $0.9 million and $0.1 million, respectively, related to non-designated foreign currency forward contracts. For the three and nine months ended September 29, 2019 we recognized losses of $1.9 million and $3.5 million, respectively, related to non-designated foreign currency forward contracts.
The total notional amount for all open foreign currency forward contracts designated as cash flow hedges as of September 27, 2020 and December 31, 2019 was $136.9 million and $132.0 million, respectively. The total notional amount for all open non-designated foreign currency forward contracts as of September 27, 2020 and
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TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
December 31, 2019 was $166.2 million and $145.1 million, respectively. All open foreign currency forward contracts as of September 27, 2020 have durations of 12 months or less.
Cross-currency interest rate swaps
During 2019, we entered into cross-currency swap agreements with five different financial institution counterparties to hedge against the effect of variability in the U.S. dollar to euro exchange rate. Under the terms of the cross-currency swap agreements, we have notionally exchanged $250 million at an annual interest rate of 4.875% for €219.2 million at an annual interest rate of 2.4595%. The swap agreements are designed as net investment hedges and expire on March 4, 2024.
During 2018, we entered into cross-currency swap agreements with six different financial institution counterparties to hedge against the effect of variability in the U.S. dollar to euro exchange rate. Under the terms of the cross-currency swap agreements, we have notionally exchanged $500 million at an annual interest rate of 4.625% for €433.9 million at an annual interest rate of 1.942%. The swap agreements are designed as net investment hedges and expire on October 4, 2023.
The swap agreements described above require an exchange of the notional amounts upon expiration or earlier termination of the agreements. We and the counterparties have agreed to effect the exchange through a net settlement.
The cross-currency swaps are marked to market at each reporting date and any changes in fair value are recognized as a component of accumulated other comprehensive income (loss) ("AOCI"). For the three and nine months ended September 27, 2020, we recognized foreign exchange losses of $23.2 million and $5.6 million, respectively, within AOCI related to the cross-currency swaps. For the three and nine months ended September 29, 2019, we recognized foreign exchange gains of $23.5 million and $29.4 million, respectively, within AOCI related to the cross-currency swaps. For the three and nine months ended September 27, 2020, we recognized $4.7 million and $14.5 million, respectively, in interest benefit related to the cross-currency swaps. For the three and nine months ended September 29, 2019, we recognized $5.0 million and $13.8 million, respectively, in interest benefit related to the cross-currency swaps.
Balance sheet presentation
The following table presents the locations in the condensed consolidated balance sheet and fair value of derivative financial instruments as of September 27, 2020 and December 31, 2019:
| September 27, 2020 | December 31, 2019 | ||||||||||
| (Dollars in thousands) | |||||||||||
| Asset derivatives: | |||||||||||
| Designated foreign currency forward contracts | $ | 916 | $ | 1,659 | |||||||
| Non-designated foreign currency forward contracts | 81 | 192 | |||||||||
| Cross-currency interest rate swaps | 25,796 | 21,575 | |||||||||
| Prepaid expenses and other current assets | 26,793 | 23,426 | |||||||||
| Cross-currency interest rate swaps | 6,113 | 13,066 | |||||||||
| Other assets | 6,113 | 13,066 | |||||||||
| Total asset derivatives | $ | 32,906 | $ | 36,492 | |||||||
| Liability derivatives: | |||||||||||
| Designated foreign currency forward contracts | $ | 2,449 | $ | 1,285 | |||||||
| Non-designated foreign currency forward contracts | 223 | 102 | |||||||||
| Other current liabilities | 2,672 | 1,387 | |||||||||
| Total liability derivatives | $ | 2,672 | $ | 1,387 | |||||||
See Note 11 for information on the location and amount of gains and losses attributable to derivatives that were reclassified from AOCI to expense (income), net of tax.
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TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
There was no ineffectiveness related to our cash flow hedges during the three and nine months ended September 27, 2020 and September 29, 2019.
Trade receivables
In the ordinary course of business, we grant non-interest bearing trade credit to our customers on normal credit terms. In an effort to reduce our credit risk, we (i) establish credit limits for all of our customer relationships, (ii) perform ongoing credit evaluations of our customers’ financial condition, (iii) monitor the payment history and aging of our customers’ receivables, and (iv) monitor open orders against an individual customer’s outstanding receivable balance.
Our allowance for credit losses is maintained for trade accounts receivable based on the expected collectability of accounts receivable, after considering our historical collection experience, the length of time an account is outstanding, the financial position of the customer, information provided by credit rating services in addition to new requirements under the accounting guidance, effective January 1, 2020, that includes the consideration of events or circumstances indicating historic collection rates may not be indicative of future collectability, for example, potential customer liquidity concerns resulting from COVID-19, that may impact the collectability of our receivables as well as our estimate of credit losses expected to be incurred over the life of our receivables. To date, we have not experienced significant payment defaults by, or identified other significant collectability concerns with, our customers. The assumptions utilized in our current estimates may change due to changes in circumstances, additional future developments and the resolution of other contingencies.
The allowance for credit losses as of September 27, 2020 and December 31, 2019 was $12.9 million and $9.1 million, respectively. The current portion of the allowance for credit losses, which was $8.4 million and $5.3 million as of September 27, 2020 and December 31, 2019, respectively, was recognized as a reduction of accounts receivable, net.
Note 10 — Fair value measurement
The following tables provide information regarding our financial assets and liabilities measured at fair value on a recurring basis as of September 27, 2020 and December 31, 2019:
Total carrying value at September 27, 2020 | 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 | $ | 11,155 | $ | 11,155 | $ | — | $ | — | |||||||||||||||
| Derivative assets | 32,906 | — | 32,906 | — | |||||||||||||||||||
| Derivative liabilities | 2,672 | — | 2,672 | — | |||||||||||||||||||
| Contingent consideration liabilities | 21,616 | — | — | 21,616 | |||||||||||||||||||
| Total carrying value at December 31, 2019 | 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 | $ | 10,926 | $ | 10,926 | $ | — | $ | — | |||||||||||||||
| Derivative assets | 36,492 | — | 36,492 | — | |||||||||||||||||||
| Derivative liabilities | 1,387 | — | 1,387 | — | |||||||||||||||||||
| Contingent consideration liabilities | 219,908 | — | — | 219,908 | |||||||||||||||||||
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TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Valuation Techniques
Our 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 our benefit plans and other arrangements. The investment assets of the trust are valued using quoted market prices.
Our financial assets and liabilities valued based upon Level 2 inputs are comprised of foreign currency forward contracts and cross-currency interest rate swap agreements. We use foreign currency forwards and cross-currency interest rate swaps to manage foreign currency transaction exposure, as well as exposure to foreign currency denominated monetary assets and liabilities. We measure the fair value of the foreign currency forwards and cross-currency swaps 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.
Our financial liabilities valued based upon Level 3 inputs (inputs that are not observable in the market) are comprised of contingent consideration arrangements pertaining to our acquisitions, which are discussed immediately below.
Contingent consideration
Contingent consideration liabilities, which primarily consist of payment obligations that are contingent upon the achievement of revenue-based goals, but also can be based on other milestones such as regulatory approvals, are remeasured to fair value each reporting period using assumptions including estimated revenues (based on internal operational budgets and long-range strategic plans), discount rates, probability of payment and projected payment dates.
We determine the fair value of the contingent consideration liabilities using a Monte Carlo simulation (which involves a simulation of future revenues during the earn-out period using management's best estimates) or discounted cash flow analysis. Increases in projected revenues, estimated cash flows and probabilities of payment may result in significantly higher fair value measurements; decreases in these items may have the opposite effect. Increases in the discount rates in periods prior to payment may result in significantly lower fair value measurements and decreases in the discount rates may have the opposite effect.
The table below provides additional information regarding the valuation technique and inputs used in determining the fair value of contingent consideration.
| Contingent Consideration Liability | Valuation Technique | Unobservable Input | Range (Weighted average) | |||||||||||||||||
| Milestone-based payments | ||||||||||||||||||||
| Discounted cash flow | Discount rate | 2.5% - 3.3% (3.0%) | ||||||||||||||||||
| Projected year of payment | 2020 - 2023 | |||||||||||||||||||
| Revenue-based payments | ||||||||||||||||||||
| Monte Carlo simulation | Revenue volatility | 22.0% | ||||||||||||||||||
| Risk free rate | Cost of debt structure | |||||||||||||||||||
| Projected year of payment | 2021 - 2022 | |||||||||||||||||||
| Discounted cash flow | Discount rate | 2.2% - 10.0% (8.9%) | ||||||||||||||||||
| Projected year of payment | 2020 - 2029 | |||||||||||||||||||
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TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The following table provides information regarding changes in the contingent consideration liabilities during the nine months ended September 27, 2020:
| Contingent consideration | |||||
| (Dollars in thousands) | |||||
Balance - December 31, 2019 | $ | 219,908 | |||
Payments (1) | (143,906) | ||||
Revaluations (2) | (54,585) | ||||
Translation adjustment | 199 | ||||
Balance - September 27, 2020 | $ | 21,616 | |||
(1) Consists mainly of a $140.6 million payment associated with our acquisition of NeoTract, Inc. resulting from the achievement of a revenue-based goal for the period from January 1, 2019 to December 31, 2019.
(2) The decrease, which is included within selling, general and administrative expenses, is mainly due to adverse financial projections resulting from the COVID-19 pandemic.
Note 11 — Shareholders’ equity
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed in the same manner except that the weighted average number of shares is increased to include dilutive securities. The following table provides a reconciliation of basic to diluted weighted average number of common shares outstanding:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| (Shares in thousands) | |||||||||||||||||||||||
| Basic | 46,530 | 46,248 | 46,451 | 46,156 | |||||||||||||||||||
| Dilutive effect of share-based awards | 803 | 928 | 818 | 895 | |||||||||||||||||||
| Diluted | 47,333 | 47,176 | 47,269 | 47,051 | |||||||||||||||||||
The weighted average number of shares that were antidilutive and therefore excluded from the calculation of earnings per share were 0.1 million the three and nine months ended September 27, 2020 and September 29, 2019.
The following tables provide information relating to the changes in accumulated other comprehensive loss, net of tax, for the nine months ended September 27, 2020 and September 29, 2019:
| 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, 2019 | $ | 735 | $ | (138,810) | $ | (206,317) | $ | (344,392) | |||||||||||||||
| Other comprehensive (loss) income before reclassifications | (4,479) | (109) | 20,087 | 15,499 | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | 1,021 | 4,180 | — | 5,201 | |||||||||||||||||||
| Net current-period other comprehensive (loss) income | (3,458) | 4,071 | 20,087 | 20,700 | |||||||||||||||||||
| Balance as of September 27, 2020 | $ | (2,723) | $ | (134,739) | $ | (186,230) | $ | (323,692) | |||||||||||||||
17
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
| 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, 2018 | $ | 807 | $ | (131,380) | $ | (210,512) | $ | (341,085) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | 646 | 215 | (27,562) | (26,701) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | (748) | 4,033 | — | 3,285 | |||||||||||||||||||
| Net current-period other comprehensive income | (102) | 4,248 | (27,562) | (23,416) | |||||||||||||||||||
| Balance as of September 29, 2019 | $ | 705 | $ | (127,132) | $ | (238,074) | $ | (364,501) | |||||||||||||||
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 27, 2020 and September 29, 2019:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| (Gains) losses on foreign exchange contracts: | |||||||||||||||||||||||
| Cost of goods sold | $ | 1,899 | $ | (523) | $ | 1,148 | $ | (888) | |||||||||||||||
| Total before tax | 1,899 | (523) | 1,148 | (888) | |||||||||||||||||||
| Taxes | (155) | 46 | (127) | 140 | |||||||||||||||||||
| Net of tax | $ | 1,744 | $ | (477) | $ | 1,021 | $ | (748) | |||||||||||||||
Amortization of pension and other postretirement benefit items (1): | |||||||||||||||||||||||
| Actuarial losses | $ | 1,731 | $ | 1,716 | $ | 5,433 | $ | 5,194 | |||||||||||||||
| Prior-service costs | 9 | 21 | 25 | 65 | |||||||||||||||||||
| Total before tax | 1,740 | 1,737 | 5,458 | 5,259 | |||||||||||||||||||
| Tax benefit | (411) | (405) | (1,278) | (1,226) | |||||||||||||||||||
| Net of tax | $ | 1,329 | $ | 1,332 | $ | 4,180 | $ | 4,033 | |||||||||||||||
| Total reclassifications, net of tax | $ | 3,073 | $ | 855 | $ | 5,201 | $ | 3,285 | |||||||||||||||
(1) These accumulated other comprehensive (loss) income components are included in the computation of net benefit expense for pension and other postretirement benefit plans.
Note 12 — Taxes on income from continuing operations
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| Effective income tax rate | (0.8)% | (132.3)% | 7.8% | (48.4)% | |||||||||||||||||||
The effective income tax rates for the three and nine months ended September 27, 2020 reflect a significant net tax benefit related to share-based compensation. The effective income tax rates for the three and nine months ended September 29, 2019 reflect a discrete tax benefit related to the reduction of a deferred tax liability associated with foreign withholding taxes. Additionally, the effective income tax rate for the nine months ended September 29, 2019 reflects a significant net tax benefit related to share-based compensation.
Note 13 — Commitments and contingent liabilities
Environmental: We are subject to contingencies as a result of environmental laws and regulations that in the future may require us to take further action to correct the effects on the environment of prior disposal practices or releases of chemical or petroleum substances by us or other parties. Much of this liability results from the U.S.
18
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
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 us to undertake certain investigative and remedial activities at sites where we conduct 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 27, 2020, we have recorded $0.7 million and $5.7 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 27, 2020. The time frame over which the accrued amounts may be paid out, based on past history, is estimated to be 10-15 years.
Legal matters: We are a party to various lawsuits and claims arising in the normal course of business. These lawsuits and claims include actions involving product liability, product warranty, commercial disputes, intellectual property, contract, employment, environmental and other matters. As of September 27, 2020, we have recorded accrued liabilities of $0.2 million in connection with such contingencies, representing our best estimate of the cost within the range of estimated possible losses that will be incurred to resolve these matters.
Based on information currently available, advice of counsel, established reserves and other resources, we do not believe that the outcome of any outstanding litigation and claims is likely to be, individually or in the aggregate, material to our 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 our 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.
In June 2020, we began producing documents and information in response to a Civil Investigative Demand (a “CID”) received in March 2020 by one of our subsidiaries, NeoTract, Inc. (“NeoTract”), from the U.S. Department of Justice through the United States Attorney’s Office for the Northern District of Georgia (collectively, the “DOJ”). The CID relates to the DOJ’s investigation of a single NeoTract customer, requires the production of documents and information pertaining to communications with, and certain rebate programs offered to, that customer and pertains to communications and activities occurring both prior to our acquisition of NeoTract in October 2017 and thereafter. In July 2020, the DOJ advised us that it had opened an investigation under the civil False Claims Act, 31 U.S.C. §3729, with respect to NeoTract’s operations broadly in addition to the customer investigation.
We maintain policies and procedures to promote compliance with the Anti-Kickback Statute, False Claims Acts and other applicable laws and regulations and intend to provide information sought by the government. We cannot at this time reasonably predict, however, the ultimate scope or outcome of this matter, including whether an investigation may raise other compliance issues of interest, including those beyond the scope described above or how any such issues might be resolved. We also cannot at this time reasonably estimate any potential liabilities or penalty, if any, that may arise from this matter, which could have a material adverse effect on our results of operations and financial condition.
Tax audits and examinations: We are routinely subject to tax examinations by various tax authorities. As of September 27, 2020, the most significant tax examination in process was in Germany. We may establish reserves with respect to our uncertain tax positions, after we adjust the reserves to address developments with respect to our uncertain tax positions, including developments in this tax examination. Accordingly, developments in tax audits and examinations, including resolution of uncertain tax positions, could result in increases or decreases to our recorded tax liabilities, which could impact our financial results.
19
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Note 14 — Segment information
The following tables present our segment results for the three and nine months ended September 27, 2020 and September 29, 2019:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Americas | $ | 375,040 | $ | 374,493 | $ | 1,045,532 | $ | 1,092,321 | |||||||||||||||
| EMEA | 135,649 | 140,518 | 423,416 | 442,110 | |||||||||||||||||||
| Asia | 68,213 | 77,864 | 188,411 | 213,869 | |||||||||||||||||||
| OEM | 49,399 | 55,444 | 168,618 | 166,110 | |||||||||||||||||||
| Net revenues | $ | 628,301 | $ | 648,319 | $ | 1,825,977 | $ | 1,914,410 | |||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Americas | $ | 121,760 | $ | 81,405 | $ | 310,267 | $ | 229,513 | |||||||||||||||
| EMEA | 17,702 | 21,820 | 53,044 | 69,670 | |||||||||||||||||||
| Asia | 10,099 | 21,460 | 33,957 | 50,699 | |||||||||||||||||||
| OEM | 8,281 | 16,008 | 35,624 | 43,213 | |||||||||||||||||||
Total segment operating profit (1) | 157,842 | 140,693 | 432,892 | 393,095 | |||||||||||||||||||
Unallocated expenses (2) | (25,750) | (23,072) | (104,904) | (92,773) | |||||||||||||||||||
| Income from continuing operations before interest and taxes | $ | 132,092 | $ | 117,621 | $ | 327,988 | $ | 300,322 | |||||||||||||||
(1)Segment operating profit includes segment net revenues from external customers reduced by the segment's standard cost of goods sold, adjusted for fixed manufacturing cost absorption variances, selling, general and administrative expenses, research and development expenses and an allocation of corporate expenses. Corporate expenses are allocated among the segments in proportion to the respective amounts of one of several items (such as net revenues, numbers of employees, and amount of time spent), depending on the category of expense involved.
(2)Unallocated expenses primarily include manufacturing variances other than fixed manufacturing cost absorption variances, restructuring and impairment charges and gain on sale of assets.
Note 15 — Subsequent event
On October 11, 2020, we executed a definitive agreement to acquire Z-Medica, LLC. ("Z-Medica"), a privately held medical device company that manufactures and sells hemostatic (hemorrhage control) products, which are marketed under the QuikClot, Combat Gauze and QuickClot Control+ brand names and will complement our anesthesia product portfolio. We will acquire Z-Medica for an initial cash purchase price of $500 million. The agreement also provides for an additional payment of up to $25 million upon the achievement of certain commercial milestones. The acquisition is subject to customary closing conditions, including receipt of certain regulatory approvals, and is expected to be completed in the fourth quarter of 2020. In anticipation of the expected completion of this transaction, in October 2020, we drew $500 million in additional borrowings under our revolving credit facility.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Teleflex Incorporated (“we,” “us,” “our" and “Teleflex”) is a global provider of medical technology products focused on enhancing clinical benefits, improving patient and provider safety and reducing total procedural costs. We primarily design, develop, manufacture and supply single-use medical devices used by hospitals and healthcare providers for common diagnostic and therapeutic procedures in critical care and surgical applications. We market and sell our products worldwide through a combination of our direct sales force and distributors. Because our products are used in numerous markets and for a variety of procedures, we are not dependent upon any one end-market or procedure. We are focused on achieving consistent, sustainable and profitable growth by increasing our market share and improving our operating efficiencies.
We evaluate our portfolio of products and businesses on an ongoing basis to ensure alignment with our overall objectives. Based on our evaluation, we may identify opportunities to divest businesses and product lines that do not meet our objectives. In addition, we may seek to optimize utilization of our facilities through restructuring initiatives designed to further improve our cost structure and enhance our competitive position. We also may continue to explore opportunities to expand the size of our business and improve operating margins through a combination of acquisitions and distributor to direct sales conversions, which generally involve our elimination of a distributor from the sales channel, either by acquiring the distributor or terminating the distributor relationship (in some instances, particularly in Asia, the conversions involve our acquisition or termination of a master distributor and the continued sale of our products through sub-distributors or through new distributors). Distributor to direct sales conversions are designed to facilitate improved product pricing and more direct access to the end users of our products within the sales channel.
On October 11, 2020, we executed a definitive agreement to acquire Z-Medica, LLC. ("Z-Medica"), a privately held medical device company that manufactures and sells hemostatic (hemorrhage control) products, which are marketed under the QuikClot, Combat Gauze and QuickClot Control+ brand names. The acquisition, which will complement our anesthesia product portfolio, includes an initial cash purchase price of $500 million and also provides for an additional payment of up to $25 million upon the achievement of certain commercial milestones. We expect the acquisition to be completed in the fourth quarter of 2020, subject to the satisfaction of customary closing conditions, including receipt of certain regulatory approvals.
COVID-19 pandemic
We continue to experience the effects of the global pandemic caused by the COVID-19 novel strain of coronavirus. Among other things, the response to the COVID-19 pandemic has had the effect of reducing the number of elective procedures being carried out, which has impacted and continues to impact some of our product categories, including our interventional urology, surgical, interventional, anesthesia and OEM products, which have experienced and continue to experience decreased demand. We have also experienced and continue to experience increased demand for products used in the treatment of patients with COVID-19, which are mostly concentrated in our respiratory and vascular access product categories. For the three and nine months ended September 27, 2020, each of our segments were negatively impacted by the COVID-19 pandemic due to the reduction in elective procedures and, to a lesser extent, as a result of government-mandated and self-imposed shut-downs in several countries, which were implemented to protect individuals and control the spread of COVID-19. The COVID-19 pandemic is impacting other elements of our operations, as well as our employees, contractors, suppliers, customers and other business partners. To date, we have not experienced significant disruptions in the global supply chain for our products that are in high demand, but, in some cases, delivery times have lengthened, resulting in backorders for some of our products.
In addition, there have been and continues to be impacts on our cost structure resulting from measures that we and other businesses are taking or will take, in accordance with governmental requirements and otherwise, to protect our employees and business partners. We continue to assess the impact on our business (including our employees, customers and suppliers) of travel restrictions, border closures and quarantines as they affect our various sites, including our 35 global manufacturing sites. In most jurisdictions, our manufacturing and distribution sites remain open because we are considered an essential business. However, we have experienced temporary or partial work stoppages in some manufacturing sites in North America and Asia. During the three and nine months ended September 27, 2020, we experienced, and we continue to experience, inefficiencies in our manufacturing operations due to government-mandated and self-imposed restrictions placed on and safety measures implemented at our facilities globally. From an operating expense perspective, we have experienced and continue to experience net decreases in selling, general and administrative expenses as a result of the COVID-19 pandemic due to cost
21
mitigation efforts implemented to control discretionary spending including selling, marketing and travel and entertainment related costs and lower performance related employee-benefit costs.
During the third quarter of 2020 and into the fourth quarter, we have begun to experience instances of improvement in revenue trends for the product categories most impacted by the postponement of non-emergent procedures because of the COVID-19 pandemic. However, we have yet to return to the revenue growth levels that we achieved prior to the onset of the pandemic. In addition, the degree of improvement has varied by product category and by region. It is uncertain whether this trend will continue or if we will again experience a decrease in the number of elective procedures performed as the COVID-19 pandemic evolves, particularly if the virus becomes more prevalent over the fall and winter seasons in the Northern Hemisphere. Overall, we believe that the COVID-19 pandemic will continue to negatively affect our revenues and operations, at least over the near-term. Because of the dynamic nature of the crisis, such as recent regional COVID-19 outbreaks that are impacting the recovery, we cannot accurately predict the extent or duration of the impacts of the pandemic.
Government investigation
In June 2020, we began producing documents and information in response to a Civil Investigative Demand (a “CID”) received in March 2020 by one of our subsidiaries, NeoTract, Inc. (“NeoTract”), from the U.S. Department of Justice through the United States Attorney’s Office for the Northern District of Georgia (collectively, the “DOJ”). The CID relates to the DOJ’s investigation of a single NeoTract customer, requires the production of documents and information pertaining to communications with, and certain rebate programs offered to, that customer and pertains to communications and activities occurring both prior to our acquisition of NeoTract in October 2017 and thereafter. In July 2020, the DOJ advised us that it had opened an investigation under the civil False Claims Act, 31 U.S.C. §3729, with respect to NeoTract’s operations broadly in addition to the customer investigation.
We maintain policies and procedures to promote compliance with the Anti-Kickback Statute, False Claims Acts and other applicable laws and regulations and intend to provide information sought by the government. We cannot at this time reasonably predict, however, the ultimate scope or outcome of this matter, including whether an investigation may raise other compliance issues of interest, including those beyond the scope described above or how any such issues might be resolved. We also cannot at this time reasonably estimate any potential liabilities or penalty, if any, that may arise from this matter, which could have a material adverse effect on our results of operations and financial condition.
Results of Operations
As used in this discussion, "new products" are products for which commercial sales have commenced within the past 36 months, and “existing products” are products for which commercial sales commenced more than 36 months ago. Discussion of results of operations items that reference the effect of one or more acquired and/or divested businesses or assets (except as noted below with respect to acquired distributors) generally reflects the impact of the acquisitions and/or divestitures within the first 12 months following the date of the acquisition and/or divestiture. In addition to increases and decreases in the per unit selling prices of our products to our customers, our discussion of the impact of product price increases and decreases also reflects the impact on the pricing of our products resulting from the elimination of the distributor, either through acquisition or termination of the distributor, from the sales channel.
Certain financial information is presented on a rounded basis, which may cause minor differences.
Net revenues
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Net revenues | $ | 628.3 | $ | 648.3 | $ | 1,826.0 | $ | 1,914.4 | |||||||||||||||
Net revenues for the three months ended September 27, 2020 decreased $20.0 million, or 3.1%, compared to the prior year period, which was primarily attributable to a $37.9 million net decrease in sales volumes of existing products caused by the COVID-19 pandemic partially offset by favorable fluctuations in foreign currency exchange rates and net revenues generated by the IWG High Performance Conductors, Inc. (HPC) acquisition.
Net revenues for the nine months ended September 27, 2020 decreased $88.4 million, or 4.6%, compared to the prior year period, which was primarily attributable to a $110.8 million net decrease in sales volumes of existing products caused by the COVID-19 pandemic partially offset by net revenues generated by the HPC acquisition.
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Gross profit
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Gross profit | $ | 329.3 | $ | 355.1 | $ | 941.3 | $ | 1,031.3 | |||||||||||||||
| Percentage of sales | 52.4 | % | 54.8 | % | 51.6 | % | 53.9 | % | |||||||||||||||
Gross margin for the three months ended September 27, 2020 decreased 240 basis points, or 4.4%, compared to the prior year period primarily due to lower sales volumes and higher manufacturing costs, both caused by the COVID-19 pandemic, and unfavorable fluctuations in foreign currency exchange rates.
Gross margin for the nine months ended September 27, 2020 decreased 230 basis points, or 4.3%, compared to the prior year period primarily due to lower sales volumes and higher manufacturing costs, both caused by the COVID-19 pandemic.
Selling, general and administrative
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Selling, general and administrative | $ | 171.7 | $ | 209.3 | $ | 510.7 | $ | 631.7 | |||||||||||||||
| Percentage of sales | 27.3 | % | 32.3 | % | 28.0 | % | 33.0 | % | |||||||||||||||
Selling, general and administrative expenses for the three months ended September 27, 2020 decreased $37.6 million compared to the prior year period. The decrease was primarily attributable to a benefit from reductions in the estimated fair value of our contingent consideration liabilities, which largely related to revenue-based milestone payments, due to adverse financial projections resulting from the COVID-19 pandemic.
Selling, general and administrative expenses for the nine months ended September 27, 2020 decreased $121.0 million compared to the prior year period. The decrease was primarily attributable to a $95.5 million benefit from reductions in the estimated fair value of our contingent consideration liabilities, which is described above in the section detailing the changes in selling, general and administrative expenses for the three months ended September 27, 2020. The decrease was also attributable to cost mitigation efforts implemented to control discretionary spending in response to the COVID-19 pandemic including reduced selling, marketing and travel and entertainment related activities and lower performance related employee-benefit costs.
Research and development
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Research and development | $ | 29.2 | $ | 28.0 | $ | 86.0 | $ | 82.7 | |||||||||||||||
| Percentage of sales | 4.7 | % | 4.3 | % | 4.7 | % | 4.3 | % | |||||||||||||||
The increases in research and development expenses for the three and nine months ended September 27, 2020 compared to the prior year period were primarily attributable to European Union Medical Device Regulation ("EU MDR") related costs partially offset by lower project spend across several of our product portfolios.
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Restructuring and impairment (credits) charges
2020 Workforce reduction plan
During the second quarter of 2020, we committed to a workforce reduction designed to improve profitability and reduce cost primarily by streamlining certain sales and marketing functions in our EMEA segment and certain manufacturing operations in our OEM segment. The workforce reduction was initiated to further align the business with our high growth strategic objectives. We estimate that we will incur aggregate pre-tax restructuring charges of $10 million to $13 million, consisting primarily of termination benefits, all of which will result in future cash outlays. This plan will be substantially complete during 2020 and as a result, most of these charges are expected to be incurred prior to the end of 2020. We expect to begin realizing plan-related savings in 2020 and expect to achieve annual pre-tax savings of $11 million to $13 million once the plans are fully implemented.
Anticipated charges and pre-tax savings related to restructuring programs and other similar cost savings initiatives
In addition to the 2020 Workforce reduction plan, we have ongoing restructuring programs primarily related to the consolidation of our manufacturing operations (referred to as our 2019, 2018 and 2014 Footprint realignment plans). We also have similar ongoing activities to relocate certain manufacturing operations within our OEM segment (the "OEM initiative") that was initiated in 2018 and does not meet the criteria for a restructuring program under applicable accounting guidance; nevertheless, the activities should result in cost savings (we expect only minimal costs to be incurred in connection with the OEM initiative). With respect to our currently ongoing restructuring programs and the OEM initiative, the table below summarizes charges incurred or estimated to be incurred and estimated annual pre-tax savings to be realized as follows: (1) with respect to charges (a) the estimated total charges that will have been incurred once the restructuring programs and OEM initiative are completed; (b) the charges incurred through December 31, 2019; and (c) the estimated charges to be incurred from January 1, 2020 through the last anticipated completion date of the restructuring programs and OEM initiative, December 31, 2024 and (2) with respect to estimated annual pre-tax savings, (a) the estimated total annual pre-tax savings to be realized once the restructuring programs and OEM initiative are completed; (b) the estimated annual pre-tax savings realized based on the progress of the restructuring programs and OEM initiative through December 31, 2019; and (c) the estimated additional annual pre-tax savings to be realized from January 1, 2020 through the last anticipated completion date of the restructuring programs and the OEM initiative, December 31, 2024.
Estimated charges and pre-tax savings are subject to change based on, among other things, the nature and timing of restructuring activities and similar activities, changes in the scope of restructuring programs and the OEM initiative, unanticipated expenditures and other developments including the uncertainties created by the COVID-19 pandemic, the effect of additional acquisitions or dispositions, the failure to realize anticipated savings associated with the development and qualification of a component included in certain kits sold by our anesthesia business in North America and other factors that were not reflected in the assumptions made by management in previously estimating restructuring and restructuring related charges and estimated pre-tax savings. Moreover, estimated pre-tax savings constituting efficiencies with respect to increased costs that otherwise would have resulted from business acquisitions involve, among other things, assumptions regarding the cost structure and integration of businesses that previously were not administered by our management, which are subject to a particularly high degree of risk and uncertainty. It is likely that estimates of charges and pre-tax savings will change from time to time, and the table below reflects changes from amounts previously estimated. In addition, the table below does not include estimated charges and pre-tax savings related to substantially completed programs. Additional details, including estimated charges expected to be incurred in connection with our restructuring programs, are described in Note 5 to the condensed consolidated financial statements included in this report.
Pre-tax savings also can be affected by increases or decreases in sales volumes generated by the businesses subject to the consolidation of manufacturing operations; such variations in revenues can increase or decrease pre-tax savings generated by the consolidation of manufacturing operations. For example, an increase in sales volumes generated by the affected businesses, although likely increasing manufacturing costs, may generate additional savings with respect to costs that otherwise would have been incurred if the manufacturing operations were not consolidated.
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| Ongoing restructuring programs and other similar cost savings initiatives | |||||||||||||||||
| Estimated Total | Actual results through December 31, 2019 | Estimated remaining from January 1, 2020 through December 31, 2024 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
Restructuring charges (1) | $103 - $124 | $83 | $20 - $41 | ||||||||||||||
Restructuring related charges (2) | 118 - 144 | 46 | 72 - 98 | ||||||||||||||
Total charges (3) | $221 - $268 | $129 | $92 - $139 | ||||||||||||||
| OEM initiative annual pre-tax savings | $6 - $7 | $1 | $5 - $6 | ||||||||||||||
Pre-tax savings- 2020 Workforce reduction plan (4) | 11 - 13 | — | 11 - 13 | ||||||||||||||
Pre-tax savings- ongoing restructuring plans (5)(6) | 68 - 78 | 25 | 43 - 53 | ||||||||||||||
| Total annual pre-tax savings | $85 - $98 | $26 | $59 - $72 | ||||||||||||||
(1)Includes estimated charges associated with the 2020 Workforce reduction plan of $10 million to $13 million.
(2)Represents charges that are directly related to restructuring programs and principally constitute costs to transfer manufacturing operations to existing lower-cost locations, project management costs and accelerated depreciation, as well as a charge that is expected to be imposed by a taxing authority as a result of our exit from facilities in the authority's jurisdiction. Most of these charges (other than the tax charge) are expected to be recognized as cost of goods sold.
(3)During the second quarter of 2020, we adjusted the estimated ranges for restructuring, restructuring related and total charges to reflect the impacts of the 2020 Workforce reduction plan (which was initiated in the second quarter of 2020) and to reflect changes in estimates related primarily to termination benefits and transfer validation associated with the ongoing restructuring programs. The prior range of total charges for the ongoing restructuring plans was $205 million to $255 million as compared to the current range of $211 million to $255 million.
(4)Most all of the pre-tax savings are expected to result in reductions to selling, general and administrative expenses.
(5)Substantially all of the pre-tax savings are expected to result in reductions to cost of goods sold.
(6)During the second quarter of 2020, we updated our estimated annual pre-tax savings associated with our 2019 and 2014 realignment plans. We now estimate our savings will be $15 million to $17 million and $28 million to $31 million, respectively, compared to our prior estimates of $12 million to $14 million and $26 million to $29 million, respectively. The increases in the savings ranges are the result of additional cost reduction measures and changes in assumptions identified as the programs progressed.
Restructuring and impairment charges (credits) incurred
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Restructuring and impairment (credits) charges | $ | (3.7) | $ | 1.3 | $ | 16.7 | $ | 20.3 | |||||||||||||||
Restructuring and impairment credits for the three months ended September 27, 2020 primarily consisted of changes in estimates with respect to termination benefits associated with the 2018 Footprint realignment plan.
Restructuring and impairment charges for the nine months ended September 27, 2020 primarily consisted of termination benefits related to our 2020 Workforce reduction plan and 2018 Footprint realignment plan.
Interest expense
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Interest expense | $ | 16.7 | $ | 19.5 | $ | 47.8 | $ | 63.0 | |||||||||||||||
| Average interest rate on debt | 2.5 | % | 3.4 | % | 2.5 | % | 3.6 | % | |||||||||||||||
The decrease in interest expense for the three and nine months ended September 27, 2020 compared to the prior year periods was primarily due to a lower average interest rate resulting from decreases in interest rates associated with our variable interest rate debt instruments partially offset by increases in average debt outstanding.
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Taxes on income from continuing operations
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | ||||||||||||||||||||
| Effective income tax rate | (0.8) | % | (132.3) | % | 7.8 | % | (48.4) | % | |||||||||||||||
The effective income tax rates for the three and nine months ended September 27, 2020 reflect a significant net tax benefit related to share-based compensation. The effective income tax rates for the three and nine months ended September 29, 2019 reflect a discrete tax benefit related to the reduction of a deferred tax liability associated with foreign withholding taxes. Additionally, the effective income tax rate for the nine months ended September 29, 2019 reflects a significant net tax benefit related to share-based compensation.
Segment Financial Information
| Segment net revenues | |||||||||||||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | % Increase/ (Decrease) | September 27, 2020 | September 29, 2019 | % Increase/ (Decrease) | ||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||
| Americas | $ | 375.0 | $ | 374.5 | 0.1 | $ | 1,045.6 | $ | 1,092.3 | (4.3) | |||||||||||||||||||||||||
| EMEA | 135.7 | 140.5 | (3.5) | 423.4 | 442.1 | (4.2) | |||||||||||||||||||||||||||||
| Asia | 68.2 | 77.9 | (12.4) | 188.4 | 213.9 | (11.9) | |||||||||||||||||||||||||||||
| OEM | 49.4 | 55.4 | (10.9) | 168.6 | 166.1 | 1.5 | |||||||||||||||||||||||||||||
| Segment net revenues | $ | 628.3 | $ | 648.3 | (3.1) | $ | 1,826.0 | $ | 1,914.4 | (4.6) | |||||||||||||||||||||||||
| Segment operating profit | |||||||||||||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | % Increase/ (Decrease) | September 27, 2020 | September 29, 2019 | % Increase/ (Decrease) | ||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||
| Americas | $ | 121.8 | $ | 81.4 | 49.6 | $ | 310.3 | $ | 229.5 | 35.2 | |||||||||||||||||||||||||
| EMEA | 17.7 | 21.8 | (18.9) | 53.0 | 69.7 | (23.9) | |||||||||||||||||||||||||||||
| Asia | 10.1 | 21.5 | (52.9) | 34.0 | 50.7 | (33.0) | |||||||||||||||||||||||||||||
| OEM | 8.2 | 16.0 | (48.3) | 35.6 | 43.2 | (17.6) | |||||||||||||||||||||||||||||
Segment operating profit (1) | $ | 157.8 | $ | 140.7 | 12.2 | $ | 432.9 | $ | 393.1 | 10.1 | |||||||||||||||||||||||||
(1)See Note 14 to our condensed consolidated financial statements included in this report for a reconciliation of segment operating profit to our condensed consolidated income from continuing operations before interest and taxes.
Comparison of the three and nine months ended September 27, 2020 and September 29, 2019
Americas
Americas net revenues for the three months ended September 27, 2020 increased $0.5 million, or 0.1%, compared to the prior year period. The increase was primarily attributable to price increases of $1.8 million and an increase in new product sales partially offset by a $1.5 million net decrease in sales volumes of existing products caused by the COVID-19 pandemic.
Americas net revenues for the nine months ended September 27, 2020 decreased $46.7 million, or 4.3%, compared to the prior year period, which was primarily attributable to a net decrease in sales volumes of existing products caused by the COVID-19 pandemic.
Americas operating profit for the three months ended September 27, 2020 increased $40.4 million, or 49.6%, compared to the prior year period, which was primarily attributable to a benefit from a reduction in the estimated fair value of our contingent consideration liabilities, which largely relate to revenue-based milestone payments, due to adverse financial projections resulting from the COVID-19 pandemic.
Americas operating profit for the nine months ended September 27, 2020 increased $80.8 million, or 35.2%, compared to the prior year period, which was primarily attributable to a benefit from a reduction in the estimated fair
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value of our contingent consideration liabilities partially offset by a decrease in gross profit resulting from lower sales caused by the COVID-19 pandemic.
EMEA
EMEA net revenues for the three months ended September 27, 2020 decreased $4.8 million, or 3.5%, compared to the prior year period, which was primarily attributable to a $10.8 million net decrease in sales volumes of existing products largely caused by the COVID-19 pandemic partially offset by favorable fluctuations in foreign currency exchange rates of $5.4 million.
EMEA net revenues for the nine months ended September 27, 2020 decreased $18.7 million, or 4.2%, compared to the prior year period, which was primarily attributable to a net decrease in sales volumes of existing products largely caused by the COVID-19 pandemic.
EMEA operating profit for the three months ended September 27, 2020 decreased $4.1 million, or 18.9%, compared to the prior year period, which was primarily attributable to a decrease in gross profit, resulting from lower sales caused by the COVID-19 pandemic partially offset by favorable mix, and an increase in research and development expenses. The decreases in operating profit were partially offset by lower selling, general and administrative expenses, also caused by the COVID-19 pandemic, and favorable fluctuations in foreign currency exchange rates.
EMEA operating profit for the nine months ended September 27, 2020 decreased $16.7 million, or 23.9%, compared to the prior year period, which was primarily attributable to a decrease in gross profit resulting from lower sales and higher manufacturing costs, both caused by the COVID-19 pandemic, an increase in research and development expenses and unfavorable fluctuations in foreign currency exchange rates partially offset by lower selling, general and administrative expenses also caused by the COVID-19 pandemic.
Asia
Asia net revenues for the three months ended September 27, 2020 decreased $9.7 million, or 12.4%, compared to the prior year period, which was primarily attributable to a net decrease in sales volumes of existing products caused by the COVID-19 pandemic.
Asia net revenues for the nine months ended September 27, 2020 decreased $25.5 million, or 11.9%, compared to the prior year period, which was primarily attributable to a net decrease in sales volumes of existing products caused by the COVID-19 pandemic.
Asia operating profit for the three months ended September 27, 2020 decreased $11.4 million, or 52.9%, compared to the prior year period, which was primarily attributable a decrease in gross profit resulting from lower sales and unfavorable product mix, both caused by the COVID-19 pandemic, which were partially offset by lower selling, general and administrative expense also caused by the COVID-19 pandemic.
Asia operating profit for the nine months ended September 27, 2020 decreased $16.7 million, or 33.0%, compared to the prior year period, which was primarily attributable to the COVID-19 pandemic, which caused a decrease in gross profit resulting from lower sales caused by the COVID-19 pandemic and unfavorable fluctuations in foreign currency exchange rates, partially offset by lower selling, general and administrative expenses also caused by the COVID-19 pandemic.
OEM
OEM net revenues for the three months ended September 27, 2020 decreased $6.0 million, or 10.9%, compared to the prior year period, which was primarily attributable to a $12.6 million net decrease in sales volumes of existing products caused by the COVID-19 pandemic partially offset by net revenues of $6.1 million generated by the HPC acquisition.
OEM net revenues for the nine months ended September 27, 2020 increased $2.5 million, or 1.5%, compared to the prior year period, which was primarily attributable to net revenues of $20.1 million generated by the HPC acquisition, partially offset by a $17.4 million net decrease in sales volumes of existing products caused by the COVID-19 pandemic.
OEM operating profit for the three months ended September 27, 2020 decreased $7.8 million, or 48.3%, compared to the prior year period, which was primarily attributable to a decrease in gross profit resulting from lower sales caused by the COVID-19 pandemic.
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OEM operating profit for the nine months ended September 27, 2020 decreased $7.6 million, or 17.6%, compared to the prior year period, which was primarily attributable to a decrease in gross profit resulting from lower sales caused by the COVID-19 pandemic and expenses incurred in connection with the HPC acquisition.
Liquidity and Capital Resources
While the potential economic impact resulting from the COVID-19 pandemic and the extent and duration of the pandemic's impact are difficult to assess or predict, the impact of the pandemic on the global financial markets may reduce our ability to access capital, which could negatively impact our short-term and long-term liquidity. In consideration of the significant uncertainty created by the COVID-19 pandemic, we are continuing to assess our liquidity and anticipated capital requirements. For the nine months ended September 27, 2020, we improved our liquidity position by paying off the borrowings outstanding under our revolving credit facility and increasing long-term borrowings by $500.0 million through the issuance of our 2028 Senior Notes. Additionally, we generated operating cash flows of $241.5 million for the nine months ended September 27, 2020. Notwithstanding the significant uncertainty created by the COVID-19 pandemic, we believe our cash flow from operations, available cash and cash equivalents and borrowings under our revolving credit facility will enable us to fund our operating requirements, capital expenditures and debt obligations for the next 12 months and the foreseeable future. We have net cash provided by United States based operating activities as well as non-United States sources of cash available to help fund our debt service requirements in the United States. We manage our worldwide cash requirements by monitoring the funds available among our subsidiaries and determining the extent to which we can access those funds on a cost effective basis.
In consideration of the COVID-19 pandemic, we are closely monitoring our receivables and payables. To date, we have not experienced significant payment defaults by, or identified other collectability concerns with, our customers, and we have sufficient lending commitments in place to enable us to fund our anticipated additional operating needs.
In anticipation of the expected completion of the Z-Medica acquisition in the fourth quarter of 2020, we drew $500 million in additional borrowings under our revolving credit facility in October 2020.
Cash Flows
Net cash provided by operating activities from continuing operations was $241.5 million for the nine months ended September 27, 2020 as compared to net cash provided by operating activities of $289.2 million for the nine months ended September 29, 2019. The $47.7 million decrease was primarily attributable to an increase in contingent consideration payments and tax payments. The decreases in operating cash flows were partially offset by favorable changes in other working capital driven by higher accounts receivable collections.
Net cash used in investing activities from continuing operations was $318.8 million for the nine months ended September 27, 2020, which included a $260.0 million payment for the acquisition of HPC, capital expenditures of $62.4 million and net interest proceeds on swaps designated as net investment hedges of $10.0 million.
Net cash provided by financing activities from continuing operations was $116.2 million for the nine months ended September 27, 2020, which reflected a net increase in borrowings of $225.0 million primarily resulting from the issuance of the $500 million of 4.25% Senior Notes due 2028 (the "2028 Notes") partially offset by repayments on our revolving credit facility. Net cash used in financing activities for the nine months ended September 27, 2020 also reflects contingent consideration payments of $64.1 million and dividend payments of $47.4 million.
Borrowings
On March 30, 2020, we increased our borrowing capacity related to our accounts receivable securitization facility from $50 million to $75 million.
The 4.875% Senior Notes due 2026 (the "2026 Notes") contain covenants that, among other things and subject to certain exceptions, limit or restrict our ability, and the ability of our subsidiaries, to incur additional debt or issue preferred stock or other disqualified stock, create liens, merge, consolidate, or dispose of certain assets, pay dividends, make investments or make other restricted payments, or enter into transactions with our affiliates. The indenture governing our 4.625% Senior Notes due 2027 (the “2027 Notes”) contains covenants that, among other things and subject to certain exceptions, limit or restrict our ability, and the ability of our subsidiaries, to create liens; consolidate, merge or dispose of certain assets; and enter into sale leaseback transactions. The 2028 Notes contain covenants that, among other things, will restrict our ability and the ability of our subsidiaries to create certain liens,
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enter into sale lease back transactions, and merge, consolidate, sell or otherwise dispose of all or substantially all of our assets.
As of September 27, 2020, we were in compliance with these requirements. The obligations under the Credit Agreement, the 2026 Notes, 2027 Notes and 2028 Notes are guaranteed (subject to certain exceptions) by substantially all of our material domestic subsidiaries, and the obligations under the Credit Agreement are (subject to certain exceptions and limitations) secured by a lien on substantially all of the assets owned by us and each guarantor.
Summarized Financial Information – Obligor Group
The 2026 Notes and 2027 Notes (collectively, the "Senior Notes") are issued by Teleflex Incorporated (the “Parent Company”), and payment of the Parent Company's obligations under the Senior Notes is guaranteed, jointly and severally, by an enumerated group of the Parent Company’s subsidiaries (each, a “Guarantor Subsidiary” and collectively, the “Guarantor Subsidiaries”). The guarantees are full and unconditional, subject to certain customary release provisions. Each Guarantor Subsidiary is directly or indirectly 100% owned by the Parent Company. Summarized financial information for the Parent and Guarantor Subsidiaries (collectively, the “Obligor Group”) as of September 27, 2020 and December 31, 2019 and for the nine months ended September 27, 2020 is as follows:
| Nine Months Ended | ||||||||||||||||||||
| September 27, 2020 | ||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
| Obligor Group | Intercompany | Obligor Group (excluding Intercompany) | ||||||||||||||||||
| Net revenue | $ | 1,266.8 | $ | 140.0 | $ | 1,126.8 | ||||||||||||||
| Cost of goods sold | 767.2 | 227.6 | 539.6 | |||||||||||||||||
| Gross profit | 499.6 | (87.6) | 587.2 | |||||||||||||||||
| Income from continuing operations | 134.2 | (18.4) | 152.6 | |||||||||||||||||
| Net income | 134.2 | (18.4) | 152.6 | |||||||||||||||||
| September 27, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||||||||
| Obligor Group | Intercompany | Obligor Group (excluding Intercompany) | Obligor Group | Intercompany | Obligor Group (excluding Intercompany) | |||||||||||||||||||||||||||||||||
| Total current assets | $ | 811.9 | $ | 80.9 | $ | 731.0 | $ | 735.8 | $ | 51.8 | $ | 684.0 | ||||||||||||||||||||||||||
| Total assets | 5,279.8 | 1,419.1 | 3,860.7 | 4,847.9 | 1,237.7 | 3,610.2 | ||||||||||||||||||||||||||||||||
| Total current liabilities | 787.3 | 574.1 | 213.2 | 852.5 | 500.8 | 351.7 | ||||||||||||||||||||||||||||||||
| Total liabilities | 3,781.5 | 878.7 | 2,902.8 | 3,659.5 | 752.4 | 2,907.1 | ||||||||||||||||||||||||||||||||
The same accounting policies as described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 are used by the Parent Company and each of its subsidiaries in connection with the summarized financial information presented above. The Intercompany column in the table above represents transactions between and among the Obligor Group and non-guarantor subsidiaries (i.e. those subsidiaries of the Parent Company that have not guaranteed payment of the Senior Notes). Obligor investments in non-guarantor subsidiaries and any related activity are excluded from the financial information presented above. The summarized financial information presented above for the Obligor Group as of and for the nine months ended September 27, 2020 gives effect to the 2028 Notes issued in a private offering in May 2020.
Contractual obligations
The following table sets forth our contractual obligations solely related to our total borrowings and interest as of September 27, 2020, which, as a result of the issuance of the 2028 Notes and the borrowing activity occurring during the nine months ended September 27, 2020 as described above in "Borrowings", have significantly changed since December 31, 2019:
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| Payments due by period | |||||||||||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||
| Total borrowings | $ | 2,148.0 | $ | 91.8 | $ | 61.2 | $ | 595.0 | $ | 1,400.0 | |||||||||||||||||||
Interest obligations (1) | 486.1 | 78.6 | 154.0 | 134.1 | 119.4 | ||||||||||||||||||||||||
(1)Interest payments on floating rate debt are based on the interest rate in effect on September 27, 2020.
Critical Accounting Estimates
The preparation of 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 and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.
In our Annual Report on Form 10-K for the year ended December 31, 2019, we provided disclosure regarding our critical accounting estimates, which are reflective of significant judgments and uncertainties, are important to the presentation of our financial condition and results of operations and could potentially result in materially different results under different assumptions and conditions.
New Accounting Standards
See Note 2 to the condensed consolidated financial statements included in this report for a discussion of recently issued accounting guidance, including estimated effects, if any, of adoption of the guidance on our financial statements.
Forward-Looking Statements
All statements made in this Quarterly Report on Form 10-Q, other than statements of historical fact, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “will,” “would,” “should,” “guidance,” “potential,” “continue,” “project,” “forecast,” “confident,” “prospects” and similar expressions typically are used to identify forward-looking statements. Forward-looking statements are based on the then-current expectations, beliefs, assumptions, estimates and forecasts about our business and the industry and markets in which we operate. These statements are not guarantees of future performance and are subject to risks and uncertainties, which are difficult to predict. Therefore, actual outcomes and results may differ materially from those expressed or implied by these forward-looking statements due to a number of factors, including the adverse economic conditions associated with the COVID-19 global health pandemic and the associated financial crisis, stay-at-home and other orders, which could cause material delays and cancellations of elective procedures, curtailed or delayed spending by customers and result in disruptions to our supply chain, closure of our facilities, delays in product launches or diversion of management and other resources to respond to the COVID-19 pandemic; the impact of global and regional economic and credit market conditions on healthcare spending; the risk that the COVID-19 pandemic disrupts local economies and causes economies to enter prolonged recessions; changes in business relationships with and purchases by or from major customers or suppliers; delays or cancellations of shipments; demand for and market acceptance of new and existing products; our inability to provide products to our customers, which may be due to, among other things, events that impact key distributors, suppliers and vendors that sterilize our products; our inability to integrate acquired businesses into our operations, realize planned synergies and operate such businesses profitably in accordance with our expectations; our inability to effectively execute our restructuring plans and programs; our inability to realize anticipated savings from restructuring plans and programs; the impact of enacted healthcare reform legislation and proposals to amend, replace or repeal the legislation; changes in Medicare, Medicaid and third party coverage and reimbursements; the impact of tax legislation and related regulations; competitive market conditions and resulting effects on revenues and pricing; increases in raw material costs that cannot be recovered in product pricing; global economic factors, including currency exchange rates, interest rates, trade disputes and sovereign debt issues; difficulties in entering new markets; and general economic conditions. For a further discussion of the risks relating to our business, see Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2019 as well as Part II, Item 1A of our Quarterly Reports on Form 10-Q for the quarters ended March 29, 2020 and June 28, 2020, and of this report. We expressly disclaim any obligation to update these forward-looking statements, except as otherwise specifically stated by us or as required by law or regulation.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the information set forth in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2019.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
(b) Change in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
We are party to various lawsuits and claims arising in the normal course of business. These lawsuits and claims include actions involving product liability and product warranty, commercial disputes, intellectual property, contract, employment, environmental and other matters. As of September 27, 2020 and December 31, 2019, we have accrued liabilities of approximately $0.2 million and $0.4 million, respectively, in connection with these matters, representing our best estimate of the cost within the range of estimated possible loss that will be incurred to resolve these matters. Based on information currently available, advice of counsel, established reserves and other resources, we do not believe that the outcome of any outstanding lawsuits or claims is likely to be, individually or in the aggregate, material to our 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 our business, financial condition, results of operations or liquidity.
Item 1A. Risk Factors
See the information set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A of our Quarterly Reports on Form 10-Q for the quarters ended March 29, 2020 and June 28, 2020. There have been no significant changes in risk factors for the quarter ended September 27, 2020 except as set forth below. The risk factor set forth below replaces in their entireties the risk factors in our Annual Report on Form 10-K for the year ended December 31, 2019 with the title “Our results of operations and financial condition may be adversely affected by public health epidemics, including the novel coronavirus reported to have originated in Wuhan, China,” and in our Quarterly Reports on Form 10-Q for the quarters ended March 29, 2020 and June 28, 2020 with the title “Our results of operations and financial condition may be adversely affected by public health epidemics, including the ongoing COVID-19 global health pandemic.”:
Our results of operations and financial condition may be adversely affected by public health epidemics, including the ongoing COVID-19 global health pandemic.
On March 11, 2020, the World Health Organization declared the global outbreak of COVID-19 to be a pandemic. The COVID-19 pandemic has significantly impacted economic activity and markets around the world. If the pandemic continues and conditions worsen, particularly if the virus becomes more prevalent over the fall and winter seasons in the Northern Hemisphere, it could negatively impact our business, results of operations, financial condition and liquidity in numerous ways, including, but not limited to, those outlined below:
•It has resulted, and we expect it will continue to result, in lower revenues in certain of our product categories, including our interventional urology (which revenues are primarily concentrated in our Americas segment), surgical, interventional, anesthesia and OEM product categories, in which we sell products largely utilized in elective procedures, which have been significantly reduced or suspended due to the pandemic.
•It has resulted in higher revenues in our respiratory and vascular access product categories. However, we are unable to predict how long this sustained demand will last or how significant it will be.
•It may cause disruptions in the manufacture of our products. We currently rely on our 35 manufacturing sites, with major manufacturing operations located in the Czech Republic, Germany, Malaysia, Mexico and the U.S., to manufacture our products. The COVID-19 pandemic, and/or the governmental or regulatory actions taken in response to COVID-19 pandemic, may interfere with our ability, or that of our employees or suppliers to perform our and their respective responsibilities and obligations relative to the conduct of our business and create a risk to our ability to manufacture our products in a timely manner, or at all. We have experienced and expect to continue to experience inefficiencies in our manufacturing operations due to government-mandated and self-imposed restrictions placed on facilities in certain locations primarily in North America and Asia. Additionally, we have experienced and continue to experience a higher than normal level of absenteeism across our global manufacturing sites. In an effort to increase the wider availability of needed medical device products, we may elect to, or the government may require us to, allocate manufacturing capacity (for example, pursuant to the U.S. Defense Production Act) in a way that adversely affects our regular operations and financial results, results in differential treatment of customers and/or adversely affects our customer relationships and reputation.
•While we have not experienced significant payment defaults by, or identified other significant collectability concerns with, our customers to date, we may be adversely impacted by delays in payments of outstanding
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receivables if our customers experience financial difficulties or are unable to borrow money to fund their operations, which may adversely impact their ability to pay for our products on a timely basis, if at all.
•The COVID-19 pandemic, including related illness, border closures, travel restrictions, quarantines, lockdowns or other workforce disruptions, could disrupt our suppliers or our suppliers’ suppliers and/or the distribution of our products, whether through our direct sales force or our distributors. These disruptions, or our failure to respond to them, could increase manufacturing or distribution costs or cause delays in delivering, or an inability to deliver, products to our customers.
•The COVID-19 pandemic has increased volatility and pricing in the capital markets, and volatility if likely to continue. We might not be able to continue to access preferred sources of liquidity when we would like, and our borrowing costs could increase.
These and other impacts of the COVID-19 pandemic, or other pandemics or epidemics, could have the effect of heightening many of the other risks described in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2019. We might not be able to predict or respond to all impacts on a timely basis to prevent near- or long-term adverse impacts to our results. The severity, magnitude and duration of the COVID-19 pandemic is uncertain, rapidly changing and hard to predict. We do not yet know the full extent of potential delays or impacts on our business, our results of operations or financial condition or on healthcare systems or the global economy as a whole. However, these effects could have an adverse impact on our liquidity, capital resources, operations and business and those of the third parties on which we rely, and such impact could be material.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
On October 27, 2020, James J. Leyden notified us that he will retire from the company on March 31, 2021 to pursue a career in public interest. Leading up to his retirement, Mr. Leyden will continue to serve in his current role as our Corporate Vice President, General Counsel and Secretary until December 31, 2020. Thereafter, Mr. Leyden will remain employed as a senior advisor until his retirement date to assist with the transition of his duties and responsibilities. From January 1, 2021 to his retirement date, Mr. Leyden’s base salary and benefits will be reduced to a level commensurate with his senior advisor role.
On October 27, 2020, our Board of Directors appointed Daniel V. Logue to succeed Mr. Leyden as Corporate Vice President, General Counsel and Secretary of Teleflex, effective January 1, 2021. Mr. Logue, who joined Teleflex in 2004, has served as Deputy General Counsel of the company since February 2017. Previously, Mr. Logue held the positions of Associate General Counsel from March 2013 to January 2017 and Assistant General Counsel from June 2004 to February 2013.
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Item 6. Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this report:
| Exhibit No. | Description | |||||||||||||
| 10.1 | — | |||||||||||||
| 10.2 | — | |||||||||||||
| 10.3 | — | |||||||||||||
31.1 | — | |||||||||||||
31.2 | — | |||||||||||||
32.1 | — | |||||||||||||
32.2 | — | |||||||||||||
101.1 | — | The following materials from our Quarterly Report on Form 10-Q for the quarter ended September 27, 2020, formatted in inline XBRL (eXtensible Business Reporting Language): (i) Cover Page; (ii) the Condensed Consolidated Statements of Income for the three and nine months ended September 27, 2020 and September 29, 2019; (iii) the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 27, 2020 and September 29, 2019; (iv) the Condensed Consolidated Balance Sheets as of September 27, 2020 and December 31, 2019; (v) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 27, 2020 and September 29, 2019; (vi) the Condensed Consolidated Statements of Changes in Equity for the three and nine months ended September 27, 2020 and September 29, 2019; and (vii) Notes to Condensed Consolidated Financial Statements. | ||||||||||||
104.1 | — | The cover page of the Company's Quarterly Report on Form 10-Q for the quarter ended September 27, 2020, formatted in inline XBRL (included in Exhibit 101.1). | ||||||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| TELEFLEX INCORPORATED | ||||||||||||||
| By: | /s/ Liam J. Kelly | |||||||||||||
Liam J. Kelly President and Chief Executive Officer (Principal Executive Officer) | ||||||||||||||
| By: | /s/ Thomas E. Powell | |||||||||||||
Thomas E. Powell Executive Vice President and Chief Financial Officer (Principal Financial Officer) | ||||||||||||||
Dated: October 29, 2020
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