TELEFLEX INC - Quarter Report: 2023 April (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 April 02, 2023
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 46,971,703 shares of common stock, par value $1.00 per share, outstanding as of May 2, 2023 .
TELEFLEX INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 2, 2023
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 | |||||||||||
| April 2, 2023 | March 27, 2022 | ||||||||||
| (Dollars and shares in thousands, except per share) | |||||||||||
| Net revenues | $ | 710,932 | $ | 641,715 | |||||||
| Cost of goods sold | 319,552 | 295,482 | |||||||||
| Gross profit | 391,380 | 346,233 | |||||||||
| Selling, general and administrative expenses | 232,716 | 203,932 | |||||||||
| Research and development expenses | 41,469 | 36,360 | |||||||||
| Restructuring and impairment charges | 2,221 | 2,405 | |||||||||
| Income from continuing operations before interest and taxes | 114,974 | 103,536 | |||||||||
| Interest expense | 18,337 | 10,418 | |||||||||
| Interest income | (843) | (222) | |||||||||
| Income from continuing operations before taxes | 97,480 | 93,340 | |||||||||
| Taxes on income from continuing operations | 20,184 | 15,973 | |||||||||
| Income from continuing operations | 77,296 | 77,367 | |||||||||
| Operating loss from discontinued operations | (711) | (294) | |||||||||
| Tax benefit on operating loss from discontinued operations | (163) | (68) | |||||||||
| Loss from discontinued operations | (548) | (226) | |||||||||
| Net income | $ | 76,748 | $ | 77,141 | |||||||
| Earnings per share: | |||||||||||
| Basic: | |||||||||||
| Income from continuing operations | $ | 1.65 | $ | 1.65 | |||||||
| Loss from discontinued operations | (0.02) | — | |||||||||
| Net income | $ | 1.63 | $ | 1.65 | |||||||
| Diluted: | |||||||||||
| Income from continuing operations | $ | 1.63 | $ | 1.63 | |||||||
| Loss from discontinued operations | (0.01) | — | |||||||||
| Net income | $ | 1.62 | $ | 1.63 | |||||||
| Weighted average common shares outstanding | |||||||||||
| Basic | 46,949 | 46,876 | |||||||||
| Diluted | 47,285 | 47,402 | |||||||||
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 | |||||||||||
| April 2, 2023 | March 27, 2022 | ||||||||||
| (Dollars in thousands) | |||||||||||
| Net income | $ | 76,748 | $ | 77,141 | |||||||
| Other comprehensive income (loss), net of tax: | |||||||||||
Foreign currency translation, net of tax of $2,970 and $(1,136) for the three months periods, respectively | 18,570 | (23,329) | |||||||||
Pension and other postretirement benefit plans adjustment, net of tax of $(354) and $(499) for the three months periods, respectively | 1,213 | 1,586 | |||||||||
Derivatives qualifying as hedges, net of tax of $120 and $(30) for the three months periods, respectively | 2,408 | 457 | |||||||||
| Other comprehensive income (loss), net of tax: | 22,191 | (21,286) | |||||||||
| Comprehensive income | $ | 98,939 | $ | 55,855 | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
TELEFLEX INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| April 2, 2023 | December 31, 2022 | ||||||||||
| (Dollars in thousands) | |||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 264,138 | $ | 292,034 | |||||||
| Accounts receivable, net | 410,020 | 408,834 | |||||||||
| Inventories | 614,106 | 578,507 | |||||||||
| Prepaid expenses and other current assets | 134,948 | 125,084 | |||||||||
| Prepaid taxes | 4,842 | 6,524 | |||||||||
| Total current assets | 1,428,054 | 1,410,983 | |||||||||
| Property, plant and equipment, net | 458,861 | 447,205 | |||||||||
| Operating lease assets | 126,773 | 131,211 | |||||||||
| Goodwill | 2,547,840 | 2,536,730 | |||||||||
| Intangible assets, net | 2,269,535 | 2,306,165 | |||||||||
| Deferred tax assets | 6,479 | 6,402 | |||||||||
| Other assets | 80,380 | 89,367 | |||||||||
| Total assets | $ | 6,917,922 | $ | 6,928,063 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Current borrowings | $ | 87,500 | $ | 87,500 | |||||||
| Accounts payable | 136,239 | 126,807 | |||||||||
| Accrued expenses | 123,451 | 140,644 | |||||||||
| Payroll and benefit-related liabilities | 102,081 | 133,092 | |||||||||
| Accrued interest | 16,862 | 5,332 | |||||||||
| Income taxes payable | 30,176 | 24,736 | |||||||||
| Other current liabilities | 79,403 | 63,381 | |||||||||
| Total current liabilities | 575,712 | 581,492 | |||||||||
| Long-term borrowings | 1,549,474 | 1,624,023 | |||||||||
| Deferred tax liabilities | 388,185 | 388,886 | |||||||||
| Pension and postretirement benefit liabilities | 30,924 | 31,394 | |||||||||
| Noncurrent liability for uncertain tax positions | 6,464 | 5,805 | |||||||||
| Noncurrent operating lease liabilities | 115,838 | 120,437 | |||||||||
| Other liabilities | 141,072 | 154,058 | |||||||||
| Total liabilities | 2,807,669 | 2,906,095 | |||||||||
| Commitments and contingencies | |||||||||||
| Total shareholders' equity | 4,110,253 | 4,021,968 | |||||||||
| Total liabilities and shareholders' equity | $ | 6,917,922 | $ | 6,928,063 | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
TELEFLEX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended | |||||||||||
| April 2, 2023 | March 27, 2022 | ||||||||||
| (Dollars in thousands) | |||||||||||
| Cash flows from operating activities of continuing operations: | |||||||||||
| Net income | $ | 76,748 | $ | 77,141 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Loss from discontinued operations | 548 | 226 | |||||||||
| Depreciation expense | 18,287 | 17,317 | |||||||||
| Intangible asset amortization expense | 41,540 | 40,597 | |||||||||
| Deferred financing costs and debt discount amortization expense | 846 | 1,048 | |||||||||
| Changes in contingent consideration | 2,447 | (30) | |||||||||
| Assets impairment charges | — | 1,497 | |||||||||
| Stock-based compensation | 7,015 | 5,302 | |||||||||
| Deferred income taxes, net | 2,092 | 409 | |||||||||
| Interest benefit on swaps designated as net investment hedges | (5,108) | (4,848) | |||||||||
| Other | (427) | (2,093) | |||||||||
| Changes in assets and liabilities, net of effects of acquisitions and disposals: | |||||||||||
| Accounts receivable | 1,339 | (27,805) | |||||||||
| Inventories | (30,099) | (19,852) | |||||||||
| Prepaid expenses and other assets | 2,752 | 4,830 | |||||||||
| Accounts payable, accrued expenses and other liabilities | (40,856) | (36,978) | |||||||||
| Income taxes receivable and payable, net | 7,225 | 5,341 | |||||||||
| Net cash provided by operating activities from continuing operations | 84,349 | 62,102 | |||||||||
| Cash flows from investing activities of continuing operations: | |||||||||||
| Expenditures for property, plant and equipment | (21,835) | (13,078) | |||||||||
| Proceeds from sale of business and assets | — | 262 | |||||||||
| Payments for businesses and intangibles acquired, net of cash acquired | (64) | — | |||||||||
| Net cash used in investing activities from continuing operations | (21,899) | (12,816) | |||||||||
| Cash flows from financing activities of continuing operations: | |||||||||||
| Reduction in borrowings | (75,125) | — | |||||||||
| Net payments from share based compensation plans and related tax impacts | (2,433) | (4,941) | |||||||||
| Payments for contingent consideration | (64) | (73) | |||||||||
| Dividends paid | (15,969) | (15,946) | |||||||||
| Net cash used in financing activities from continuing operations | (93,591) | (20,960) | |||||||||
| Cash flows from discontinued operations: | |||||||||||
| Net cash used in operating activities | (285) | (119) | |||||||||
| Net cash used in discontinued operations | (285) | (119) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 3,530 | (6,635) | |||||||||
| Net (decrease) increase in cash and cash equivalents | (27,896) | 21,572 | |||||||||
| Cash and cash equivalents at the beginning of the period | 292,034 | 445,084 | |||||||||
| Cash and cash equivalents at the end of the period | $ | 264,138 | $ | 466,656 | |||||||
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, 2022 | 47,957 | $ | 47,957 | $ | 715,118 | $ | 3,817,304 | $ | (403,522) | 1,032 | $ | (154,889) | $ | 4,021,968 | |||||||||||||||||||||||||||||||||
| Net income | 76,748 | 76,748 | |||||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($0.34 per share) | (15,969) | (15,969) | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 22,191 | 22,191 | |||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under compensation plans | 18 | 18 | 2,333 | (19) | 2,639 | 4,990 | |||||||||||||||||||||||||||||||||||||||||
| Deferred compensation | — | — | 324 | (6) | 1 | 325 | |||||||||||||||||||||||||||||||||||||||||
Balance at April 2, 2023 | 47,975 | $ | 47,975 | $ | 717,775 | $ | 3,878,083 | $ | (381,331) | 1,007 | $ | (152,249) | $ | 4,110,253 | |||||||||||||||||||||||||||||||||
| 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, 2021 | 47,929 | $ | 47,929 | $ | 693,090 | $ | 3,517,954 | $ | (346,959) | 1,069 | $ | (157,266) | $ | 3,754,748 | |||||||||||||||||||||||||||||||||
Net income | 77,141 | 77,141 | |||||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($0.34 per share) | (15,946) | (15,946) | |||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | (21,286) | (21,286) | |||||||||||||||||||||||||||||||||||||||||||||
Shares issued under compensation plans | 5 | 5 | (950) | (27) | 894 | (51) | |||||||||||||||||||||||||||||||||||||||||
Deferred compensation | — | — | 100 | (5) | 828 | 928 | |||||||||||||||||||||||||||||||||||||||||
Balance at March 27, 2022 | 47,934 | $ | 47,934 | $ | 692,240 | $ | 3,579,149 | $ | (368,245) | 1,037 | $ | (155,544) | $ | 3,795,534 | |||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(all tabular amounts in thousands unless otherwise noted)
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. 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, 2022.
Note 2 — Recently issued accounting standards
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 believe 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, which constituted 87%, 11% and 2% of consolidated net revenues, respectively, for the three months ended April 2, 2023. 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.
7
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The following table disaggregates revenue by global product category for the three months ended April 2, 2023 and March 27, 2022.
| Three Months Ended | |||||||||||
| April 2, 2023 | March 27, 2022 | ||||||||||
| Vascular access | $ | 177,652 | $ | 166,134 | |||||||
| Anesthesia | 93,332 | 86,957 | |||||||||
| Interventional | 116,897 | 96,859 | |||||||||
| Surgical | 99,023 | 89,702 | |||||||||
| Interventional urology | 75,378 | 74,895 | |||||||||
| OEM | 76,997 | 57,656 | |||||||||
Other (1) | 71,653 | 69,512 | |||||||||
Net revenues (2) | $ | 710,932 | $ | 641,715 | |||||||
(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 includes net revenues from each of the non-OEM product categories listed above.
Note 4 — Acquisition and Divestiture
Acquisition
In the fourth quarter of 2022, we completed the acquisition of Standard Bariatrics, Inc. (“Standard Bariatrics”), a privately-held medical device company that commercialized a powered stapling technology for bariatric surgery that complements our surgical product portfolio. Under the terms of the agreement, we acquired Standard Bariatrics for cash payments of $173 million, with the potential to make three milestone payments up to $130 million in aggregate if certain commercial milestones are met.
Divestiture
On May 15, 2021, we entered into a definitive agreement to sell certain product lines within our global respiratory product portfolio (the "Divested respiratory business") to Medline Industries, Inc. (“Medline”) for consideration of $286.0 million, reduced by $12 million in working capital not transferring to Medline, which is subject to customary post close adjustments (the "Respiratory business divestiture"). In connection with the Respiratory business divestiture, we also entered into several ancillary agreements with Medline to help facilitate the transfer of the business, which provide for transition support, quality, supply and manufacturing services, including a manufacturing and supply transition agreement (the "MSTA").
On June 28, 2021, the first day of the third quarter of 2021, we completed the initial phase of the Respiratory business divestiture, pursuant to which we received cash proceeds of $259 million. The second phase of the Respiratory business divestiture will occur once we transfer certain additional manufacturing assets to Medline and is expected to occur prior to the end of 2023. We plan to recognize the remaining consideration, and any gain on sale resulting from the completion of the second phase of the divestiture, when it becomes realizable.
Net revenues attributed to services provided to Medline in accordance with the MSTA, which are presented within our Americas reporting segment, were $20.0 million and $21.1 million for the three months ended April 2, 2023 and March 27, 2022, respectively.
Note 5 — Restructuring and impairment charges
We have ongoing restructuring initiatives consisting of a strategic restructuring plan designed to improve operating performance and position the organization to deliver long-term durable growth by creating efficiencies that align with our high growth strategic objectives (the “2022 restructuring plan”) and a plan, initiated in connection with the Respiratory business divestiture designed to separate the manufacturing operations to be transferred to Medline
8
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
from those that will remain with Teleflex (the “Respiratory divestiture plan”). The following tables provide a summary of our cost estimates and other information associated with these plans:
| 2022 restructuring plan | Respiratory divestiture plan | ||||||||||
| Plan expense estimates: | (Dollars in millions) | ||||||||||
| Termination benefits | $18 to $22 | $5 to $8 | |||||||||
Other costs (1) | 1 to 1 | — to — | |||||||||
| Restructuring charges | 19 to 23 | 5 to 8 | |||||||||
Restructuring related charges (2) | 20 to 25 | 19 to 22 | |||||||||
| Total restructuring and restructuring related charges | $39 to $48 | $24 to $30 | |||||||||
| Other plan estimates: | |||||||||||
| Expected cash outlays | $26 to $32 | $24 to $30 | |||||||||
| Expected capital expenditures | $2 to $2 | $22 to $28 | |||||||||
| Other plan information: | |||||||||||
| Period initiated | November 2022 | May 2021 | |||||||||
| Estimated period of substantial completion | 2023 | 2023 | |||||||||
| Aggregate restructuring charges | $17.7 | $3.4 | |||||||||
| Restructuring reserve: | |||||||||||
| Balance as of April 2, 2023 | $12.6 | $3.3 | |||||||||
| Restructuring related charges incurred: | |||||||||||
| Three Months Ended April 2, 2023 | $4.4 | $2.1 | |||||||||
| Aggregate restructuring related charges | $14.5 | $14.3 | |||||||||
(1)Includes facility closure, employee relocation, equipment relocation and outplacement costs.
(2)Restructuring related charges represent costs that are directly related to the plans and principally constitute costs to transfer manufacturing operations to the existing lower-cost locations, project management costs and accelerated depreciation. Substantially all of the restructuring related charges are expected to be recognized within cost of goods sold.
Restructuring and impairment charges recognized for the three months ended April 2, 2023 and March 27, 2022 consisted of the following:
| Three Months Ended April 2, 2023 | |||||||||||||||||
| Termination Benefits | Other Costs (1) | Total | |||||||||||||||
| 2022 Restructuring plan | $ | 2,133 | $ | 73 | $ | 2,206 | |||||||||||
| Respiratory divestiture plan | 128 | 12 | 140 | ||||||||||||||
Other restructuring programs (2) | (314) | 189 | (125) | ||||||||||||||
| Restructuring charges | $ | 1,947 | $ | 274 | $ | 2,221 | |||||||||||
Three Months Ended March 27, 2022 | |||||||||||||||||
| Termination Benefits | Other Costs (1) | Total | |||||||||||||||
| Respiratory divestiture plan | $ | 106 | $ | 14 | $ | 120 | |||||||||||
| 2019 Footprint realignment plan | (670) | 24 | (646) | ||||||||||||||
| 2018 Footprint realignment plan | 158 | 62 | 220 | ||||||||||||||
Other restructuring programs (3) | 1,132 | 82 | 1,214 | ||||||||||||||
| Restructuring charges | $ | 726 | $ | 182 | $ | 908 | |||||||||||
| Asset impairment charges | — | 1,497 | 1,497 | ||||||||||||||
| Restructuring and impairment charges | $ | 726 | $ | 1,679 | $ | 2,405 | |||||||||||
(1) Other costs include facility closure, contract termination and other exit costs.
(2) Includes activity primarily related to our 2014, 2018, and 2019 Footprint realignment plans.
9
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
(3) Includes activity primarily related to a restructuring plan initiated in the first quarter of 2022 that is designed to relocate manufacturing operations at certain of our facilities, the 2021 Restructuring plan and the 2014 Footprint realignment plan.
Note 6 — Inventories
Inventories as of April 2, 2023 and December 31, 2022 consisted of the following:
| April 2, 2023 | December 31, 2022 | ||||||||||
| Raw materials | $ | 195,962 | $ | 186,641 | |||||||
| Work-in-process | 107,117 | 98,993 | |||||||||
| Finished goods | 311,027 | 292,873 | |||||||||
| Inventories | $ | 614,106 | $ | 578,507 | |||||||
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 three months ended April 2, 2023:
| Americas | EMEA | Asia | OEM | Total | |||||||||||||||||||||||||
| December 31, 2022 | $ | 1,731,093 | $ | 468,524 | $ | 225,103 | $ | 112,010 | $ | 2,536,730 | |||||||||||||||||||
| Currency translation adjustment | 1,592 | 7,540 | 1,978 | — | 11,110 | ||||||||||||||||||||||||
| April 2, 2023 | $ | 1,732,685 | $ | 476,064 | $ | 227,081 | $ | 112,010 | $ | 2,547,840 | |||||||||||||||||||
The gross carrying amount of, and accumulated amortization relating to, intangible assets as of April 2, 2023 and December 31, 2022 were as follows:
| Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||||||||
| April 2, 2023 | December 31, 2022 | April 2, 2023 | December 31, 2022 | ||||||||||||||||||||
| Customer relationships | $ | 1,330,674 | $ | 1,328,539 | $ | (514,005) | $ | (497,335) | |||||||||||||||
| In-process research and development | 27,403 | 27,075 | — | — | |||||||||||||||||||
| Intellectual property | 1,602,097 | 1,599,355 | (669,967) | (646,643) | |||||||||||||||||||
| Distribution rights | 23,211 | 23,115 | (21,378) | (21,090) | |||||||||||||||||||
| Trade names | 565,938 | 564,023 | (74,611) | (71,128) | |||||||||||||||||||
| Non-compete agreements | 21,832 | 21,429 | (21,659) | (21,175) | |||||||||||||||||||
| $ | 3,571,155 | $ | 3,563,536 | $ | (1,301,620) | $ | (1,257,371) | ||||||||||||||||
Note 8 — 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 months ended April 2, 2023, we recognized no gain or loss related to non-designated foreign currency forward contracts. For the three months ended March 27, 2022, we recognized a loss of $3.3 million 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 April 2, 2023 and December 31, 2022 was $239.8 million and $184.8 million, respectively. The total notional amount for all open non-designated foreign currency forward contracts as of April 2, 2023 and December 31, 2022 was $119.7 million and $152.9 million, respectively. All open foreign currency forward contracts as of April 2, 2023 have durations of 12 months or less.
10
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
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"). The following table summarizes the foreign exchange gains and losses recognized within AOCI and the interest benefit recognized within interest expense related to cross currency swap for the three months ended April 2, 2023 and March 27, 2022:
| Three Months Ended | |||||||||||
| April 2, 2023 | March 27, 2022 | ||||||||||
| Foreign exchange (loss) gain | $ | (10,031) | $ | 3,840 | |||||||
| Interest benefit | 5,108 | 4,848 | |||||||||
Balance sheet presentation
The following table presents the locations in the condensed consolidated balance sheet and fair value of derivative financial instruments as of April 2, 2023 and December 31, 2022:
| April 2, 2023 | December 31, 2022 | ||||||||||
| Asset derivatives: | |||||||||||
| Designated foreign currency forward contracts | $ | 6,004 | $ | 3,154 | |||||||
| Non-designated foreign currency forward contracts | 43 | 41 | |||||||||
| Cross-currency interest rate swaps | 52,526 | 48,503 | |||||||||
| Prepaid expenses and other current assets | 58,573 | 51,698 | |||||||||
| Cross-currency interest rate swaps | — | 11,912 | |||||||||
| Other assets | — | 11,912 | |||||||||
| Total asset derivatives | $ | 58,573 | $ | 63,610 | |||||||
| Liability derivatives: | |||||||||||
| Designated foreign currency forward contracts | $ | 967 | $ | 983 | |||||||
| Non-designated foreign currency forward contracts | 292 | 477 | |||||||||
| Other current liabilities | 1,259 | 1,460 | |||||||||
| Total liability derivatives | $ | 1,259 | $ | 1,460 | |||||||
See Note 10 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. There was no ineffectiveness related to our cash flow hedges during the three months ended April 2, 2023 and March 27, 2022.
11
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Trade receivables
The allowance for credit losses as of April 2, 2023 and December 31, 2022 was $9.1 million and $8.6 million, respectively. The current portion of the allowance for credit losses, which was $5.3 million and $4.9 million as of April 2, 2023 and December 31, 2022, respectively, was recognized as a reduction of accounts receivable, net.
Note 9 — Fair value measurement
The following tables provide information regarding our financial assets and liabilities measured at fair value on a recurring basis as of April 2, 2023 and December 31, 2022:
Total carrying value at April 2, 2023 | Quoted prices in active markets (Level 1) | Significant other observable Inputs (Level 2) | Significant unobservable Inputs (Level 3) | ||||||||||||||||||||
| Investments in marketable securities | $ | 11,552 | $ | 11,552 | $ | — | $ | — | |||||||||||||||
| Derivative assets | 58,573 | — | 58,573 | — | |||||||||||||||||||
| Derivative liabilities | 1,259 | — | 1,259 | — | |||||||||||||||||||
| Contingent consideration liabilities | 46,405 | — | — | 46,405 | |||||||||||||||||||
| Total carrying value at December 31, 2022 | Quoted prices in active markets (Level 1) | Significant other observable Inputs (Level 2) | Significant unobservable Inputs (Level 3) | ||||||||||||||||||||
| Investments in marketable securities | $ | 10,097 | $ | 10,097 | $ | — | $ | — | |||||||||||||||
| Derivative assets | 63,610 | — | 63,610 | — | |||||||||||||||||||
| Derivative liabilities | 1,460 | — | 1,460 | — | |||||||||||||||||||
| Contingent consideration liabilities | 44,022 | — | — | 44,022 | |||||||||||||||||||
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.
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 certain 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.
12
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The table below provides additional information regarding the valuation technique and inputs used in determining the fair value of our significant contingent consideration liabilities.
| Contingent Consideration Liability | Valuation Technique | Unobservable Input | ||||||||||||||||||
| Revenue-based | ||||||||||||||||||||
| Monte Carlo simulation | Revenue volatility | 31.3 | % | |||||||||||||||||
| Risk free rate | Cost of debt structure | |||||||||||||||||||
| Projected year of payment | 2024 - 2026 | |||||||||||||||||||
The following table provides information regarding changes in our contingent consideration liabilities for the three months ended April 2, 2023:
| Contingent consideration | |||||
| Balance – December 31, 2022 | $ | 44,022 | |||
| Payments | (64) | ||||
| Revaluations | 2,447 | ||||
Balance – April 2, 2023 | $ | 46,405 | |||
Note 10 — Shareholders' equity
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed in the same manner except that the weighted average number of shares is increased to include dilutive securities. The following table provides a reconciliation of basic to diluted weighted average number of common shares outstanding:
| Three Months Ended | |||||||||||
| April 2, 2023 | March 27, 2022 | ||||||||||
| Basic | 46,949 | 46,876 | |||||||||
| Dilutive effect of share-based awards | 336 | 526 | |||||||||
| Diluted | 47,285 | 47,402 | |||||||||
The weighted average number of shares that were antidilutive and therefore excluded from the calculation of earnings per share were 0.6 million and 0.3 million for the three months ended April 2, 2023 and March 27, 2022, respectively.
The following tables provide information relating to the changes in accumulated other comprehensive loss, net of tax, for the three months ended April 2, 2023 and March 27, 2022:
| Cash Flow Hedges | Pension and Other Postretirement Benefit Plans | Foreign Currency Translation Adjustment | Accumulated Other Comprehensive (Loss) Income | ||||||||||||||||||||
| Balance as of December 31, 2022 | $ | 4,931 | $ | (135,799) | $ | (272,654) | $ | (403,522) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | 5,260 | (184) | 18,570 | 23,646 | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | (2,852) | 1,397 | — | (1,455) | |||||||||||||||||||
| Net current-period other comprehensive income | 2,408 | 1,213 | 18,570 | 22,191 | |||||||||||||||||||
| Balance as of April 2, 2023 | $ | 7,339 | $ | (134,586) | $ | (254,084) | $ | (381,331) | |||||||||||||||
13
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 | ||||||||||||||||||||
| Balance as of December 31, 2021 | $ | 1,081 | $ | (138,290) | $ | (209,750) | $ | (346,959) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | 57 | 246 | (23,329) | (23,026) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | 400 | 1,340 | — | 1,740 | |||||||||||||||||||
| Net current-period other comprehensive income (loss) | 457 | 1,586 | (23,329) | (21,286) | |||||||||||||||||||
| Balance as of March 27, 2022 | $ | 1,538 | $ | (136,704) | $ | (233,079) | $ | (368,245) | |||||||||||||||
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 months ended April 2, 2023 and March 27, 2022:
| Three Months Ended | |||||||||||
| April 2, 2023 | March 27, 2022 | ||||||||||
| (Gains) Loss on foreign exchange contracts: | |||||||||||
| Cost of goods sold | $ | (3,054) | $ | 398 | |||||||
| Total before tax | (3,054) | 398 | |||||||||
| Taxes | 202 | 2 | |||||||||
| Net of tax | (2,852) | 400 | |||||||||
Amortization of pension and other postretirement benefit items (1): | |||||||||||
| Actuarial losses | 2,066 | 2,000 | |||||||||
| Prior-service costs | (252) | (252) | |||||||||
| Total before tax | 1,814 | 1,748 | |||||||||
| Tax benefit | (417) | (408) | |||||||||
| Net of tax | 1,397 | 1,340 | |||||||||
| Total reclassifications, net of tax | $ | (1,455) | $ | 1,740 | |||||||
(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 11 — Taxes on income from continuing operations
| Three Months Ended | |||||||||||
| April 2, 2023 | March 27, 2022 | ||||||||||
| Effective income tax rate | 20.7% | 17.1% | |||||||||
The effective income tax rates for the three months ended April 2, 2023 and March 27, 2022 were 20.7% and 17.1%, respectively. The effective income tax rate for the three months ended April 2, 2023 reflects an increase in tax expense related to the revaluation of certain U.S. state operating losses and credit carryforwards. The effective income tax rates for both periods reflect a tax benefit from research and development tax credits. The effective income tax rate for the three months ended March 27, 2022 reflects a net tax benefit related to excess share-based compensation.
Note 12 — 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. 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
14
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
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 April 2, 2023, we have recorded $2.5 million and $3.6 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 April 2, 2023. 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 April 2, 2023, we have recorded accrued liabilities of $0.4 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.
Other: In 2015, the Italian parliament enacted legislation that, among other things, imposed a “payback” measure on medical device companies that supply goods and services to the Italian National Healthcare System. Under the measure, companies are required to make payments to the Italian government if medical device expenditures in a given year exceed regional expenditure ceilings established for that year. The payment amounts are calculated based on the amount by which the regional ceilings for the given year were exceeded. Considerable uncertainty exists related to the enforceability of and implementation process for the payback law. In response to decrees issued by the Italian Ministry of Health, the various Italian regions issued invoices to medical device companies, including Teleflex, under the payback measure in the fourth quarter of 2022 seeking payment with respect to excess expenditures for the years 2015 through 2018. Following the issuance of the invoices, we and numerous other medical device companies filed appeals with the Italian administrative courts challenging the enforceability of the payback measure, which appeals remain pending. As of April 2, 2023, our reserve for this matter is $11.9 million, of which, $0.8 million was recorded as a reduction of revenue in 2023. If the payback was to ultimately be enforced in its existing form, we estimate that we would be required to remit payments in excess of our current reserve of up to $18.4 million.
On April 4, 2023, one of our Mexican subsidiaries received a notification from the Mexican Federal Tax Administration Service (“SAT”) setting forth its preliminary findings with respect to a foreign trade operations audit carried out by SAT for the period from July 1, 2017 to June 6, 2019. The preliminary findings stated that our Mexican subsidiary did not evidence the export of goods temporarily imported under Mexico’s Manufacturing, Maquila and Export Services Industries Program (“IMMEX Program”), therefore triggering the potential obligation for payment of import duties, value added tax, customs processing fees and other fines and penalties. In response to the notification, our Mexican subsidiary has requested that the matter be referred to the Procuraduría de la Defensa del Contribuyente, or “PRODECON,” (local tax ombudsperson) to help facilitate the process by which our Mexican subsidiary may provide SAT with appropriate documentation evidencing the export of the goods in accordance with the requirements of the IMMEX Program.
While we cannot predict with certainty the outcome of this audit, based on currently known information, we do not believe a loss is either probable or estimable. Accordingly, no loss contingency has been recorded in our financial statements as of April 2, 2023 related to this matter. However, if the final resolution of the matter is not favorable to us, our Mexican subsidiary may be required to make payment of certain import duties, fines and surcharges, which could be material.
15
TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Tax audits and examinations: We are routinely subject to tax examinations by various tax authorities. As of April 2, 2023, the most significant tax examinations in process were in Ireland and 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 these tax examinations. 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.
Note 13 — Segment information
The following tables present our segment results for the three months ended April 2, 2023 and March 27, 2022:
| Three Months Ended | |||||||||||
| April 2, 2023 | March 27, 2022 | ||||||||||
| Americas | $ | 411,864 | $ | 377,961 | |||||||
| EMEA | 143,340 | 136,908 | |||||||||
| Asia | 78,731 | 69,190 | |||||||||
| OEM | 76,997 | 57,656 | |||||||||
| Net revenues | $ | 710,932 | $ | 641,715 | |||||||
| Three Months Ended | |||||||||||
| April 2, 2023 | March 27, 2022 | ||||||||||
| Americas | $ | 98,618 | $ | 96,901 | |||||||
| EMEA | 12,771 | 9,094 | |||||||||
| Asia | 21,000 | 17,417 | |||||||||
| OEM | 20,037 | 10,923 | |||||||||
Total segment operating profit (1) | 152,426 | 134,335 | |||||||||
Unallocated expenses (2) | (37,452) | (30,799) | |||||||||
| Income from continuing operations before interest and taxes | $ | 114,974 | $ | 103,536 | |||||||
(1)Segment operating profit includes segment net revenues from external customers reduced by its 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.
(2)Unallocated expenses primarily include manufacturing variances other than fixed manufacturing cost absorption variances and restructuring and impairment charges.
16
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.
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. All of the dollar amounts in the tables are presented in millions unless otherwise noted.
Certain financial information is presented on a rounded basis, which may cause minor differences.
Net revenues
| Three Months Ended | |||||||||||
| April 2, 2023 | March 27, 2022 | ||||||||||
| Net revenues | $ | 710.9 | $ | 641.7 | |||||||
Net revenues for the three months ended April 2, 2023 increased $69.2 million, or 10.8%, compared to the prior year period, primarily due to a $63.0 million increase in sales of new products and price increases, partially offset by unfavorable fluctuations in foreign currency exchange rates. Moreover, net revenues for the three months ended April 2, 2023 reflect the impact of a five day increase in the number of shipping days compared to the prior year period.
Gross profit
| Three Months Ended | |||||||||||
| April 2, 2023 | March 27, 2022 | ||||||||||
| Gross profit | $ | 391.4 | $ | 346.2 | |||||||
| Percentage of sales | 55.1 | % | 54.0 | % | |||||||
Gross margin for the three months ended April 2, 2023 increased 110 basis points, or 2.0%, compared to the prior year period, primarily due to price increases, lower logistics and distribution related costs and favorable fluctuations in foreign currency exchange rates, partially offset by continued cost inflation from macro-economic factors, specifically, raw materials and labor costs.
17
On April 4, 2023, one of our Mexican subsidiaries received a notification from the Mexican Federal Tax Administration Service (“SAT”) setting forth its preliminary findings with respect to a foreign trade operations audit carried out by SAT for the period from July 1, 2017 to June 6, 2019. The preliminary findings stated that our Mexican subsidiary did not evidence the export of goods temporarily imported under Mexico’s Manufacturing, Maquila and Export Services Industries Program (“IMMEX Program”), therefore triggering the potential obligation for payment of import duties, value added tax, customs processing fees and other fines and penalties. In response to the notification, our Mexican subsidiary has requested that the matter be referred to the Procuraduría de la Defensa del Contribuyente, or “PRODECON,” (local tax ombudsperson) to help facilitate the process by which our Mexican subsidiary may provide SAT with appropriate documentation evidencing the export of the goods in accordance with the requirements of the IMMEX Program.
While we cannot predict with certainty the outcome of this audit, based on currently known information, we do not believe a loss is either probable or estimable. Accordingly, no loss contingency has been recorded in our financial statements as of April 2, 2023 related to this matter. However, if the final resolution of the matter is not favorable to us, our Mexican subsidiary may be required to make payment of certain import duties, fines and surcharges, which could be material.
Selling, general and administrative
| Three Months Ended | |||||||||||
| April 2, 2023 | March 27, 2022 | ||||||||||
| Selling, general and administrative | $ | 232.7 | $ | 203.9 | |||||||
| Percentage of sales | 32.7 | % | 31.8 | % | |||||||
Selling, general and administrative expenses for the three months ended April 2, 2023 increased $28.8 million, compared to the prior year period primarily due to higher sales and marketing expenses across certain of our product portfolios, higher operating expenses incurred by acquired businesses, primarily Standard Bariatrics, an increase in contingent consideration expense and higher IT related costs. The increases in selling, general and administrative expenses were partially offset by favorable fluctuations in foreign currency exchange rates.
Research and development
| Three Months Ended | |||||||||||
| April 2, 2023 | March 27, 2022 | ||||||||||
| Research and development | $ | 41.5 | $ | 36.4 | |||||||
| Percentage of sales | 5.8 | % | 5.7 | % | |||||||
The increase in research and development expenses for the three months ended April 2, 2023 compared to the prior year period was primarily attributable to higher project spend within certain of our product portfolios.
Restructuring and impairment charges
| Three Months Ended | |||||||||||
| April 2, 2023 | March 27, 2022 | ||||||||||
| Restructuring and impairment charges | $ | 2.2 | $ | 2.4 | |||||||
Restructuring charges for the three months ended April 2, 2023 primarily consisted of termination benefits related to the 2022 restructuring plan.
Ongoing restructuring plans
We have ongoing restructuring initiatives consisting of a strategic restructuring plan designed to improve operating performance and position the organization to deliver long-term durable growth by creating efficiencies that align with our high growth strategic objectives (the “2022 restructuring plan”) and a plan, initiated in connection with the Respiratory business divestiture designed to separate the manufacturing operations to be transferred to Medline from those that will remain with Teleflex (the “Respiratory divestiture plan”).
We estimate that we will incur aggregate pre-tax restructuring and restructuring related charges in connection with the 2022 restructuring plan and Respiratory divestiture plan of $39 million to $48 million and $24 million to $30 million, respectively. We expect to achieve annual pre-tax savings in connection with the 2022 restructuring plan of $21 million to $23 million, once the plan is fully implemented.
18
For additional information regarding our restructuring plans, refer to Note 5 within the condensed consolidated financial statements included in this report.
Interest expense
| Three Months Ended | |||||||||||
| April 2, 2023 | March 27, 2022 | ||||||||||
| Interest expense | $ | 18.3 | $ | 10.4 | |||||||
| Average interest rate on debt | 4.0 | % | 2.0 | % | |||||||
The increase in interest expense for the three months ended April 2, 2023 compared to the prior year period was primarily due to a higher average interest rate resulting from increases in interest rates associated with our variable interest rate debt instruments partially offset by a decrease in average debt outstanding.
Taxes on income from continuing operations
| Three Months Ended | |||||||||||
| April 2, 2023 | March 27, 2022 | ||||||||||
| Effective income tax rate | 20.7 | % | 17.1 | % | |||||||
The effective income tax rate for the three months ended April 2, 2023 reflects an increase in tax expense related to the revaluation of certain U.S. state operating losses and credit carryforwards. The effective income tax rates for both periods reflect a tax benefit from research and development tax credits. The effective income tax rate for the three months ended March 27, 2022 reflects a net tax benefit related to excess share-based compensation.
Segment Financial Information
| Segment net revenues | |||||||||||||||||
| Three Months Ended | |||||||||||||||||
| April 2, 2023 | March 27, 2022 | % Increase/(Decrease) | |||||||||||||||
| Americas | $ | 411.9 | $ | 378.0 | 9.0 | ||||||||||||
| EMEA | 143.3 | 136.9 | 4.7 | ||||||||||||||
| Asia | 78.7 | 69.2 | 13.8 | ||||||||||||||
| OEM | 77.0 | 57.6 | 33.5 | ||||||||||||||
| Segment net revenues | $ | 710.9 | $ | 641.7 | 10.8 | ||||||||||||
| Segment operating profit | |||||||||||||||||
| Three Months Ended | |||||||||||||||||
| April 2, 2023 | March 27, 2022 | % Increase/(Decrease) | |||||||||||||||
| Americas | $ | 98.6 | $ | 96.9 | 1.8 | ||||||||||||
| EMEA | 12.8 | 9.1 | 40.4 | ||||||||||||||
| Asia | 21.0 | 17.4 | 20.6 | ||||||||||||||
| OEM | 20.0 | 10.9 | 83.4 | ||||||||||||||
Segment operating profit (1) | $ | 152.4 | $ | 134.3 | 13.5 | ||||||||||||
(1)See Note 13 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 months ended April 2, 2023 and March 27, 2022
Americas
Americas net revenues for the three months ended April 2, 2023 increased $33.9 million, or 9.0%, compared to the prior year period, which was primarily attributable to a $54.6 million increase in sales of new products and price increases, partially offset by a $29.1 million decrease in sales volume of existing products, notwithstanding the impact of a five day increase in the number of shipping days within the three months ended April 2, 2023.
Americas operating profit for the three months ended April 2, 2023 increased $1.7 million, or 1.8%, compared to the prior year period, which was primarily attributable to an increase in gross profit resulting from higher sales and
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price increases, partially offset by higher sales and marketing expenses to support higher sales, operating expenses and contingent consideration expense related to Standard Bariatrics and higher research and development costs.
EMEA
EMEA net revenues for the three months ended April 2, 2023 increased $6.4 million, or 4.7%, compared to the prior year period, which was primarily attributable to a $10.2 million increase in sales volumes of existing products, reflecting, in part, the impact of a five day increase in the number of shipping days within the three months ended April 2, 2023, and price increases. The increases in net revenues were partially offset by $7.2 million of unfavorable fluctuations in foreign currency exchange rates.
EMEA operating profit for the three months ended April 2, 2023 increased $3.7 million, or 40.4%, compared to the prior year period, which was primarily attributable to an increase in gross profit resulting from higher sales and price increases, partially offset by unfavorable fluctuations in foreign currency exchange rates.
Asia
Asia net revenues for the three months ended April 2, 2023 increased $9.5 million, or 13.8%, compared to the prior year period, which was primarily attributable to a $7.1 million increase in sales volumes of existing products and $7.0 million in sales of new products, partially offset by $5.1 million of unfavorable fluctuations in foreign currency exchange rates.
Asia operating profit for the three months ended April 2, 2023 increased $3.6 million, or 20.6%, compared to the prior year period, which was primarily attributable to an increase in gross profit resulting from higher sales, partially offset by unfavorable fluctuations in foreign currency exchange rates and higher sales and marketing expenses to support higher sales.
OEM
OEM net revenues for the three months ended April 2, 2023 increased $19.4 million, or 33.5%, compared to the prior year period, which was primarily attributable to a $15.0 million increase in sales volumes of existing products and price increases.
OEM operating profit for the three months ended April 2, 2023 increased $9.1 million, or 83.4%, compared to the prior year period, which was primarily attributable to an increase in gross profit resulting from higher sales and price increases.
Liquidity and Capital Resources
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.
Cash Flows
Net cash provided by operating activities from continuing operations was $84.3 million for the three months ended April 2, 2023 as compared to $62.1 million for the three months ended March 27, 2022. The $22.2 million increase was primarily attributable to favorable changes in working capital driven by higher accounts receivable collections as compared to the prior year, partially offset by an increase in inventories due to purchases to maintain customer service levels during a period of elevated global supply chain volatility.
Net cash used in investing activities from continuing operations was $21.9 million for the three months ended April 2, 2023, and primarily consisted of $21.8 million in capital expenditures.
Net cash used in financing activities from continuing operations was $93.6 million for the three months ended April 2, 2023, and primarily consisted of a $75.1 million reduction in borrowings and $16.0 million in dividend payments.
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Borrowings
The indentures governing our 4.625% Senior Notes due 2027 (the “2027 Notes”) and 4.25% Senior Notes due 2028 (the "2028 Notes") contain 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. As of April 2, 2023, we were in compliance with these requirements.
The obligations under our senior credit agreement (the "Credit Agreement"), the 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 2027 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 April 2, 2023 and December 31, 2022 and for the three months ended April 2, 2023 is as follows:
| Three Months Ended | ||||||||||||||||||||
| April 2, 2023 | ||||||||||||||||||||
| Obligor Group | Intercompany | Obligor Group (excluding Intercompany) | ||||||||||||||||||
| Net revenue | $ | 530.9 | $ | 79.7 | $ | 451.2 | ||||||||||||||
| Cost of goods sold | 327.6 | 128.4 | 199.2 | |||||||||||||||||
| Gross profit | 203.3 | (48.7) | 252.0 | |||||||||||||||||
| Income from continuing operations | 51.3 | 14.3 | 37.0 | |||||||||||||||||
| Net income | 50.7 | 14.3 | 36.4 | |||||||||||||||||
| April 2, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||
| Obligor Group | Intercompany | Obligor Group (excluding Intercompany) | Obligor Group | Intercompany | Obligor Group (excluding Intercompany) | |||||||||||||||||||||||||||||||||
| Total current assets | $ | 930.9 | $ | 168.8 | $ | 762.1 | $ | 878.3 | $ | 110.5 | $ | 767.8 | ||||||||||||||||||||||||||
| Total assets | 3,411.3 | 1,567.4 | 1,843.9 | 3,420.3 | 1,510.9 | 1,909.4 | ||||||||||||||||||||||||||||||||
| Total current liabilities | 987.9 | 741.8 | 246.1 | 882.9 | 627.9 | 255.0 | ||||||||||||||||||||||||||||||||
| Total liabilities | 3,193.7 | 839.8 | 2,353.9 | 3,168.0 | 712.3 | 2,455.7 | ||||||||||||||||||||||||||||||||
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, 2022 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.
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, 2022, 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.
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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 what is expressed or implied by these forward-looking statements due to a number of factors, including changes in business relationships with and purchases by or from major customers or suppliers; delays or cancellations in shipments; demand for and market acceptance of new and existing products; the impact of inflation and disruptions in our global supply chain on us and our suppliers (particularly sole-source suppliers and providers of sterilization services), including fluctuations in the cost and availability of resins and other raw materials, as well as certain components, used in the production or sterilization of our products, transportation constraints and delays, product shortages, energy shortages or increased energy costs, labor shortages in the United States and elsewhere, and increased operating and labor costs; 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 programs; our inability to realize anticipated savings resulting 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; global economic factors, including currency exchange rates, interest rates, trade disputes, sovereign debt issues, and international conflicts and hostilities, such as the ongoing conflict between Russia and Ukraine; public health epidemics including the novel coronavirus (referred to as COVID-19); difficulties 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, 2022. We expressly disclaim any obligation to update these forward-looking statements, except as otherwise explicitly stated by us or as required by law or regulation.
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, 2022.
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 April 2, 2023 and December 31, 2022, we had accrued liabilities of approximately $0.4 million and $0.5 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, 2022. There have been no significant changes in risk factors for the quarter ended April 2, 2023.
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
Not applicable.
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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 | |||||||||||||
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 April 2, 2023, formatted in inline XBRL (eXtensible Business Reporting Language): (i) Cover Page; (ii) the Condensed Consolidated Statements of Income for the three months ended April 2, 2023 and March 27, 2022; (iii) the Condensed Consolidated Statements of Comprehensive Income for the three months ended April 2, 2023 and March 27, 2022; (iv) the Condensed Consolidated Balance Sheets as of April 2, 2023 and December 31, 2022; (v) the Condensed Consolidated Statements of Cash Flows for the three months ended April 2, 2023 and March 27, 2022; (vi) the Condensed Consolidated Statements of Changes in Equity for the three months ended April 2, 2023 and March 27, 2022; 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 April 2, 2023, 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: May 4, 2023
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