TELEFLEX INC - FORM 10-Q - May 3, 2018

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EX-32.2 - EXHIBIT 32.2 - TELEFLEX INCtfx-201841xex322.htm
EX-32.1 - EXHIBIT 32.1 - TELEFLEX INCtfx-201841xex321.htm
EX-31.2 - EXHIBIT 31.2 - TELEFLEX INCtfx-201841xex312.htm
EX-31.1 - EXHIBIT 31.1 - TELEFLEX INCtfx-201841xex311.htm
EX-10.1 - EXHIBIT 10.1 - TELEFLEX INCexhibit101-fifthamendmentt.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                    .
Commission file number 1-5353
 
TELEFLEX INCORPORATED
(Exact name of registrant as specified in its charter)
 
Delaware
 
23-1147939
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer
identification no.)
550 E. Swedesford Rd., Suite 400, Wayne, PA
 
19087
(Address of principal executive offices)
 
(Zip Code)
(610) 225-6800
(Registrant’s telephone number, including area code)
(None)
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   x    No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨
 (Do not check if a smaller reporting company)
 
Smaller reporting company
¨
 
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ¨    No  x
The registrant had 45,543,546 shares of common stock, par value $1.00 per share, outstanding as of April 30, 2018.



TELEFLEX INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 1, 2018
TABLE OF CONTENTS
 
  
Page
  
 
 
 
 
 
 
Item 1:
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
Item 2:
 
  
Item 3:
 
  
Item 4:
 
  
 
 
 
  
 
 
 
 
 
 
Item 1:
 
  
Item 1A:
 
  
Item 2:
 
  
Item 3:
 
  
Item 4:
 
 
Item 5:
 
  
Item 6:
 
  
 
 
 
  


1


PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
TELEFLEX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(Dollars and shares in thousands, except per share)
Net revenues
$
587,230

 
$
487,881

Cost of goods sold
255,960

 
232,321

Gross profit
331,270

 
255,560

Selling, general and administrative expenses
215,337

 
163,969

Research and development expenses
26,027

 
17,827

Restructuring charges
3,063

 
12,945

Income from continuing operations before interest, loss on extinguishment of debt and taxes
86,843

 
60,819

Interest expense
25,943

 
17,726

Interest income
(273
)
 
(169
)
Loss on extinguishment of debt
—

 
5,582

Income from continuing operations before taxes
61,173

 
37,680

Taxes (benefit) on income from continuing operations
6,242

 
(2,669
)
Income from continuing operations
54,931

 
40,349

Operating income (loss) from discontinued operations
1,235

 
(282
)
Tax benefit on income (loss) from discontinued operations
(18
)
 
(103
)
Income (loss) from discontinued operations
1,253

 
(179
)
Net income
$
56,184

 
$
40,170

Earnings per share:
 
 
 
Basic:
 
 
 
Income from continuing operations
$
1.21

 
$
0.90

Income (loss) from discontinued operations
0.03

 
(0.01
)
Net income
$
1.24

 
$
0.89

Diluted:
 
 
 
Income from continuing operations
$
1.18

 
$
0.87

Income (loss) from discontinued operations
0.02

 
(0.01
)
Net income
$
1.20

 
$
0.86

Dividends per share
$
0.34

 
$
0.34

Weighted average common shares outstanding
 
 
 
Basic
45,329

 
44,893

Diluted
46,695

 
46,615

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 1, 2018
 
April 2, 2017
 
(Dollars in thousands)
Net income
$
56,184

 
$
40,170

Other comprehensive income, net of tax:
 
 
 
Foreign currency translation, net of tax of $(5,872) and $(7,089)
81,188

 
46,982

Pension and other postretirement benefit plans adjustment, net of tax of $(234) and $(532)
881

 
890

Derivatives qualifying as hedges, net of tax of $(211) and $(555)
621

 
1,728

Other comprehensive income, net of tax:
82,690

 
49,600

Comprehensive income
$
138,874

 
$
89,770

The accompanying notes are an integral part of the condensed consolidated financial statements.

3


TELEFLEX INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
April 1, 2018
 
December 31, 2017
 
(Dollars in thousands)
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
378,872

 
$
333,558

Accounts receivable, net
359,140

 
345,875

Inventories, net
403,676

 
395,744

Prepaid expenses and other current assets
52,998

 
47,882

Prepaid taxes
7,234

 
5,748

Assets held for sale
3,239

 
—

Total current assets
1,205,159

 
1,128,807

Property, plant and equipment, net
389,519

 
382,999

Goodwill
2,264,447

 
2,235,592

Intangible assets, net
2,390,555

 
2,383,748

Deferred tax assets
3,969

 
3,810

Other assets
46,951

 
46,536

Total assets
$
6,300,600

 
$
6,181,492

LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Current borrowings
$
77,500

 
$
86,625

Accounts payable
84,686

 
92,027

Accrued expenses
101,128

 
96,853

Current portion of contingent consideration
162,061

 
74,224

Payroll and benefit-related liabilities
80,418

 
107,415

Accrued interest
20,503

 
6,165

Income taxes payable
13,500

 
11,514

Other current liabilities
11,978

 
9,053

Total current liabilities
551,774

 
483,876

Long-term borrowings
2,154,217

 
2,162,927

Deferred tax liabilities
616,711

 
603,676

Pension and postretirement benefit liabilities
117,874

 
121,410

Noncurrent liability for uncertain tax positions
12,628

 
12,296

Noncurrent contingent consideration
119,796

 
197,912

Other liabilities
167,100

 
168,864

Total liabilities
3,740,100

 
3,750,961

Commitments and contingencies

 

Total shareholders' equity
2,560,500

 
2,430,531

Total liabilities and shareholders' equity
$
6,300,600

 
$
6,181,492

The accompanying notes are an integral part of the condensed consolidated financial statements.


4


TELEFLEX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(Dollars in thousands)
Cash flows from operating activities of continuing operations:
 
 
 
Net income
$
56,184

 
$
40,170

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
(Income) loss from discontinued operations
(1,253
)
 
179

Depreciation expense
14,832

 
14,180

Amortization expense of intangible assets
37,816

 
18,785

Amortization expense of deferred financing costs and debt discount
1,178

 
1,406

Loss on extinguishment of debt
—

 
5,582

Fair value step up of acquired inventory sold
—

 
7,832

Changes in contingent consideration
9,592

 
179

Stock-based compensation
4,787

 
4,240

Deferred income taxes, net
(1,472
)
 
(3,081
)
Other
(1,272
)
 
(2,703
)
Changes in operating assets and liabilities, net of effects of acquisitions and disposals:
 
 
 
Accounts receivable
(3,402
)
 
18,691

Inventories
32

 
(5,322
)
Prepaid expenses and other current assets
(3,406
)
 
(1,224
)
Accounts payable and accrued expenses
(27,185
)
 
2,696

Income taxes receivable and payable, net
417

 
(10,670
)
   Net cash provided by operating activities from continuing operations
86,848

 
90,940

Cash flows from investing activities of continuing operations:
 
 
 
Expenditures for property, plant and equipment
(15,747
)
 
(12,894
)
Proceeds from sale of assets
—

 
6,332

Payments for businesses and intangibles acquired, net of cash acquired
(3,684
)
 
(975,524
)
Net cash used in investing activities from continuing operations
(19,431
)
 
(982,086
)
Cash flows from financing activities of continuing operations:
 
 
 
Proceeds from new borrowings
—

 
1,194,500

Reduction in borrowings
(18,500
)
 
(138,251
)
Debt extinguishment, issuance and amendment fees
(74
)
 
(19,114
)
Net proceeds from share based compensation plans and the related tax impacts
1,400

 
(505
)
Payments for contingent consideration
(91
)
 
(79
)
Dividends paid
(15,447
)
 
(15,287
)
Net cash provided by (used in) financing activities from continuing operations
(32,712
)
 
1,021,264

Cash flows from discontinued operations:
 
 
 
Net cash used in operating activities
(206
)
 
(266
)
Net cash used in discontinued operations
(206
)
 
(266
)
Effect of exchange rate changes on cash and cash equivalents
10,815

 
15,488

Net increase in cash and cash equivalents
45,314

 
145,340

Cash and cash equivalents at the beginning of the period
333,558

 
543,789

Cash and cash equivalents at the end of the period
$
378,872

 
$
689,129

 
 
 
 
Non cash financing activities of continuing operations:
 
 
 
Settlement and exchange of convertible notes with common or treasury stock                                
$
—

 
$
958

Acquisition of treasury stock associated with settlement and exchange of convertible note hedge and warrant agreements                   
$
17,872

 
$
19,311

The accompanying notes are an integral part of the condensed consolidated financial statements.

5


TELEFLEX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
 

 
Common Stock
 
Additional
Paid In
Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Loss
 
Treasury Stock
 
Total
 
Shares
 
Dollars
 
 
 
 
Shares
 
Dollars
 
 
(Dollars and shares in thousands, except per share)
Balance at December 31, 2017
46,871

 
$
46,871

 
$
591,721

 
$
2,285,886

 
$
(265,091
)
 
1,704

 
$
(228,856
)
 
$
2,430,531

Cumulative effect adjustment resulting from the adoption of new accounting standards
 
 
 
 
 
 
2,110

 
 
 
 
 
 
 
2,110

Net income
 
 
 

 
 

 
56,184

 
 

 
 

 
 

 
56,184

Cash dividends ($0.34 per share)
 

 
 

 
 

 
(15,447
)
 
 

 
 

 
 

 
(15,447
)
Other comprehensive income
 

 
 

 
 

 
 

 
82,690

 
 

 
 

 
82,690

Settlements of note hedges associated with convertible notes and warrants
 
 
 
 
(17,884
)
 
 
 
 
 
(132
)
 
17,872

 
(12
)
Shares issued under compensation plans
97

 
97

 
992

 
 

 
 

 
(43
)
 
3,033

 
4,122

Deferred compensation
 

 
 

 
 

 
 

 
 

 
(8
)
 
322

 
322

Balance as of April 1, 2018
46,968

 
$
46,968

 
$
574,829

 
$
2,328,733

 
$
(182,401
)
 
1,521

 
$
(207,629
)
 
$
2,560,500

The accompanying notes are an integral part of the condensed consolidated financial statements.

6

TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Note 1 — Basis of presentation
The accompanying unaudited condensed consolidated financial statements of Teleflex Incorporated and its subsidiaries (“we,” “us,” “our,” “Teleflex” and the “Company”) are prepared on the same basis as its annual consolidated financial statements.
In the opinion of management, the financial statements reflect all adjustments, which are of a normal recurring nature, necessary for the fair presentation of financial statements for interim periods in accordance with accounting principles generally accepted in the United States of America ("GAAP") and with Rule 10-01 of Securities and Exchange Commission ("SEC") Regulation S-X, which sets forth the instructions for financial statements included in Form 10-Q. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the periods reported are not necessarily indicative of those that may be expected for a full year.
In accordance with applicable accounting standards and as permitted by Rule 10-01 of Regulation S-X, the accompanying condensed consolidated financial statements do not include all of the information and footnote disclosures that are required to be included in the Company's annual consolidated financial statements. Accordingly, the Company's quarterly condensed consolidated financial statements should be read in conjunction with the Company's consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2017.
Note 2 — New accounting standards
In May 2014, the Financial Accounting Standards Board ("FASB"), in a joint effort with the International Accounting Standards Board ("IASB"), issued new accounting guidance to clarify the principles for recognizing revenue. This new guidance, as amended by additional guidance issued in 2015 and 2016, is encompassed in FASB Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) and is designed to enhance the comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets, and affects any entity that enters into contracts with customers or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards. The new guidance establishes principles for reporting information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity's contracts with customers. The core principle of the new guidance is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The new guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those years. The Company adopted the new standard on January 1, 2018 using the modified retrospective method applied to all contracts; as a result, the Company recognized the cumulative effect of adopting the guidance as a $0.3 million increase to the Company's opening balance of retained earnings on the adoption date. Also in connection with the adoption of the new standard, the Company reclassified the reserve for product returns from a contra-receivable to a liability. The reserve for returns and allowances was $4.4 million at April 1, 2018. The adoption of this guidance did not have a material impact on the Company's consolidated results of operations, cash flows and financial position. Additional information and disclosures required by this new standard are contained in Note 3.
In February 2016, the FASB issued guidance that will change the requirements for accounting for leases. Under the new guidance, lessees (including lessees under both leases classified as finance leases, which are to be classified based on criteria similar to that applicable to capital leases under current guidance, and leases classified as operating leases) will recognize a right-to-use asset and a lease liability on the balance sheet, initially measured as the present value of lease payments under the lease. Under current guidance, operating leases are not recognized on the balance sheet. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements; the guidance provides certain practical expedients. The Company is currently evaluating this guidance to determine its impact on the Company’s consolidated results of operations, cash flows and financial position.

7

TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


In October 2016, the FASB issued new guidance requiring companies to recognize the income tax effects of intra-entity sales and transfers of assets, other than inventory, in the income statement as income tax expense (or benefit) in the period in which the transfer occurs. Previously, recognition was prohibited until the assets were sold to an outside party or otherwise utilized. The guidance is effective for annual periods beginning after December 15, 2017. The Company adopted the new standard on January 1, 2018 using the modified retrospective method of adoption; as a result, the Company recognized the cumulative effect of adopting the guidance as a $1.8 million increase to the Company's opening balance of retained earnings on the adoption date. The adoption of this guidance did not have a material impact on the Company's consolidated results of operations, cash flows and financial position.
In March 2017, the FASB issued guidance for employers that sponsor defined benefit pension or other postretirement benefit plans. The guidance requires that these employers disaggregate specified components of net periodic pension cost and net periodic postretirement benefit cost (collectively, "net benefit cost"). Specifically, the guidance generally requires employers to present in the income statement the service cost component of net benefit cost in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 and generally is required to be applied retrospectively. The Company adopted this guidance on January 1, 2018; the impact was not material to the consolidated financial statements.
In August 2017, the FASB issued guidance with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. The new guidance provides for changes to current designation and measurement guidance for qualifying hedging relationships and to the method of presenting hedge results. In addition, the new guidance includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The new guidance is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated results of operations and financial position.
In February 2018, the FASB issued new guidance to address a narrow-scope financial reporting issue that arose as a consequence of the Tax Cuts and Jobs Act ("the TCJA"). Existing guidance requires that deferred tax liabilities and assets be adjusted for a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. The guidance is applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income (rather than in net income), such as amounts related to benefit plans and hedging activity. As a result, the tax effects of items within accumulated other comprehensive income (referred to as stranded tax effects) do not reflect the appropriate tax rate. The new guidance permits for a reclassification of these amounts to retained earnings, thereby eliminating the stranded tax effects. The new guidance also requires certain disclosures about the stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted for reporting periods for which financial statements have not yet been issued. The new guidance can be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recognized. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
From time to time, new accounting guidance is issued by the FASB or other standard setting bodies that is adopted by the Company as of the effective date or, in some cases where early adoption is permitted, in advance of the effective date. The Company has assessed the recently issued guidance that is not yet effective and, unless otherwise indicated above, believes the new guidance will not have a material impact on the its consolidated results of operations, cash flows or financial position.
Note 3 - Net revenues
The Company primarily generates revenue from the sale of medical devices including single use disposable devices and, to a lesser extent, reusable devices, instruments and capital equipment. Revenue is recognized when obligations under the terms of a contract with the Company’s customer are satisfied; this occurs upon the transfer of control of the products. Generally, transfer of control to the customer occurs at the point in time when the Company’s

8

TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


products are shipped from the manufacturing facility. The Company markets and sells products through its direct sales force and distributors to customers within the following end markets: (1) hospitals and healthcare providers; (2) other medical device manufacturers; and (3) home care providers such as pharmacies, which comprised 87%, 9% and 4% of consolidated net revenues, respectively, for the three months ended April 1, 2018. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. Payment is generally due 30 days from the date of invoice.

The Company has made the following accounting policy elections and elected to use certain practical expedients, as permitted by the FASB, in applying ASC 606: (1) the Company accounts for amounts collected from customers for sales and other taxes, net of related amounts remitted to tax authorities; (2) the Company does not adjust the promised amount of consideration for the effects of a significant financing component because, at contract inception, the Company expects the period between the time when the Company transfers a promised good or service to the customer and the time when the customer pays for that good or service will be one year or less; (3) the Company expenses costs to obtain a contract as they are incurred if the expected period of benefit, and therefore the amortization period, is one year or less; (4) the Company accounts for shipping and handling activities that occur after control transfers to the customer as a fulfillment cost rather than an additional promised service; and (5) the Company classifies shipping and handling costs within cost of goods sold.
The amount of consideration the Company receives and revenue the Company recognizes varies as a result of changes in customer sales incentives, including discounts and rebates, and returns offered to customers. The estimate of revenue is adjusted upon the earlier of the following events: (i) the most likely amount of consideration expected to be received changes or (ii) the consideration becomes fixed. The Company’s policy is to accept returns only in cases in which the product is defective and covered under the Company’s standard warranty provisions. When the Company gives customers the right to return products, the Company estimates the expected returns based on an analysis of historical experience. The reserve for returns and allowances was $4.4 million and $4.7 million as of April 1, 2018 and April 2, 2017, respectively. In estimating customer rebates, the Company considers the lag time between the point of sale and the payment of the customer’s rebate claim, customer-specific trend analyses, contractual commitments, including stated rebate rates, historical experience with respect to specific customers and other relevant information as the Company has a history of providing similar rebates on similar products to similar customers. The reserve for customer incentive programs, including customer rebates, was $13.2 million and $10.1 million at April 1, 2018 and April 2, 2017, respectively. The Company expects the amounts subject to the reserve as of April 1, 2018 to be paid within 90 days subsequent to period-end.
The following table disaggregates revenue by global product category for the three months ended April 1, 2018 and April 2, 2017.
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
Revenue by global product category (1) (2)
(Dollars in thousands)
Vascular access
$
144,241

 
$
130,022

Anesthesia
85,418

 
81,205

Interventional
71,680

 
43,966

Surgical
85,632

 
87,304

Interventional urology
42,300

 
—

OEM
45,872

 
43,346

Other (3)
112,087

 
102,038

Net revenues
$
587,230

 
$
487,881

(1)
The product categories listed above are presented on a global basis; in contrast, the Company’s North American reportable segments generally are defined based on the particular products sold by the segments, and its non-North American reportable segments are defined based on the geographic location of segment operations (with the exception of the Original Equipment and Development Services ("OEM") reportable segment, which operates globally). The Company’s EMEA and Asia reportable segments, as well as its Latin America operating segment, include net revenues from each of the product categories listed above.

9

TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


(2)
Products included within certain of the product categories listed in the table above differ from those included within the similarly named reportable segment. The differences are due to the fact that segment classification generally is determined based on the call point within the customer's organization from which those sales originated, while the classification of products within the product categories listed above includes sales originating from multiple call points within the customer's organization.
(3) Other revenues in the table above comprise the Company’s respiratory, urology and cardiac product categories.

Note 4 — Acquisitions
During 2017, the Company completed several acquisitions; the largest of which were Vascular Solutions, Inc. ("Vascular Solutions") and NeoTract, Inc. ("NeoTract"), which are summarized below. The fair value of the consideration transferred for the 2017 acquisitions was $2.0 billion.
Vascular Solutions
On February 17, 2017, the Company acquired Vascular Solutions, a medical device company that developed and marketed products for use in minimally invasive coronary and peripheral vascular procedures. The aggregate consideration paid by the Company in connection with the acquisition was $975.5 million.
NeoTract
On October 2, 2017, the Company acquired NeoTract, a medical device company that developed and commercialized the UroLift System, a minimally invasive medical device for treating lower urinary tract symptoms due to benign prostatic hyperplasia, or BPH. The fair value of consideration transferred by the Company was $975.2 million, which included initial payments of $725.6 million in cash less a favorable working capital adjustment of $1.4 million (payment for which remains outstanding as of April 1, 2018) and $251.0 million in estimated fair value of contingent consideration related to revenue-based milestones. The contingent consideration liability represents the estimated fair value of the Company’s obligations, under the acquisition agreement, to make additional payments of up to $375 million in the aggregate if specified sales goals through the end of 2020 are achieved. Financial information of NeoTract is primarily presented within the Interventional Urology North America operating segment, which is included in the "all other" category in the Company's presentation of segment information.
The Company is continuing to evaluate the initial purchase price allocations in connection with its acquisition of NeoTract, and further adjustments may be necessary as a result of the Company's assessment of additional information related to the fair values of the assets acquired and liabilities assumed, primarily deferred tax liabilities, certain intangible assets and goodwill.
Pro forma combined financial information 
The following unaudited pro forma combined financial information for the three months ended April 2, 2017 gives effect to the Vascular Solutions and NeoTract acquisitions as if they had occurred on January 1, 2016. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have occurred under the ownership and management of the Company.
 
Three Months Ended
 
April 2, 2017
 
(Dollars and shares in thousands, except per share)
Net revenue
$
533,318

Net income
$
37,108

Basic earnings per common share:
 
Net income
$
0.83

Diluted earnings per common share:
 
Net income
$
0.80

Weighted average common shares outstanding:
 
Basic
44,893

Diluted
46,615


10

TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


The unaudited pro forma combined financial information presented above includes the accounting effects of the Vascular Solutions and NeoTract acquisitions, including, to the extent applicable, amortization charges from acquired intangible assets; adjustments for depreciation of property, plant and equipment; interest expense; the revaluation of inventory; and the related tax effects. The unaudited pro forma financial information also includes non-recurring charges specifically related to the Vascular Solutions and NeoTract acquisitions.
Note 5 — Restructuring charges
The following tables provide information regarding restructuring charges recognized by the Company for the three months ended April 1, 2018 and April 2, 2017: 
Three Months Ended April 1, 2018
 
 
 
 
 
 
Termination benefits
 
Other restructuring costs (2)
 
Total
 
(Dollars in thousands)
2016 Footprint realignment plan
$
1,955

 
$
194

 
$
2,149

2014 Footprint realignment plan
116

 
8

 
124

Other restructuring programs (1)
585

 
205

 
790

Restructuring charges
$
2,656

 
$
407

 
$
3,063

Three Months Ended April 2, 2017
 
 
 
 
 
 
Termination benefits
 
Other restructuring costs (2)
 
Total
 
(Dollars in thousands)
Vascular Solutions Integration Program
$
4,482

 
$
—

 
$
4,482

EMEA Restructuring Program
7,121

 
—

 
7,121

2016 Footprint realignment plan
539

 
(30
)
 
509

2014 Footprint realignment plan
303

 
8

 
311

Other restructuring programs (3)
305

 
217

 
522

Restructuring charges
$
12,750

 
$
195

 
$
12,945

(1)
Other restructuring programs in 2018 include the Vascular Solutions integration program and the EMEA restructuring program (both initiated in 2017) as well as the other 2016 restructuring programs. For a description of these programs, see Note 4 to the Company’s consolidated financial statements included in its annual report on Form 10-K for the year ended December 31, 2017.
(2)
Other restructuring costs include facility closure, contract termination, and other exit costs.
(3)
Other restructuring programs in 2017 primarily includes the other 2016 restructuring programs.
2016 Footprint Realignment Plan
In 2016, the Company initiated a restructuring plan (the “2016 Footprint realignment plan") involving the relocation of certain manufacturing operations, the relocation and outsourcing of certain distribution operations and a related workforce reduction at certain of the Company's facilities. These actions commenced in the first quarter of 2016 and are expected to be substantially completed by the end of 2018. The Company estimates that it will incur aggregate pre-tax restructuring and restructuring related charges in connection with the 2016 Footprint realignment plan of between approximately $34 million to $44 million, of which an estimated $27 million to $31 million are expected to result in future cash outlays. Most of these charges, and the related cash outlays, are expected to be made prior to the end of 2018.
In addition to the restructuring charges shown in the tables above, the Company recorded restructuring related charges with respect to the 2016 Footprint realignment plan of $1.4 million and $2.1 million for the three months ended April 1, 2018 and April 2, 2017, respectively, within cost of goods sold.
As of April 1, 2018, the Company has incurred restructuring charges in connection with the 2016 Footprint realignment plan aggregating to $16.8 million. Additionally, as of April 1, 2018, the Company has incurred restructuring

11

TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


related charges aggregating to $16.1 million related to the 2016 Footprint realignment plan, consisting of accelerated depreciation and certain other costs that principally resulted from the transfer of manufacturing operations to new locations. The restructuring related charges primarily were included in cost of goods sold. As of April 1, 2018, the Company has a restructuring reserve of $6.5 million related to this plan, all of which related to termination benefits.
2014 Footprint Realignment Plan
In 2014, the Company initiated a restructuring plan (“the 2014 Footprint realignment plan”) involving the consolidation of operations and a related reduction in workforce at certain facilities, and the relocation of manufacturing operations from certain higher-cost locations to existing lower-cost locations. These actions commenced in the second quarter 2014 and are expected to be substantially completed by the end of the first half of 2020. The Company estimates that it will incur aggregate pre-tax restructuring and restructuring related charges in connection with the 2014 Footprint realignment plan of approximately $46 million to $51 million, of which an estimated $38 million to $43 million are expected to result in future cash outlays. The Company expects to incur $24 million to $30 million in aggregate capital expenditures under the plan.

In addition to the restructuring charges set forth in the tables above, the Company recorded restructuring related charges with respect to the 2014 Footprint realignment plan of $0.4 million and $1.6 million for the three months ended April 1, 2018 and April 2, 2017 respectively, within cost of goods sold.

As of April 1, 2018, the Company has incurred restructuring charges in connection with the 2014 Footprint realignment plan aggregating to $11.9 million. Additionally, as of April 1, 2018, the Company has incurred restructuring related charges aggregating to $27.3 million related to the 2014 Footprint realignment plan, consisting of accelerated depreciation and certain other costs that principally resulted from the transfer of manufacturing operations from the existing locations to new locations. These restructuring related charges primarily were included in cost of goods sold. As of April 1, 2018, the Company has a restructuring reserve of $3.7 million in connection with the plan, all of which related to termination benefits.

For additional information regarding the Company's restructuring programs, see Note 4 to the Company's consolidated financial statements included in its annual report on Form 10-K for the year ended December 31, 2017.
Restructuring charges by reportable operating segment, and by all other operating segments in the aggregate, for the three months ended April 1, 2018 and April 2, 2017 are set forth in the following table:   
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(Dollars in thousands)
Vascular North America
$
321

 
$
728

Interventional North America
545

 
4,215

Anesthesia North America
34

 
247

EMEA
251

 
7,527

All other
1,912

 
228

Restructuring charges
$
3,063

 
$
12,945

Note 6 — Inventories, net
Inventories as of April 1, 2018 and December 31, 2017 consisted of the following:
 
April 1, 2018
 
December 31, 2017
 
(Dollars in thousands)
Raw materials
$
94,786

 
$
98,451

Work-in-process
66,185

 
62,381

Finished goods
242,705

 
234,912

Inventories, net
$
403,676

 
$
395,744


12

TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


Note 7 — Goodwill and other intangible assets, net
The following table provides information relating to changes in the carrying amount of goodwill by reportable operating segment, and by all other operating segments in the aggregate, for the three months ended April 1, 2018:
 
Vascular
North America

Interventional North America
 
Anesthesia
North America

Surgical
North America

EMEA

Asia
 
OEM

All
Other

Total
 
(Dollars in thousands)
December 31, 2017
$
264,869


$
433,049

 
$
157,289


$
250,912


$
494,548


$
209,200

 
$
4,883


$
420,842


$
2,235,592

Goodwill related to acquisitions
—


—

 
—


—


9


3

 
—


145


157

Currency translation adjustment
—


5,630

 
303


—


16,225


4,048

 
—


2,492


28,698

April 1, 2018
$
264,869

 
$
438,679

 
$
157,592

 
$
250,912

 
$
510,782

 
$
213,251

 
$
4,883

 
$
423,479

 
$
2,264,447

The Company's gross carrying amount of, and accumulated amortization relating to, intangible assets as of April 1, 2018 and December 31, 2017 were as follows:
 
Gross Carrying Amount
 
Accumulated Amortization
 
April 1, 2018
 
December 31, 2017
 
April 1, 2018
 
December 31, 2017
 
(Dollars in thousands)
Customer relationships
$
1,044,509

 
$
1,023,837

 
$
(295,480
)
 
$
(281,263
)
In-process research and development
31,698

 
34,672

 
—

 
—

Intellectual property
1,312,598

 
1,287,487

 
(282,907
)
 
(258,580
)
Distribution rights
23,922

 
23,697

 
(17,490
)
 
(16,996
)
Trade names
578,646

 
571,510

 
(25,990
)
 
(22,069
)
Non-compete agreements
24,964

 
23,429

 
(3,915
)
 
(1,976
)
 
$
3,016,337

 
$
2,964,632

 
$
(625,782
)
 
$
(580,884
)
Note 8 — Financial instruments
Foreign Currency Forward Contracts
The Company uses derivative instruments for risk management purposes. Foreign currency forward contracts designated as cash flow hedges are used to manage exposure related to foreign currency transactions. Foreign currency forward contracts not designated as hedges for accounting purposes are used to manage exposure related to near term foreign currency denominated monetary assets and liabilities. For the three months ended April 1, 2018 the Company recognized a gain related to non-designated foreign currency forward contracts of $0.6 million. For the three months ended April 2, 2017, the Company recognized a loss related to non-designated foreign currency forward contracts of $0.8 million.

13

TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


The following table presents the locations in the condensed consolidated balance sheet and fair value of derivative financial instruments as of April 1, 2018 and December 31, 2017:
 
April 1, 2018
 
December 31, 2017
 
Fair Value
 
(Dollars in thousands)
Asset derivatives:
 
 
 
Designated foreign currency forward contracts
$
1,989

 
$
914

Non-designated foreign currency forward contracts
198

 
307

Prepaid expenses and other current assets
$
2,187

 
$
1,221

Total asset derivatives
$
2,187

 
$
1,221

Liability derivatives:
 
 
 
Designated foreign currency forward contracts
$
993

 
$
1,373

Non-designated foreign currency forward contracts
455

 
53

Other current liabilities
$
1,448

 
$
1,426

Total liability derivatives
$
1,448

 
$
1,426

The total notional amount for all open foreign currency forward contracts designated as cash flow hedges as of April 1, 2018 and December 31, 2017 was $117.3 million and $88.5 million, respectively. The total notional amount for all open non-designated foreign currency forward contracts as of April 1, 2018 and December 31, 2017 was $111.5 million and $110.6 million, respectively. All open foreign currency forward contracts as of April 1, 2018 have durations of twelve months or less.
There was no ineffectiveness related to the Company’s cash flow hedges during the three months ended April 1, 2018 and April 2, 2017.
Concentration of Credit Risk
Concentrations of credit risk with respect to trade accounts receivable are generally limited due to the Company’s large number of customers and their diversity across many geographic areas. However, a portion of the Company’s trade accounts receivable outside the United States, include sales to government-owned or supported healthcare systems in several countries, which are subject to payment delays. Payment is dependent upon the creditworthiness of the healthcare systems in those countries and the financial stability of those countries' economies.
Certain of the Company’s customers, particularly in Greece, Italy, Spain and Portugal, have extended or delayed payments for products and services already provided, raising collectability concerns regarding the Company’s accounts receivable from these customers. As a result, the Company continues to closely monitor the allowance for doubtful accounts with respect to these customers. The following table provides information regarding the Company's allowance for doubtful accounts, the aggregate net current and long-term trade accounts receivable related to customers in Greece, Italy, Spain and Portugal and the percentage of the Company’s total net current and long-term trade accounts receivable represented by these customers' trade accounts receivable at April 1, 2018 and December 31, 2017:

April 1, 2018

December 31, 2017

(Dollars in thousands)
Allowance for doubtful accounts (1)
$
9,865

 
$
10,255

Current and long-term trade accounts receivable, net in Greece, Italy, Spain and Portugal (2)
$
56,940


$
49,054

Percentage of total net current and long-term trade accounts receivable - Greece, Italy, Spain and Portugal
16.3
%

14.6
%
(1) The current portion of the allowance for doubtful accounts was $3.1 million and $3.5 million as of April 1, 2018 and December 31, 2017, respectively, and was recognized in accounts receivable, net.
(2)
The long-term portion of trade accounts receivable, net from customers in Greece, Italy, Spain and Portugal at April 1, 2018 and December 31, 2017 was $3.7 million and $3.3 million, respectively.

14

TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


For the three months ended April 1, 2018 and April 2, 2017, net revenues from customers in Greece, Italy, Spain and Portugal were $38.3 million and $31.5 million, respectively.
Note 9 — Fair value measurement
For a description of the fair value hierarchy, see Note 10 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2017.
The following tables provide information regarding the Company's financial assets and liabilities that are measured at fair value on a recurring basis as of April 1, 2018 and December 31, 2017:
 
Total carrying
value at
April 1, 2018
 
Quoted prices in active
markets (Level 1)
 
Significant other
observable
Inputs (Level 2)
 
Significant
unobservable
Inputs (Level 3)
 
(Dollars in thousands)
Investments in marketable securities
$
8,989

 
$
8,989

 
$
—

 
$
—

Derivative assets
2,187

 
—

 
2,187

 
—

Derivative liabilities
1,448

 
—

 
1,448

 
—

Contingent consideration liabilities
281,857

 
—

 
—

 
281,857

 
Total carrying
value at
December 31, 2017
 
Quoted prices in active
markets (Level 1)
 
Significant other
observable
Inputs (Level 2)
 
Significant
unobservable
Inputs (Level 3)
 
(Dollars in thousands)
Investments in marketable securities
$
9,045

 
$
9,045

 
$
—

 
$
—

Derivative assets
1,221

 
—

 
1,221

 
—

Derivative liabilities
1,426

 
—

 
1,426

 
—

Contingent consideration liabilities
272,136

 
—

 
—

 
272,136

There were no transfers of financial assets or liabilities reported at fair value among Level 1, Level 2 or Level 3 within the fair value hierarchy during the three months ended April 1, 2018.
    
Valuation Techniques
The Company’s financial assets valued based upon Level 1 inputs are comprised of investments in marketable securities held in trust, which are available to satisfy benefit obligations under Company benefit plans and other arrangements. The investment assets of the trust are valued using quoted market prices.
The Company’s financial assets and liabilities valued based upon Level 2 inputs are comprised of foreign currency forward contracts. The Company uses foreign currency forward contracts to manage foreign currency transaction exposure as well as exposure to foreign currency denominated monetary assets and liabilities. The Company measures the fair value of the foreign currency forward contracts by calculating the amount required to enter into offsetting contracts with similar remaining maturities as of the measurement date, based on quoted market prices, and taking into account the creditworthiness of the counterparties.
The Company’s financial liabilities valued based upon Level 3 inputs are comprised of contingent consideration arrangements pertaining to the Company’s acquisitions.
Contingent consideration
As of April 1, 2018, the Company estimates that contingent consideration payments will occur in 2018 through 2029, and the maximum amount of undiscounted payments the Company could make under contingent consideration arrangements is $400.4 million. The contingent consideration liabilities, which primarily consist of Company obligations payable if specified net sales goals are achieved, are remeasured to fair value each reporting period using assumptions including estimated revenues (based on internal operational budgets and long-range strategic plans), discount rates, probability of payment and project payment dates.

15

TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)



The contingent consideration fair value measurement is based on significant inputs not observable in the market and therefore constitute Level 3 inputs within the fair value hierarchy. The contingent consideration liability related to the NeoTract acquisition represents the estimated fair value of the Company's obligations to make payments of up to $375 million in the aggregate if specified sales goals are achieved. Specifically, the payments are based on net sales (as defined in the NeoTract acquisition agreement) for the periods from January 1, 2018 through April 30, 2018 and the years ended December 31, 2018, 2019 and 2020. The fair value of the contingent consideration related to the NeoTract acquisition was estimated using a Monte Carlo valuation approach, which simulates future revenues during the earn out-period using management's best estimates. The Company determines the value of its other contingent consideration liabilities based on a probability-weighted discounted cash flow analysis. Increases in projected revenues and probabilities of payment may result in significantly higher fair value measurements; decreases in these items may have the opposite effect. Increases in the discount rates may result in significantly lower fair value measurements; decreases in these items 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 recognized in connection with the NeoTract acquisition.
 
Valuation Technique
 
Unobservable Input
 
Range
Contingent consideration
Monte Carlo simulation
 
Revenue volatility
 
21.1
%
 
 
 
Risk free rate
 
Cost of debt structure

 

 
Projected year of payment
 
2018 - 2021

The following table provides information regarding changes, during the three months ended April 1, 2018, in Level 3 financial liabilities related to contingent consideration:
 
Contingent consideration
 
2018
 
(Dollars in thousands)
Balance - December 31, 2017
$
272,136

Payment
(91
)
Revaluations
9,592

Translation adjustment
220

Balance - April 1, 2018
$
281,857

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 1, 2018
 
April 2, 2017
 
(Shares in thousands)
Basic
45,329

 
44,893

Dilutive effect of share-based awards
1,044

 
821

Dilutive effect of convertible notes and warrants
322

 
901

Diluted
46,695

 
46,615

In connection with the issuance by the Company in 2010 of convertible notes that matured in August 2017, and as part of hedging arrangements between the Company and two institutional counterparties, the Company issued warrants to the counterparties, entitling them to purchase Company common stock. These transactions are described in greater detail in Note 11 to the consolidated financial statements included in the Company's Annual Report on Form

16

TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


10-K for the year ended December 31, 2017. At April 1, 2018, warrants to purchase 374,418 shares at an exercise price of $74.65 per share remained outstanding. The remaining warrants expire ratably over a period ending on August 31, 2018. At April 1, 2018, the intrinsic value of the warrants (i.e. the excess of the aggregate market price of the underlying shares over the aggregate exercise price of the warrants) was $67.5 million.
The weighted average number of shares that were antidilutive and therefore excluded from the calculation of earnings per share were 0.6 million and 0.5 million for the three months ended April 1, 2018 and April 2, 2017, respectively.
The following tables provide information relating to the changes in accumulated other comprehensive loss, net of tax, for the three months ended April 1, 2018 and April 2, 2017:
 
Cash Flow Hedges
 
Pension and Other Postretirement Benefit Plans
 
Foreign Currency Translation Adjustment
 
Accumulated Other Comprehensive (Loss) Income
 
(Dollars in thousands)
Balance as of December 31, 2017
$
340

 
$
(138,808
)
 
$
(126,623
)
 
$
(265,091
)
Other comprehensive income (loss) before reclassifications
1,341

 
(478
)
 
81,188

 
82,051

Amounts reclassified from accumulated other comprehensive income
(720
)
 
1,359

 
—

 
639

Net current-period other comprehensive income
621

 
881

 
81,188

 
82,690

Balance as of April 1, 2018
$
961

 
$
(137,927
)
 
$
(45,435
)
 
$
(182,401
)
 
Cash Flow Hedges
 
Pension and Other Postretirement Benefit Plans
 
Foreign Currency Translation Adjustment
 
Accumulated Other Comprehensive (Loss) Income
 
(Dollars in thousands)
Balance at December 31, 2016
$
(2,424
)
 
$
(136,596
)
 
$
(299,697
)
 
$
(438,717
)
Other comprehensive (loss) before reclassifications
350

 
(241
)
 
46,982

 
47,091

Amounts reclassified from accumulated other comprehensive loss
1,378

 
1,131

 
—

 
2,509

Net current-period other comprehensive income
1,728

 
890

 
46,982

 
49,600

Balance at April 2, 2017
$
(696
)
 
$
(135,706
)
 
$
(252,715
)
 
$
(389,117
)
  

17

TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


The following table provides information relating to the location in the statements of operations and amount of reclassifications of losses/(gains) in accumulated other comprehensive (loss) income into expense/(income), net of tax, for the three months ended April 1, 2018 and April 2, 2017:
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(Dollars in thousands)
(Gains) losses on foreign exchange contracts:
 
 
 
Cost of goods sold
$
(833
)
 
$
1,645

Total before tax
(833
)
 
1,645

Taxes (benefit)
113

 
(267
)
Net of tax
$
(720
)
 
$
1,378

Amortization of pension and other postretirement benefit items:
Actuarial losses (1)
$
1,746

 
$
1,726

Prior-service costs(1)
24

 
29

Total before tax
1,770

 
1,755

Tax benefit
(411
)
 
(624
)
Net of tax
$
1,359

 
$
1,131

 
 
 
 
Total reclassifications, net of tax
$
639

 
$
2,509

(1) These accumulated other comprehensive (loss) income components are included in the computation of net benefit expense for pension and other postretirement benefit plans (see Note 12 for additional information).
Note 11 — Taxes on income from continuing operations
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
Effective income tax rate
10.2%
 
(7.1)%

The Tax Cuts and Jobs Act (the “TCJA”) was enacted on December 22, 2017. The legislation significantly changes U.S. tax law by, among other things, permanently reducing corporate income tax rates from a maximum of 35% to 21%, effective January 1, 2018; implementing a territorial tax system, by generally providing for, among other things, a dividends received deduction on the foreign source portion of dividends received from a foreign corporation if specified conditions are met; imposing two new U.S. base erosion provisions: (1) the global intangible low-taxed income ("GILTI") provisions and (2) the base erosion and anti-abuse tax ("BEAT") provisions; and imposing a one-time repatriation tax on undistributed post-1986 foreign subsidiary earnings and profits, which are deemed repatriated for purposes of the tax.
In accordance with the applicable provisions of SEC Staff Accounting Bulletin No. 118, the Company included in its consolidated financial statements as of December 31, 2017 provisional amounts reflecting the tax impact related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities. Once the Company's accounting for the income tax effects of the TCJA is complete, the amounts with respect to the income tax effects of the TCJA may differ from the provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the TCJA.
The effective income tax rate for the three months ended April 1, 2018 and April 2, 2017 was 10.2% and (7.1)%, respectively. The effective income tax rate for the three months ended April 1, 2018 includes the benefit of a lower U.S. corporate income tax rate of 21.0% from the enactment of the TCJA, partially offset by a tax cost associated with GILTI and other TCJA related changes. The effective income tax rate for the three months ended April 2, 2017 reflects a tax benefit associated with costs incurred in connection with the Vascular Solutions acquisition.

18

TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


Note 12 — Pension and other postretirement benefits
The Company has a number of defined benefit pension and postretirement plans covering eligible U.S. and non-U.S. employees. As of April 1, 2018, no further benefits are being accrued under the Company’s U.S. defined benefit pension plans and the Company’s other postretirement benefit plans, other than certain postretirement benefit plans covering employees subject to a collective bargaining agreement.
Net pension and other postretirement benefits expense (income) consist of the following:
 
Pension
Three Months Ended
 
Other Postretirement Benefits
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
April 1, 2018
 
April 2, 2017
 
(Dollars in thousands)
Service cost
$
378

 
$
717

 
$
52

 
$
74

Interest cost
3,722

 
3,785

 
378

 
378

Expected return on plan assets
(7,421
)
 
(6,743
)
 
—

 
—

Net amortization and deferral
1,707

 
1,690

 
62

 
65

Net benefits expense (income)
$
(1,614
)
 
$
(551
)
 
$
492

 
$
517

Note 13 — Commitments and contingent liabilities
Environmental: The Company is subject to contingencies as a result of environmental laws and regulations that in the future may require the Company to take further action to correct the effects on the environment of prior disposal practices or releases of chemical or petroleum substances by the Company or other parties. Much of this liability results from the U.S. Comprehensive Environmental Response, Compensation and Liability Act, often referred to as Superfund, the U.S. Resource Conservation and Recovery Act and similar state laws. These laws require the Company to undertake certain investigative and remedial activities at sites where the Company conducts or once conducted operations or at sites where Company-generated waste was disposed.
Remediation activities vary substantially in duration and cost from site to site. These activities, and their associated costs, depend on the mix of unique site characteristics, evolving remediation technologies, the regulatory agencies involved and their enforcement policies, as well as the presence or absence of other potentially responsible parties. At April 1, 2018, the Company has recorded $1.0 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 April 1, 2018. The time frame over which the accrued amounts may be paid out, based on past history, is estimated to be 15-20 years.
Litigation: The Company is a party to various lawsuits and claims arising in the normal course of business. These lawsuits and claims include actions involving product liability, intellectual property, employment, environmental and other matters. As of April 1, 2018, the Company has recorded accrued liabilities of $1.8 million in connection with such contingencies, representing its best estimate of the cost within the range of estimated possible losses that will be incurred to resolve these matters. 
Based on information currently available, advice of counsel, established reserves and other resources, the Company does not believe that the outcome of any outstanding litigation and claims is likely to be, individually or in the aggregate, material to its business, financial condition, results of operations or liquidity. However, in the event of unexpected further developments, it is possible that the ultimate resolution of these matters, or other similar matters, if unfavorable, may be materially adverse to the Company’s business, financial condition, results of operations or liquidity. Legal costs such as outside counsel fees and expenses are charged to selling, general and administrative expenses in the period incurred.
Tax audits and examinations: The Company and its subsidiaries are routinely subject to tax examinations by various tax authorities. As of April 1, 2018, the most significant tax examinations in process are in Germany, Italy, and the United States. The Company may establish reserves with respect to its uncertain tax positions, after which it adjusts the reserves to address developments with respect to its uncertain tax positions, including developments in these tax examinations. Accordingly, developments in tax audits and examinations, including resolution of uncertain tax positions,

19

TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


could result in increases or decreases to the Company’s recorded tax liabilities, which could impact the Company’s financial results.
Other: The Company has various purchase commitments for materials, supplies and other items occurring in the ordinary conduct of its business. On average, such commitments are not at prices in excess of current market prices.
Note 14 — Segment information
Following the Company's acquisition of Vascular Solutions, the Company commenced an integration program under which it is combining the Vascular Solutions' business with some of its legacy businesses. As a result, effective during the fourth quarter 2017, the Company realigned its operating segments. The changes to the operating segments were also made to reflect the manner in which the Company’s chief operating decision maker assesses business performance and allocates resources. The Company now has the following seven reportable segments: Vascular North America, Interventional North America, Anesthesia North America, Surgical North America, Europe, Middle East and Africa ("EMEA"), Asia and Original Equipment and Development Services ("OEM"). In connection with the presentation of segment information, the Company will continue to present certain operating segments, which currently include the Interventional Urology North America, Respiratory North America and Latin America operating segments, in the “all other” category because they are not material. All prior comparative periods presented have been restated to reflect these changes.
The following tables present the Company’s segment results for the three months ended April 1, 2018 and April 2, 2017:
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(Dollars in thousands)
Vascular North America
$
83,048

 
$
79,011

Interventional North America
60,196

 
39,946

Anesthesia North America
50,565

 
48,207

Surgical North America
40,677

 
45,944

EMEA
159,870

 
133,574

Asia
58,244

 
50,168

OEM
45,854

 
43,346

All other
88,776

 
47,685

Net revenues
$
587,230

 
$
487,881


20

TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(Dollars in thousands)
Vascular North America
$
24,662

 
$
18,290

Interventional North America
14,120

 
(8,035
)
Anesthesia North America
17,333

 
13,304

Surgical North America
14,748

 
16,380

EMEA
31,770

 
21,310

Asia
13,368

 
10,884

OEM
9,016

 
9,121

All other
(11,973
)
 
9,327

Total segment operating profit (1)
113,044

 
90,581

Unallocated expenses (2)
(26,201
)
 
(29,762
)
Income from continuing operations before interest, loss on extinguishment of debt and taxes
$
86,843

 
$
60,819

(1)
Segment operating profit includes segment net revenues from external customers reduced by the segment's standard cost of goods sold, adjusted for fixed manufacturing cost absorption variances, selling, general and administrative expenses, research and development expenses and an allocation of corporate expenses. Corporate expenses are allocated among the segments in proportion to the respective amounts of one of several items (such as net revenues, numbers of employees, and amount of time spent), depending on the category of expense involved.
(2)
Unallocated expenses primarily include manufacturing variances other than fixed manufacturing cost absorption variances, restructuring charges and gain on sale of assets.
The following table provides total net revenues by geographic region (based on the Company's selling location) for the three months ended April 1, 2018 and April 2, 2017:
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(Dollars in thousands)
United States
$
344,357

 
$
286,314

Europe
171,320

 
141,022

Asia
49,555

 
43,004

All other
21,998

 
17,541

Net revenues
$
587,230

 
$
487,881


21

TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


Note 15 — Condensed consolidating guarantor financial information
The Company’s $250 million principal amount of 5.25% Senior Notes due 2024 (the “2024 Notes”), $400 million principal amount of 4.875% Senior Notes due 2026 (the “2026 Notes”) and $500 million principal amount of 4.625% Senior Notes due 2027 (the “2027 Notes," and collectively with the 2024 Notes and the 2026 Notes, the "Senior Notes") are issued by Teleflex Incorporated (the “Parent Company”), and payment of the Parent Company's obligations under the Senior Notes are guaranteed, jointly and severally, by certain of the Parent Company’s subsidiaries (each, a “Guarantor Subsidiary” and collectively, the “Guarantor Subsidiaries”). The 2024 Notes, 2026 Notes and 2027 Notes are guaranteed by the same Guarantor Subsidiaries. The guarantees are full and unconditional, subject to certain customary release provisions. Each Guarantor Subsidiary is directly or indirectly 100% owned by the Parent Company. The Company’s condensed consolidating statements of income and comprehensive income for the three months ended April 1, 2018 and April 2, 2017, condensed consolidating balance sheets as of April 1, 2018 and December 31, 2017 and condensed consolidating statements of cash flows for the three months ended April 1, 2018 and April 2, 2017, provide consolidated information for:
a.
Parent Company, the issuer of the guaranteed obligations;
b.
Guarantor Subsidiaries, on a combined basis;
c.
Non-Guarantor Subsidiaries (i.e., those subsidiaries of the Parent Company that have not guaranteed
payment of the Senior Notes), on a combined basis; and
d.
Parent Company and its subsidiaries on a consolidated basis.
The same accounting policies as described in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 are used by the Parent Company and each of its subsidiaries in connection with the condensed consolidating financial information, except for the use of the equity method of accounting to reflect ownership interests in subsidiaries, which are eliminated upon consolidation.
Consolidating entries and eliminations in the following condensed consolidated financial statements represent adjustments to (a) eliminate intercompany transactions between or among the Parent Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries, (b) eliminate the investments in subsidiaries and (c) record consolidating entries.

During the first quarter 2018, a Guarantor Subsidiary merged with and into Parent; the transaction was reflected as of the beginning of the earliest period presented in the condensed consolidating financial statements.



22

TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


TELEFLEX INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


 
Three Months Ended April 1, 2018
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Condensed
Consolidated
 
(Dollars in thousands)
Net revenues
$
—

 
$
379,419

 
$
320,009

 
$
(112,198
)
 
$
587,230

Cost of goods sold
—

 
217,604

 
142,008

 
(103,652
)
 
255,960

Gross profit
—

 
161,815

 
178,001

 
(8,546
)
 
331,270

Selling, general and administrative expenses
9,181

 
130,914

 
75,771

 
(529
)
 
215,337

Research and development expenses
227

 
19,368

 
6,432

 
—

 
26,027

Restructuring charges
—

 
908

 
2,155

 
—

 
3,063

(Loss) income from continuing operations before interest and taxes
(9,408
)
 
10,625

 
93,643

 
(8,017
)
 
86,843

Interest, net
22,141

 
2,931

 
598

 
—

 
25,670

(Loss) income from continuing operations before taxes
(31,549
)
 
7,694

 
93,045

 
(8,017
)
 
61,173

(Benefit) taxes on (loss) income from continuing operations
(13,192
)
 
6,423

 
14,177

 
(1,166
)
 
6,242

Equity in net income of consolidated subsidiaries
74,567

 
76,876

 
293

 
(151,736
)
 
—

Income from continuing operations
56,210

 
78,147

 
79,161

 
(158,587
)
 
54,931

Operating (loss) income from discontinued operations
(44
)
 
—

 
1,279

 
—

 
1,235

Tax benefit on loss from discontinued operations
(18
)
 
—

 
—

 
—

 
(18
)
(Loss) income from discontinued operations
(26
)
 
—

 
1,279

 
—

 
1,253

Net income
56,184

 
78,147

 
80,440

 
(158,587
)
 
56,184

Other comprehensive income
82,690

 
70,119

 
87,227

 
(157,346
)
 
82,690

Comprehensive income
$
138,874

 
$
148,266

 
$
167,667

 
$
(315,933
)
 
$
138,874


23

TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


 
 
 
 
 
 
 
 
 
 
 
Three Months Ended April 2, 2017
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Condensed
Consolidated
 
(Dollars in thousands)
Net revenues
$
—

 
$
315,643

 
$
276,315

 
$
(104,077
)
 
$
487,881

Cost of goods sold
—

 
192,001

 
143,896

 
(103,576
)
 
232,321

Gross profit
—

 
123,642

 
132,419

 
(501
)
 
255,560

Selling, general and administrative expenses
20,519

 
94,043

 
48,844

 
563

 
163,969

Research and development expenses
235

 
11,186

 
6,406

 
—

 
17,827

Restructuring charges
—

 
5,374

 
7,571

 
—

 
12,945

(Loss) income from continuing operations before interest, extinguishment of debt and taxes
(20,754
)
 
13,039

 
69,598

 
(1,064
)
 
60,819

Interest, net
24,273

 
(7,562
)
 
846

 
—

 
17,557

Loss on extinguishment of debt
5,582

 
—

 
—

 
—

 
5,582

(Loss) income from continuing operations before taxes
(50,609
)
 
20,601

 
68,752

 
(1,064
)
 
37,680

(Benefit) taxes on (loss) income from continuing operations
(21,333
)
 
5,911

 
12,229

 
524

 
(2,669
)
Equity in net income of consolidated subsidiaries
69,625

 
55,802

 
216

 
(125,643
)
 
—

Income from continuing operations
40,349

 
70,492

 
56,739

 
(127,231
)
 
40,349

Operating loss from discontinued operations
(282
)
 
—

 
—

 
—

 
(282
)
Tax benefit on loss from discontinued operations
(103
)
 
—

 
—

 
—

 
(103
)
Loss from discontinued operations
(179
)
 
—

 
—

 
—

 
(179
)
Net income
40,170

 
70,492

 
56,739

 
(127,231
)
 
40,170

Other comprehensive income
49,600

 
49,404

 
53,901

 
(103,305
)
 
49,600

Comprehensive income
$
89,770

 
$
119,896

 
$
110,640

 
$
(230,536
)
 
$
89,770





24

TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


TELEFLEX INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
 
 
April 1, 2018
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Condensed
Consolidated
 
(Dollars in thousands)
ASSETS
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
28,407

 
$
10,200

 
$
340,265

 
$
—

 
$
378,872

Accounts receivable, net
2,822

 
35,826

 
315,300

 
5,192

 
359,140

Accounts receivable from consolidated subsidiaries
25,239

 
994,384

 
346,925

 
(1,366,548
)
 
—

Inventories, net
—

 
246,289

 
192,343

 
(34,956
)
 
403,676

Prepaid expenses and other current assets
15,470

 
12,482

 
21,064

 
3,982

 
52,998

Prepaid taxes
—

 
—

 
7,234

 
—

 
7,234

Assets held for sale
—

 
3,239

 
—

 
—

 
3,239

Total current assets
71,938

 
1,302,420

 
1,223,131

 
(1,392,330
)
 
1,205,159

Property, plant and equipment, net
2,340

 
205,115

 
182,064

 
—

 
389,519

Goodwill
—

 
1,247,150

 
1,017,297

 
—

 
2,264,447

Intangibles assets, net
—

 
1,333,983

 
1,056,572

 
—

 
2,390,555

Investments in consolidated subsidiaries
5,963,828

 
1,827,988

 
19,723

 
(7,811,539
)
 
—

Deferred tax assets
—

 
—

 
6,230

 
(2,261
)
 
3,969

Notes receivable and other amounts due from consolidated subsidiaries
2,171,364

 
2,189,631

 
—

 
(4,360,995
)
 
—

Other assets
30,864

 
6,426

 
9,661

 
—

 
46,951

Total assets
$
8,240,334

 
$
8,112,713

 
$
3,514,678

 
$
(13,567,125
)
 
$
6,300,600

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Current borrowings
$
27,500

 
$
—

 
$
50,000

 
$
—

 
$
77,500

Accounts payable
2,954

 
45,416

 
36,316

 
—

 
84,686

Accounts payable to consolidated subsidiaries
1,014,612

 
275,625

 
76,311

 
(1,366,548
)
 
—

Accrued expenses
20,314

 
33,152

 
47,662

 
—

 
101,128

Current portion of contingent consideration
—

 
162,061

 
—

 
—

 
162,061

Payroll and benefit-related liabilities
15,618

 
24,212

 
40,588

 
—

 
80,418

Accrued interest
20,463

 
—

 
40

 
—

 
20,503

Income taxes payable
936

 
—

 
13,730

 
(1,166
)
 
13,500

Other current liabilities
1,466

 
5,355

 
5,157

 
—

 
11,978

Total current liabilities
1,103,863

 
545,821

 
269,804

 
(1,367,714
)
 
551,774

Long-term borrowings
2,154,217

 
—

 
—

 
—

 
2,154,217

Deferred tax liabilities
88,632

 
270,305

 
260,035

 
(2,261
)
 
616,711

Pension and postretirement benefit liabilities
66,986

 
32,393

 
18,495

 
—

 
117,874

Noncurrent liability for uncertain tax positions
1,396

 
8,237

 
2,995

 
—

 
12,628

Notes payable and other amounts due to consolidated subsidiaries
2,114,287

 
2,048,841

 
197,867

 
(4,360,995
)
 
—

Noncurrent contingent consideration
—

 
108,727

 
11,069

 
—

 
119,796

Other liabilities
150,453

 
5,802

 
10,845

 
—

 
167,100

Total liabilities
5,679,834

 
3,020,126

 
771,110

 
(5,730,970
)
 
3,740,100

Total shareholders' equity
2,560,500

 
5,092,587

 
2,743,568

 
(7,836,155
)
 
2,560,500

Total liabilities and shareholders' equity
$
8,240,334

 
$
8,112,713

 
$
3,514,678

 
$
(13,567,125
)
 
$
6,300,600

 

25

TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


 
December 31, 2017
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Condensed
Consolidated
 
(Dollars in thousands)
ASSETS
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
37,803

 
$
8,933

 
$
286,822

 
$
—

 
$
333,558

Accounts receivable, net
2,414

 
57,818

 
280,980

 
4,663

 
345,875

Accounts receivable from consolidated subsidiaries
14,478

 
1,177,246

 
343,115

 
(1,534,839
)
 
—

Inventories, net
—

 
245,533

 
176,490

 
(26,279
)
 
395,744

Prepaid expenses and other current assets
14,874

 
9,236

 
19,790

 
3,982

 
47,882

Prepaid taxes
—

 
—

 
5,748

 
—

 
5,748

Total current assets
69,569

 
1,498,766

 
1,112,945

 
(1,552,473
)
 
1,128,807

Property, plant and equipment, net
2,088

 
213,663

 
167,248

 
—

 
382,999

Goodwill
—

 
1,246,144

 
989,448

 
—

 
2,235,592

Intangibles assets, net
—

 
1,355,275

 
1,028,473

 
—

 
2,383,748

Investments in consolidated subsidiaries
5,806,244

 
1,674,077

 
19,620

 
(7,499,941
)
 
—

Deferred tax assets
—

 
—

 
6,071

 
(2,261
)
 
3,810

Notes receivable and other amounts due from consolidated subsidiaries
2,452,101

 
2,231,832

 
—

 
(4,683,933
)
 
—

Other assets
31,173

 
6,397

 
8,966

 
—

 
46,536

Total assets
$
8,361,175

 
$
8,226,154

 
$
3,332,771

 
$
(13,738,608
)
 
$
6,181,492

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Current borrowings
$
36,625

 
$
—

 
$
50,000

 
$
—

 
$
86,625

Accounts payable
4,269

 
46,992

 
40,766

 
—

 
92,027

Accounts payable to consolidated subsidiaries
1,211,568

 
261,121

 
62,150

 
(1,534,839
)
 
—

Accrued expenses
17,957

 
31,827

 
47,069

 
—

 
96,853

Current portion of contingent consideration
—

 
74,224

 
—

 
—

 
74,224

Payroll and benefit-related liabilities
21,145

 
44,009

 
42,261

 
—

 
107,415

Accrued interest
6,133

 
—

 
32

 
—

 
6,165

Income taxes payable
4,352

 
—

 
7,162

 
—

 
11,514

Other current liabilities
1,461

 
3,775

 
3,817

 
—

 
9,053

Total current liabilities
1,303,510

 
461,948

 
253,257

 
(1,534,839
)
 
483,876

Long-term borrowings
2,162,927

 
—

 
—

 
—

 
2,162,927

Deferred tax liabilities
88,512

 
265,426

 
251,999

 
(2,261
)
 
603,676

Pension and postretirement benefit liabilities
70,860

 
32,750

 
17,800

 
—

 
121,410

Noncurrent liability for uncertain tax positions
1,117

 
8,196

 
2,983

 
—

 
12,296

Notes payable and other amounts due to consolidated subsidiaries
2,155,146

 
2,320,611

 
208,176

 
(4,683,933
)
 
—

Noncurrent contingent consideration
—

 
186,923

 
10,989

 
—

 
197,912

Other liabilities
148,572

 
7,850

 
12,442

 
—

 
168,864

Total liabilities
5,930,644

 
3,283,704

 
757,646

 
(6,221,033
)
 
3,750,961

Total shareholders' equity
2,430,531

 
4,942,450

 
2,575,125

 
(7,517,575
)
 
2,430,531

Total liabilities and shareholders' equity
$
8,361,175

 
$
8,226,154

 
$
3,332,771

 
$
(13,738,608
)
 
$
6,181,492


26

TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


TELEFLEX INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
 
Three Months Ended April 1, 2018
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Condensed
Consolidated
 
(Dollars in thousands)
Net cash (used in) provided by operating activities from continuing operations
$
(108,377
)
 
$
134,198

 
$
61,027

 
$
86,848

Cash flows from investing activities of continuing operations:
 
 
 
 
 
 
 
Expenditures for property, plant and equipment
(159
)
 
(5,015
)
 
(10,573
)
 
(15,747
)
Payments for businesses and intangibles acquired, net of cash acquired
—

 
—

 
(3,684
)
 
(3,684
)
Net cash used in investing activities from continuing operations
(159
)
 
(5,015
)
 
(14,257
)
 
(19,431
)
Cash flows from financing activities of continuing operations:
 
 
 
 
 
 
 
Reduction in borrowings
(18,500
)
 
—

 
—

 
(18,500
)
Debt extinguishment, issuance and amendment fees
(74
)
 
—

 
—

 
(74
)
Net proceeds from share based compensation plans and the related tax impacts
1,400

 
—

 
—

 
1,400

Payments for contingent consideration
—

 
(91
)
 
—

 
(91
)
Dividends paid
(15,447
)
 
—

 
—

 
(15,447
)
Intercompany transactions
131,967

 
(127,825
)
 
(4,142
)
 
—

Net cash provided by (used in) financing activities from continuing operations
99,346

 
(127,916
)
 
(4,142
)
 
(32,712
)
Cash flows from discontinued operations:
 
 
 
 
 
 
 
Net cash used in operating activities
(206
)
 
—

 
—

 
(206
)
Net cash used in discontinued operations
(206
)
 
—

 
—

 
(206
)
Effect of exchange rate changes on cash and cash equivalents
—

 
—

 
10,815

 
10,815

Net (decrease) increase in cash and cash equivalents
(9,396
)
 
1,267

 
53,443

 
45,314

Cash and cash equivalents at the beginning of the period
37,803

 
8,933

 
286,822

 
333,558

Cash and cash equivalents at the end of the period
$
28,407

 
$
10,200

 
$
340,265

 
$
378,872


27

TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


 
Three Months Ended April 2, 2017
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Condensed
Consolidated
 
(Dollars in thousands)
Net cash (used in) provided by operating activities from continuing operations
$
(86,020
)
 
$
158,343

 
$
80,535

 
$
(61,918
)
 
$
90,940

Cash flows from investing activities of continuing operations:
 
 
 
 
 
 
 
 

Expenditures for property, plant and equipment
(155
)
 
(2,206
)
 
(10,533
)
 
—

 
(12,894
)
Proceeds from sale of assets
—

 
—

 
6,332

 
—

 
6,332

Payments for businesses and intangibles acquired, net of cash acquired
(975,524
)
 
—

 
—

 
—

 
(975,524
)
Net cash used in investing activities from continuing operations
(975,679
)
 
(2,206
)
 
(4,201
)
 
—

 
(982,086
)
Cash flows from financing activities of continuing operations:
 
 
 

 
 

 
 

 
 
Proceeds from new borrowings
1,194,500

 
—

 
—

 
—

 
1,194,500

Reduction in borrowings
(138,251
)
 
—

 
—

 
—

 
(138,251
)
Debt extinguishment, issuance and amendment fees
(19,114
)
 
—

 
—

 
—

 
(19,114
)
Net proceeds from share based compensation plans and the related tax impacts
(505
)
 
—

 
—

 
—

 
(505
)
Payments for contingent consideration
—

 
(79
)
 
—

 
—

 
(79
)
Dividends paid
(15,287
)
 
—

 
—

 
—

 
(15,287
)
     Intercompany transactions
179,151

 
(149,496
)
 
(29,655
)
 
—

 
—

Intercompany dividends paid
—

 
—

 
(61,918
)
 
61,918

 
—

Net cash provided by (used in) financing activities from continuing operations
1,200,494

 
(149,575
)
 
(91,573
)
 
61,918

 
1,021,264

Cash flows from discontinued operations:
 

 
 

 
 

 
 

 
 
Net cash used in operating activities
(266
)
 
—

 
—

 
—

 
(266
)
Net cash used in discontinued operations
(266
)
 
—

 
—

 
—

 
(266
)
Effect of exchange rate changes on cash and cash equivalents
—

 
—

 
15,488

 
—

 
15,488

Net increase in cash and cash equivalents
138,529

 
6,562

 
249

 
—

 
145,340

Cash and cash equivalents at the beginning of the period
14,571

 
1,031

 
528,187

 
—

 
543,789

Cash and cash equivalents at the end of the period
$
153,100

 
$
7,593

 
$
528,436

 
$
—

 
$
689,129




28

TELEFLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


Note 16 — Subsequent event

On May 1, 2018, the Company initiated a restructuring plan involving the relocation of certain manufacturing operations to an existing lower-cost location, the outsourcing of certain of the Company’s distribution operations, and related workforce reductions (the “2018 Footprint realignment plan"). These actions are expected to commence in the second quarter 2018 and are expected to be substantially completed by the end of 2024. The following table provides a summary of the Company’s cost estimates by major type of expense associated with the 2018 Footprint realignment plan:
Type of expense
Total estimated amount expected to be incurred
Termination benefits
$60 million to $70 million
Other exit costs (1)
$2 million to $4 million
Restructuring charges
$62 million to $74 million
Restructuring related charges (2)
$40 million to $59 million
Total restructuring and restructuring related charges
$102 million to $133 million
(1)
Includes contract termination costs as well as facility closure and other exit costs (employee relocation costs, equipment relocation costs and outplacement).
(2)
Consists of pre-tax charges related to accelerated depreciation and other costs directly related to the plan, primarily project management costs and costs to transfer manufacturing operations to the new location, as well as a charge associated with the Company’s exit from the facilities that is expected to be imposed by the taxing authority in the affected jurisdiction. Excluding this tax charge, substantially all of the charges are expected to be recognized within costs of goods sold.

The Company estimates $99 million to $127 million of the restructuring and restructuring related charges will result in future cash outlays. Additionally, the Company expects that it will incur $19 million to $23 million in aggregate capital expenditures under the plan. The Company expects to incur most of these charges and cash outlays prior to 2024.

As the 2018 Footprint realignment plan progresses, management will reevaluate the estimated expenses and charges set forth above, and may revise its estimates, as appropriate, consistent with GAAP.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 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; 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 from restructuring plans and programs; the impact of healthcare reform legislation and proposals to amend the legislation; changes in Medicare, Medicaid and third party coverage and reimbursements; 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, sovereign debt issues and the impact of the United Kingdom’s vote to leave the European Union; 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, 2017. 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.

29


Overview
Teleflex is a global provider of medical technology products that enhance clinical benefits, improve patient and provider safety and reduce 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 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, 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 conversions are designed to facilitate improved product pricing and more direct access to the end users of our products within the sales channel.
On May 1, 2018, we initiated a restructuring plan involving the relocation of certain manufacturing operations to an existing lower-cost location, the outsourcing of certain distribution operations and related workforce reductions (the "2018 Footprint realignment plan). See "Result of Operations - Restructuring charges" below and Note 16 to the condensed consolidated financial statements included in this report for additional information.
On February 17, 2017, we acquired Vascular Solutions, Inc. (“Vascular Solutions”), a medical device company that developed and marketed clinical products for use in minimally invasive coronary and peripheral vascular procedures, for an aggregate purchase price of $975.5 million. The acquisition is expected to meaningfully accelerate the growth of our vascular and interventional access product portfolios by facilitating our further expansion into the coronary and peripheral vascular market, and by generating increased cross-portfolio selling opportunities to both our and Vascular Solutions' customer bases.
On October 2, 2017, we acquired NeoTract, Inc. ("NeoTract"), a medical device company that developed and commercialized the UroLift System, a minimally invasive medical device for treating lower urinary tract symptoms due to benign prostatic hyperplasia, or BPH. The fair value of the consideration we transferred to acquire NeoTract was $975.2 million, which included initial payments of $725.6 million in cash less a favorable working capital adjustment of $1.4 million (payment for which remains outstanding as of April 1, 2018) and $251.0 million, constituting the estimated fair value of contingent consideration. The contingent consideration liability represents the estimated fair value of our obligations, under the acquisition agreement, to make additional payments of up to $375 million in the aggregate if specified net sales goals through the end of 2020 are achieved.
During 2017 we also completed acquisitions related to our anesthesia and respiratory product portfolios and distributor to direct sales conversions. The total fair value of the consideration related to these acquisitions was $80.1 million.
See Note 4 to the condensed consolidated financial statements included in this report for additional information.
Change in Reportable Segments
Following our acquisition of Vascular Solutions, we commenced an integration program under which we are combining Vascular Solutions' businesses with some of our legacy businesses. As a result, effective during the fourth quarter of 2017, we realigned our operating segments. The changes to the operating segments were also made to reflect the manner in which our chief operating decision maker assesses business performance and allocates resources. We now have the following seven reportable segments: Vascular North America, Interventional North America, Anesthesia North America, Surgical North America, Europe, Middle East and Africa ("EMEA"), Asia and Original Equipment and Development Services ("OEM"). In connection with the presentation of segment information, we will continue to present certain segments, which currently include our Interventional Urology North America, Respiratory North America and Latin America operating segments, in the “all other” category because they are not material. All prior comparative periods presented have been restated to reflect these changes.

30


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 businesses (except as noted below with respect to acquired distributors) generally reflects the impact of the acquisitions within the first 12 months following the date of the acquisition. 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, for the first 12 months following the acquisition or termination of a distributor, the impact on the pricing of our products resulting from the elimination of the distributor from the sales channel. To the extent an acquired distributor had pre-acquisition sales of products other than ours, the impact of the post-acquisition sales of those products on our results of operations is included within our discussion of the impact of acquired businesses.
Certain financial information is presented on a rounded basis, which may cause minor differences.
Net Revenues
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(Dollars in millions)
Net Revenues
$
587.2

 
$
487.9

Net revenues for the three months ended April 1, 2018 increased $99.3 million, or 20.4%, compared to the prior year period. The increase is primarily attributable to net revenues of $65.6 million generated by acquired businesses and the $24.5 million impact of favorable fluctuations in foreign currency exchange rates.
Gross profit
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(Dollars in millions)
Gross profit
$
331.3

 
$
255.6

Percentage of sales
56.4
%
 
52.4
%

Gross margin for the three months ended April 1, 2018 increased 400 basis points, or 7.6%, compared to the prior year period. The increase in gross margin reflects the adverse impact to the prior year period of the step-up in carrying value of inventory recognized in connection with the Vascular Solutions acquisition, the favorable impact of gross margin generated by acquired businesses, mainly NeoTract and Vascular Solutions, favorable fluctuations in foreign currency exchange rates and the favorable impact of cost improvement initiatives, including the 2016 and 2014 Footprint realignment restructuring plans.

Selling, general and administrative
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(Dollars in millions)
Selling, general and administrative
$
215.3

 
$
164.0

Percentage of sales
36.7
%
 
33.6
%
Selling, general and administrative expenses for the three months ended April 1, 2018 increased $51.3 million compared to the prior year period. The increase is primarily attributable to $49.1 million in operating expenses incurred by acquired businesses, primarily NeoTract, and an increase in contingent consideration expense of $9.4 million. These increases were partially offset by a $9.2 million decrease in transaction and other nonrecurring expenses; in 2017, we incurred transaction and other nonrecurring expenses in connection with several acquisitions, principally including Vascular Solutions.

31


Research and development
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(Dollars in millions)
Research and development
$
26.0

 
$
17.8

Percentage of sales
4.4
%
 
3.6
%
The increase in research and development expenses for the three months ended April 1, 2018 compared to the prior year period is primarily attributable to expenses incurred in connection with our interventional and interventional urology product portfolios.
Restructuring charges
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(Dollars in millions)
Restructuring charges
$
3.1

 
$
12.9

For the three months ended April 1, 2018, we recorded $3.1 million in restructuring charges, which primarily related to termination benefits associated with the 2016 Footprint realignment plan.
For the three months ended April 2, 2017, we recorded $12.9 million in restructuring charges, which primarily related to termination benefits associated with the EMEA restructuring program and the Vascular Solutions integration program.
2018 Footprint realignment plan
On May 1, 2018, we initiated a restructuring plan involving the relocation of certain manufacturing operations to an existing lower-cost location, the outsourcing of certain distribution operations and related workforce reductions (the “2018 Footprint realignment plan"). These actions are expected to commence in the second quarter 2018 and are expected to be substantially completed by the end of 2024.
We estimate that we will incur aggregate pre-tax restructuring and restructuring related charges in connection with the 2018 Footprint realignment plan of $102 million to $133 million, of which, we expect $55 million to $72 million to be incurred in 2018 and most of the balance is expected to be incurred prior to the end of 2024. We estimate that $99 million to $127 million of these charges will result in future cash outlays, of which, $9 million to $10 million is expected to be made in 2018 and most of the balance is expected to be made by the end of 2024. Additionally, we expect to incur $19 million to $23 million in aggregate capital expenditures under the plan, of which up, to $1 million is expected to be incurred during 2018 and most of the balance is expected to be incurred by the end of 2021.
We expect to begin realizing plan-related savings in 2018 and expect to achieve annual pre-tax savings of $25 million to $30 million once the plan is fully implemented.
Anticipated charges and pre-tax savings related to restructuring programs and other similar cost savings initiatives
In addition to the 2018 Footprint realignment plan, we have ongoing restructuring programs related to (i) the integration of Vascular Solutions into Teleflex; (ii) the centralization of certain administrative functions in our EMEA segment; (iii) the consolidation of our manufacturing operations (referred to as our 2016 and 2014 Footprint realignment plans); and (iv) other restructuring programs designed to improve operating efficiencies and reduce costs. See Note 5 to the condensed consolidated financial statements included in this report. We also have similar ongoing activities to relocate certain manufacturing operations within our OEM segment that do not meet the criteria for a qualified restructuring program ("the OEM initiative"), but the activities will result in cost savings (despite minimal costs expected to be incurred). With respect to our restructuring plans and programs and the OEM initiative, the table below summarizes (1) the estimated total restructuring and restructuring related charges and estimated annual pre-tax savings (including pre-tax savings related to the OEM initiative) and synergies once the programs are completed; (2) the restructuring

32


and restructuring related charges incurred and estimated pre-tax savings realized through December 31, 2017; and (3) the restructuring and restructuring related charges expected to be incurred and estimated incremental pre-tax savings (including pre-tax savings related to the OEM initiative) and synergies estimated to be realized for these programs from January 1, 2018 through the anticipated completion dates.

Estimated charges and pre-tax savings are subject to change based on, among other things, the nature and timing of restructuring and similar activities, changes in the scope of restructuring plans and programs and the OEM initiative, unanticipated expenditures and other developments, the effect of additional acquisitions or dispositions 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 relating to programs involving the integration of acquired businesses are particularly difficult to forecast because the estimate of pre-tax savings, to a considerable extent, involves assumptions regarding operation of businesses during periods when those businesses were not administered by our management. 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 has been updated to remove estimated charges and pre-tax savings related to completed programs. Estimated charges expected to be incurred in connection with the restructuring programs are described in more detail in Notes 5 and 16 to the condensed consolidated financial statements included in this report.

 
Ongoing restructuring programs and other similar cost savings initiatives (1)
 
Estimated Total
 
Through
December 31, 2017
 
Estimated Remaining from January 1, 2018 through
December 31, 2024
 
(Dollars in millions)
Restructuring charges
$106 - $125
 
$42
 
$64 - $83
Restructuring related charges (2)
96 - 127
 
44
 
52 - 83
Total charges
$202 - $252
 
$86
 
$116 - $166
 
 
 
 
 
 
OEM initiative pre-tax savings
$6 - $7
 
$—
 
$6 - $7
Pre-tax savings (3)(4)
$101 - $120
 
$45
 
$56 - $75
Total pre-tax savings
$107 - $127
 
$45
 
$62 - $82

(1)
Includes estimated financial information related to the 2018 Footprint realignment plan, which was initiated during the second quarter 2018 and is described in more detail above.
(2)
Restructuring related charges principally constitute pre-tax charges related to accelerated depreciation and other costs directly related to the plan, primarily costs to transfer manufacturing operations to the new location and project management costs, as well as a charge associated with our exit from the facilities that is expected to be imposed by the taxing authority in the affected jurisdiction. Most of these charges (other than the tax charge) are expected to be recognized in costs of goods sold
(3)
Approximately 65% of the pre-tax savings are expected to result in reductions to cost of goods sold. As previously disclosed, during 2016, in connection with our execution of the 2014 Footprint realignment plan, we implemented changes to medication delivery devices included in certain of our kits, which are expected to result in increased product costs (and therefore reduced the annual savings we anticipated at the inception of the program). However, we also expect to achieve improved pricing on these kits to offset the cost, which is expected to result in estimated annual increased revenues of $5 million to $6 million, which is not reflected in the table above. We realized a $1.0 million benefit resulting from this incremental pricing in 2017. Moreover, during the fourth quarter of 2017, we entered into an agreement with an alternate provider for the development and supply of a component to be included in certain kits sold by our Vascular and Anesthesia North America operating segments. The agreement will result in increased development costs, but is expected to reduce the cost of the component supply, once the supply becomes commercially available, as compared to the costs incurred with respect to our current suppliers. Therefore, we anticipate a net savings from the agreement, which is reflected in the table above.
(4)
While pre-tax savings address anticipated cost savings to be realized with respect to our historical expense items, they also reflect anticipated efficiencies to be realized with respect to increased costs that otherwise would have resulted from our acquisition of Vascular Solutions and Pyng Medical Corp. ("Pyng"), which we acquired in 2017. In this regard, the pre-tax savings are expected to result from the elimination of redundancies between our operations and Vascular Solutions’ and Pyng's operations, principally through the elimination of personnel redundancies.

33


Interest expense
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(Dollars in millions)
Interest expense
$
25.9

 
$
17.7

Average interest rate on debt
4.2
%
 
3.5
%
The increase in interest expense for the three months ended April 1, 2018 compared to the prior year period was primarily due to an increase in average debt outstanding resulting from additional borrowings under our principal credit facility, as well as the November 2017 issuance of our 4.625% Senior Notes due 2027 ("2027 Notes"). The increase in interest expense was also the result of a higher average interest rate on debt.
Loss on extinguishment of debt
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(Dollars in millions)
Loss on extinguishment of debt
$
—

 
$
5.6

For the three months ended April 2, 2017, the loss on the extinguishment of debt was primarily related to our repurchase of convertible notes through exchange transactions we entered into with certain holders of the convertible notes.
Taxes on income from continuing operations
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
Effective income tax rate
10.2
%
 
(7.1
)%

The Tax Cuts and Jobs Act (the “TCJA”) was enacted on December 22, 2017. The legislation significantly changes U.S. tax law by, among other things, permanently reducing corporate income tax rates from a maximum of 35% to 21%, effective January 1, 2018; implementing a territorial tax system, by generally providing for, among other things, a dividends received deduction on the foreign source portion of dividends received from a foreign corporation if specified conditions are met; imposing two new U.S. base erosion provisions: (1) the global intangible low-taxed income ("GILTI") provisions and (2) the base erosion and anti-abuse tax ("BEAT") provisions; and imposing a one-time repatriation tax on undistributed post-1986 foreign subsidiary earnings and profits, which are deemed repatriated for purposes of the tax.
 
In accordance with the applicable provisions of SEC Staff Accounting Bulletin No. 118 ("SAB 118"), the Company included in its consolidated financial statements as of December 31, 2017 provisional amounts reflecting the tax impact related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities. Once our accounting for the income tax effects of the TCJA is complete, the amounts with respect to the income tax effects of the TCJA may differ from the provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the TCJA.

The effective income tax rate for the three months ended April 1, 2018 and April 2, 2017 was 10.2% and (7.1)%, respectively. The effective income tax rate for the three months ended April 1, 2018 includes the benefit of a lower U.S. corporate income tax rate of 21.0% from the enactment of the TCJA, partially offset by a tax cost associated with GILTI and other TCJA related changes. The effective income tax rate for the three months ended April 2, 2017 reflects a tax benefit associated with costs incurred in connection with the Vascular Solutions acquisition.


34


Segment Financial Information
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
% Increase/
(Decrease)

(Dollars in millions)
 
 
Vascular North America
$
83.0

 
$
79.0

 
5.1

Interventional North America
60.2

 
39.9

 
50.7

Anesthesia North America
50.6

 
48.2

 
4.9

Surgical North America
40.7

 
46.0

 
(11.5
)
EMEA
159.9

 
133.6

 
19.7

Asia
58.2

 
50.2

 
16.1

OEM
45.8

 
43.3

 
5.8

All other
88.8

 
47.7

 
86.2

Net revenues
$
587.2

 
$
487.9

 
20.4

 
 
 
 
 
 
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
% Increase/
(Decrease)

(Dollars in millions)
 
 

Vascular North America
$
24.7

 
$
18.3

 
34.8

Interventional North America
14.1

 
(8.0
)
 
275.7

Anesthesia North America
17.3

 
13.3

 
30.3

Surgical North America
14.7

 
16.4

 
(10.0
)
EMEA
31.8

 
21.3

 
49.1

Asia
13.4

 
10.9

 
22.8

OEM
9.0

 
9.1

 
(1.2
)
All other
(12.0
)
 
9.3

 
(228.4
)
Segment operating profit (1)
$
113.0

 
$
90.6

 
24.8

(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, loss on extinguishment of debt and taxes.
Comparison of the three months ended April 1, 2018 and April 2, 2017
Vascular North America
Vascular North America net revenues for the three months ended April 1, 2018 increased $4.0 million, or 5.1% compared to the prior year period. The increase is primarily attributable to a $1.6 million increase in new product sales and a $1.5 million increase in sales volumes of existing products despite one less shipping day in the first quarter 2018 as compared to the comparable prior year period.
Vascular North America operating profit for the three months ended April 1, 2018 increased $6.4 million, or 34.8%, compared to the prior year period. The increase is primarily attributable to an increase in gross profit resulting from lower manufacturing costs as well as the impact of increases in sales volumes, prices and new product sales. The increase in operating profit also reflects lower selling, general and administrative expenses.
Interventional North America
Interventional North America net revenues for the three months ended April 1, 2018 increased 20.3 million , or 50.7% compared to the prior year period. The increase is primarily attributable to net revenues generated by Vascular Solutions of $18.7 million and to a lesser extent, new products.

35


Interventional North America operating profit for the three months ended April 1, 2018 increased 22.1 million, or 275.7% compared to the prior year period. The increase is primarily attributable to operating profit generated by Vascular Solutions. The prior year period was adversely affected by transaction and other expenses as well as the step-up in carrying value of inventory recognized in connection with the Vascular Solutions acquisition.
Anesthesia North America
Anesthesia North America net revenues for the three months ended April 1, 2018 increased $2.4 million, or 4.9% compared to the prior year period. The increase in net revenues is primarily attributable to an increase in new product sales of $1.3 million and net revenues generated by an acquired business.
Anesthesia North America operating profit for the three months ended April 1, 2018 increased $4.0 million, or 30.3% compared to the prior year period. The increase is primarily attributable to an increase in gross profit resulting from a more favorable product mix as well as lower selling, general and administrative expenses.
Surgical North America
Surgical North America net revenues for the three months ended April 1, 2018 decreased $5.3 million, or 11.5%, compared to the prior year period, primarily due to a $6.3 million decrease in sales volumes of existing products.
Surgical North America operating profit for the three months ended April 1, 2018 decreased $1.7 million, or 10.0%, compared to the prior year period, which is primarily attributable a decrease in gross profit resulting from lower sales volumes partially offset by lower selling, general and administrative expenses.
EMEA
EMEA net revenues for the three months ended April 1, 2018 increased $26.3 million, or 19.7%, compared to the prior year period. The increase is primarily attributable to favorable fluctuations in foreign currency exchange rates of $19.3 million and, to a lesser extent, net revenues generated by acquired businesses and price increases.
EMEA operating profit for the three months ended April 1, 2018 increased $10.5 million, or 49.1%, compared to the prior year period. The increase is primarily attributable to an increase in gross profit reflecting the impact of favorable fluctuations in foreign currency exchange rates and the impact of the Vascular Solutions acquisition and subsequent distributor to direct sales conversions with respect to the Vascular Solutions business. These increases were partially offset by higher amortization and selling expenses.
Asia
Asia net revenues for the three months ended April 1, 2018 increased $8.0 million, or 16.1%, compared to the prior year period. The increase is primarily attributable to favorable fluctuations in foreign currency exchange rates of $3.2 million, an increase in sales volumes of existing products of $2.6 million as well as net revenues generated by the acquired businesses.
Asia operating profit for the three months ended April 1, 2018 increased $2.5 million, or 22.8%, compared to the prior year period. The increase was primarily attributable to an increase in gross profit reflecting the impact of favorable fluctuations in foreign currency exchange rates and an increase in sales volumes of existing products. These increases were partially offset by higher operating expenses.
OEM
OEM net revenues for the three months ended April 1, 2018 increased $2.5 million, or 5.8%, compared to the prior year period. The increase is primarily attributable to an increase in sales volumes of existing products of $1.5 million and favorable fluctuations in foreign currency exchange rates of $1.2 million.
OEM operating profit for the three months ended April 1, 2018 decreased $0.1 million, or 1.2%, compared to the prior year period. The decrease is primarily attributable to higher manufacturing costs partially offset by the impact of higher sales volumes.
All Other
Net revenues for our other operating segments increased $41.1 million, or 86.2%, compared to the prior year periods. The increase is primarily attributable net revenues generated by NeoTract.

36


Operating profit for our other operating segments for the three months ended April 1, 2018 decreased $21.3 million, or 228.4%, compared to the prior year period. The decrease is primarily attributable to operating expenses associated with NeoTract.

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.
The TCJA significantly changes U.S. tax law by, among other things, imposing a one-time repatriation tax on undistributed post-1986 earnings and profits of foreign subsidiaries. Previously, we were not taxed in the U.S. on certain foreign earnings unless and until they were repatriated to the U.S. Under the TCJA, we will have to pay $154.0 million over eight years for the deemed repatriation of these foreign earnings, regardless of whether such earnings are actually repatriated. As a result of the repatriation tax provisions of the TCJA, we anticipate that, generally, we will be able to access cash located at our foreign subsidiaries without incurring any additional U.S. federal income tax liabilities. We are not aware of any other restrictions on repatriation of these funds and, subject to cash payment of additional foreign withholding taxes, these funds could be repatriated, if necessary.
To date, we have not experienced significant payment defaults by our customers, and we have sufficient lending commitments in place to enable us to fund our anticipated additional operating needs. However, although there have been recent improvements in certain countries, global financial markets remain volatile and the global credit markets are constrained, which creates a risk that our customers and suppliers may be unable to access liquidity. Consequently, we continue to monitor our credit risk, particularly with respect to customers in Greece, Italy, Portugal and Spain, and consider other mitigation strategies. As of April 1, 2018 and December 31, 2017, our net trade accounts receivable from publicly funded hospitals in Italy, Spain, Portugal and Greece were $29.4 million and $24.7 million, respectively. As of April 1, 2018 and December 31, 2017, our net trade accounts receivable from customers in these countries were approximately 16.3% and 15.0%, respectively of our consolidated net trade accounts receivable. For the three months ended April 1, 2018 and April 2, 2017, net revenues from customers in these countries were 6.5% of total net revenues, and average days that current and long-term trade accounts receivable were outstanding were 152 days and 155 days, respectively. If economic conditions in these countries deteriorate, we may experience significant credit losses related to the public hospital systems in these countries. Moreover, if global economic conditions generally deteriorate, we may experience further delays in customer payments, reductions in our customers’ purchases and higher credit losses, which could have a material adverse effect on our results of operations and cash flows in 2018 and future years.
Cash Flows
Cash flows from operating activities from continuing operations provided net cash of approximately $86.8 million for the three months ended April 1, 2018 as compared to $90.9 million for the three months ended April 2, 2017. The $4.1 million decrease is attributable to a net unfavorable impact from changes in working capital partially offset by favorable operating results. The net unfavorable impact from changes in working capital were the result of a net decrease in accounts payable and accrued expenses and a net increase in accounts receivable partially offset by a net increase in income taxes payable, net.
The decrease in accounts payable and other accrued expenses for the three months ended April 1, 2018 was $27.2 million compared to an increase of $2.7 million for three months ended April 2, 2017. The decrease is attributable to higher restructuring activity and payroll and benefit related payments. The increase in accounts receivable for the three months ended April 1, 2018 was $3.4 million compared to a decrease of $18.7 million for three months ended April 2, 2017. The net increase in accounts receivable is attributable to the sale of receivables outstanding with public hospitals in Italy for $16.0 million during the first quarter 2017 as well as higher net revenues in the first quarter 2018. The increase in incomes taxes payable, net was the result of lower payments in the first quarter 2018 as compared to the first quarter 2017.

Net cash used in investing activities from continuing operations was $19.4 million for the three months ended April 1, 2018, which includes a cash outflow for capital expenditures of $15.7 million and acquisition payments of $3.7 million principally related to distributor to direct sales conversions.

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Net cash used in financing activities from continuing operations was $32.7 million for the three months ended April 1, 2018, which includes an $18.5 million repayment of borrowings and dividend payments of 15.4 million.

Borrowings

The credit agreement relating to our revolving credit facility and a term loan used to fund a portion of the consideration we paid to acquire Vascular Solutions (the “Credit Agreement”) and the indentures under which we issued our 5.25% Senior Notes due 2024 (the “2024 Notes”) and 4.875% Senior Notes due 2026 (the "2026 Notes") contain covenants that, among other things, 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; pay dividends, make investments or make other restricted payments; sell assets; merge, consolidate, sell or otherwise dispose of all or substantially all of our assets; or enter into transactions with our affiliates. The indenture with respect to our 2027 Notes contains covenants that, among other things, 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. Additionally, the Credit Agreement contains financial covenants that require us to maintain a consolidated total leverage ratio (generally, Consolidated Total Funded Indebtedness, as defined in the Credit Agreement, on the date of determination to Consolidated EBITDA, as defined in the Credit Agreement, for the four most recent fiscal quarters ending on or preceding the date of determination) of not more than 4.50 to 1.00, and a consolidated senior secured leverage ratio (generally, Consolidated Senior Secured Funded Indebtedness, as defined in the Credit Agreement, on the date of determination to Consolidated EBITDA for the four most recent fiscal quarters ending on or preceding the date of determination) of not more than 3.50 to 1.00. The Company is further required to maintain a consolidated interest coverage ratio (generally, Consolidated EBITDA for the four most recent fiscal quarters ending on or preceding the date of determination to Consolidated Interest Expense, as defined in the Credit Agreement, paid in cash for such period) of not less than 3.50 to 1.00.
As of April 1, 2018, we were in compliance with these requirements. The obligations under the Credit Agreement, the 2024 Notes, the 2026 Notes and the 2027 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.
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, 2017, 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 standards, including estimated effects, if any, on our financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See the information set forth in Part II, Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
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

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(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. Management’s assessment of disclosure controls and procedures excluded consideration of NeoTract’s internal control over financial reporting.  NeoTract was acquired during the fourth quarter of 2017 and the exclusion is consistent with guidance provided by the staff of the Securities and Exchange Commission that an assessment of a recently acquired business may be omitted from management’s report on internal control over financial reporting for up to one year from the date of acquisition, subject to specified conditions.  NeoTract's total assets (excluding goodwill and intangible assets) were $49.5 million as of April 1, 2018; its revenues for the three months ended April 1, 2018 were $42.3 million.
(b) Change in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during our most recent 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, contracts, employment and environmental matters. As of April 1, 2018 and December 31, 2017, we have accrued liabilities of approximately $1.8 million and $2.5 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 any such actions are 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. See “Litigation” within Note 13 to the condensed consolidated financial statements included in this report for additional information.

Item 1A. Risk Factors
There have been no significant changes in risk factors for the quarter ended April 1, 2018. See the information set forth in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
 
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 this report:
 
Exhibit No.
 
 
  
Description
10.1
 
—
 
 
31.1
 
 
—
  
 
 
31.2
 
 
—
  
 
 
32.1
 
 
—
  
 

32.2
 
 
—
  
 
 
101.1
 
 
—
  

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended April 1, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Income for the three months ended April 1, 2018 and April 2, 2017; (ii) the Condensed Consolidated Statements of Comprehensive Income for the three months ended April 1, 2018 and April 2, 2017; (iii) the Condensed Consolidated Balance Sheets as of April 1, 2018 and December 31, 2017; (iv) the Condensed Consolidated Statements of Cash Flows for the three months ended April 1, 2018 and April 25, 2017; (v) the Condensed Consolidated Statements of Changes in Equity for the three months ended April 1, 2018 and April 2, 2017; and (vi) Notes to Condensed Consolidated Financial Statements.
_____________________________________________________
    


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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 3, 2018


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