Teleflex(TFX) - 2022 Q4 - Annual Report

PART I Business Teleflex is a global provider of single-use medical technology products for critical care and surgical applications, operating across four segments and subject to extensive regulation - Teleflex is a global provider of medical technology products, primarily single-use devices for critical care and surgical applications, with major manufacturing operations in the Czech Republic, Malaysia, Mexico, and the U.S[17] - The company operates through four reportable segments: Americas, EMEA (Europe, the Middle East and Africa), Asia (Asia Pacific), and OEM (Original Equipment Manufacturer and Development Services)[25] - Key product categories include Vascular Access, Anesthesia, Interventional, Surgical, Interventional Urology, Respiratory, and Urology[28] - As of December 31, 2022, Teleflex employed approximately 15,500 people worldwide, with 4,000 in the U.S. and 11,500 in 32 other countries[64] Risk Factors Teleflex faces significant risks from intense competition, extensive government regulations, operational disruptions, substantial indebtedness, and market fluctuations - The medical device industry is highly competitive and characterized by rapid technological advances, requiring substantial investment in R&D to design and market new products[90][91] - The company is subject to extensive and evolving government regulation in the U.S. (FDA) and internationally (e.g., EU MDR), which can lead to costly and time-consuming processes for product clearance and approval[95][96] - Disruptions in product sterilization, particularly from regulatory restrictions on ethylene oxide, could impair the ability to supply products and adversely affect operations[111][113] - As of December 31, 2022, the company had total consolidated indebtedness of $1.7 billion, which increases financial risk and imposes restrictive covenants on business operations[149][152] - The company is exposed to market risks from fluctuations in foreign currency exchange rates, commodity prices, and interest rates, which may adversely affect financial results[133] Unresolved Staff Comments There are no unresolved staff comments - Not applicable[162] Properties As of December 31, 2022, Teleflex owns or leases approximately 90 properties globally for manufacturing, distribution, research, and administration, with major facilities in the U.S., Malaysia, Mexico, Czech Republic, Germany, and Ireland Major Facilities (50,000+ sq. ft.) as of December 31, 2022 | Location | Primary use | Square Footage | Owned or Leased | | :--- | :--- | :--- | :--- | | Olive Branch, MS | Distribution warehouse | 627,000 | Leased | | Kamunting, Malaysia | Manufacturing | 286,000 | Owned | | Nuevo Laredo, Mexico | Manufacturing | 277,000 | Leased | | Tecate, Mexico | Manufacturing | 172,000 | Owned | | Chihuahua, Mexico | Manufacturing | 153,000 | Owned | | Maple Grove, MN | Manufacturing | 129,000 | Owned | | Morrisville, NC | Office administration | 121,000 | Leased | | Zdar Nad Sazauou, Czech Republic | Manufacturing | 108,000 | Owned | | Trenton, GA | Manufacturing | 102,000 | Owned | | Hradec Kralove, Czech Republic | Manufacturing | 92,000 | Owned | Legal Proceedings Teleflex is party to various lawsuits and claims, with $0.5 million accrued, and faces a potential $23.0 million liability from an Italian 'payback' measure, while a U.S. Department of Justice investigation was closed - The company is party to various lawsuits and claims arising in the normal course of business, with accrued liabilities of $0.5 million as of December 31, 2022[166][506] - In August 2022, the U.S. Department of Justice closed its Civil Investigative Demand into the company's subsidiary, NeoTract, Inc., which related to an investigation of a single customer and certain rebate programs[507] - Regarding the Italian "payback" measure on medical device companies, Teleflex has a reserve of $10.9 million as of December 31, 2022, with a potential liability of up to $23.0 million if fully enforced[511] Mine Safety Disclosures This item is not applicable to the company - Not applicable[168] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Teleflex common stock trades on the NYSE under 'TFX', with 367 holders of record as of February 21, 2023, and the report includes a five-year stock performance graph - The company's common stock is listed on the New York Stock Exchange under the symbol "TFX"[171] Five-Year Cumulative Total Stockholder Returns | Company / Index | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Teleflex Incorporated | 100.00 | 104.45 | 152.76 | 167.66 | 134.31 | 102.59 | | S&P 500 Index | 100.00 | 95.62 | 125.72 | 148.85 | 191.58 | 156.88 | | S&P 500 Healthcare Equipment & Supply Index | 100.00 | 114.24 | 148.06 | 175.90 | 210.90 | 166.35 | Reserved This item is not applicable - Not applicable[174] Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal year 2022, Teleflex's net revenues decreased by 0.7% to $2.791 billion due to unfavorable foreign currency and lower sales volumes, while gross margin declined and operating cash flow significantly decreased, though liquidity remains solid Results of Operations For 2022, net revenues decreased by 0.7% to $2,791.0 million due to sales volume and currency impacts, gross profit fell to $1,531.1 million with a 54.9% margin, and R&D expenses rose for EU MDR compliance, increasing the effective tax rate to 18.6% Financial Performance Comparison (2022 vs. 2021) | Metric | 2022 | 2021 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Revenues | $2,791.0M | $2,809.6M | ($18.6M) | (0.7%) | | Gross Profit | $1,531.1M | $1,549.6M | ($18.5M) | (1.2%) | | Gross Margin | 54.9% | 55.2% | (30 bps) | (0.5%) | | R&D Expenses | $153.8M | $130.8M | $23.0M | 17.6% | | Interest Expense | $54.3M | $57.0M | ($2.7M) | (4.7%) | | Effective Tax Rate | 18.6% | 13.3% | 5.3 p.p. | N/A | Restructuring and Impairment Charges Teleflex initiated a new strategic restructuring plan in November 2022, expecting $39 million to $48 million in charges, while continuing other divestiture and realignment plans, with total charges for 2022 at $20.3 million - A new strategic restructuring plan was initiated on November 15, 2022, designed to improve operating performance, with estimated aggregate pre-tax charges of $39 million to $48 million and expected annual pre-tax savings of $21 million to $23 million once fully implemented[191][192][193] Restructuring and Impairment Charges (in millions) | Plan | 2022 | 2021 | | :--- | :--- | :--- | | 2022 Restructuring plan | $15.5 | $— | | Respiratory divestiture plan | $0.6 | $2.7 | | 2019 Footprint realignment plan | ($1.0) | $0.3 | | 2018 Footprint realignment plan | $2.1 | $2.5 | | Other restructuring programs | $1.6 | $2.1 | | Impairment charges | $1.5 | $6.7 | | Total | $20.3 | $21.7 | Segment Results In 2022, Americas segment revenue was flat but operating profit grew 6.6%, EMEA revenue fell 8.0% with operating profit down 55.2% due to currency and EU MDR costs, Asia revenue grew 2.9% with slight profit decline, and OEM showed strong performance with 11.0% revenue growth and 16.3% operating profit increase Segment Net Revenues (in millions) | Segment | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Americas | $1,653.7 | $1,659.3 | (0.3%) | | EMEA | $558.4 | $606.8 | (8.0%) | | Asia | $306.3 | $297.8 | 2.9% | | OEM | $272.6 | $245.7 | 11.0% | | Total | $2,791.0 | $2,809.6 | (0.7%) | Segment Operating Profit (in millions) | Segment | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Americas | $452.0 | $424.2 | 6.6% | | EMEA | $42.5 | $94.9 | (55.2%) | | Asia | $82.8 | $84.6 | (2.2%) | | OEM | $65.4 | $56.2 | 16.3% | | Total | $642.7 | $659.9 | (2.6%) | Liquidity and Capital Resources The company's liquidity primarily stems from operating activities, which provided $342.8 million in cash in 2022, a significant decrease from 2021 due to lower operating results and unfavorable working capital changes, though management believes current liquidity is sufficient Summary of Cash Flows (in millions) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Operating activities | $342.8 | $652.1 | | Investing activities | ($259.4) | $156.7 | | Financing activities | ($217.5) | ($715.8) | | (Decrease) increase in cash | ($153.1) | $69.2 | - The $309.3 million decrease in cash from operating activities was primarily due to less favorable operating results and unfavorable changes in working capital, including higher tax payments and an increase in inventories[228] Free Cash Flow Reconciliation (in millions) | | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $342.8 | $652.1 | | Less: Capital expenditures | $79.2 | $71.6 | | Free cash flow | $263.6 | $580.5 | Financing Arrangements As of December 31, 2022, Teleflex's total debt was $1.72 billion, including a new five-year $1.0 billion revolving credit facility and a $500.0 million term loan, with the company in compliance with all debt covenants - On November 4, 2022, the company entered into a new Credit Agreement providing for a five-year, $1.0 billion revolving credit facility and a $500.0 million term loan, both maturing in November 2027[234] - As of December 31, 2022, outstanding long-term debt included $500 million of 4.625% Senior Notes due 2027 and $500 million of 4.25% Senior Notes due 2028[239] - The company utilizes an accounts receivable securitization facility with a capacity of up to $75 million, which was fully drawn at year-end 2022[240] Critical Accounting Policies and Estimates Management identifies critical accounting policies requiring significant judgment and estimates, including inventory valuation, impairment assessment of long-lived assets and goodwill, valuation of contingent consideration liabilities, and determination of income tax provisions - Goodwill and other indefinite-lived intangible assets are tested for impairment annually in the fourth quarter, or more frequently if impairment indicators arise, by comparing the fair value of a reporting unit to its carrying value[249][252] - Contingent consideration liabilities from acquisitions are remeasured to fair value each reporting period, with changes recognized in operating earnings, totaling $44.0 million as of December 31, 2022[259][260] - The company establishes reserves for uncertain tax positions, with a valuation allowance for deferred tax assets of $91.5 million at December 31, 2022, primarily related to the uncertainty of utilizing tax loss and credit carryforwards[264][265] Quantitative and Qualitative Disclosures About Market Risk Teleflex is exposed to market risks from interest rates, foreign currency exchange rates, and commodity prices, which are managed using derivative instruments, with a 1.0% change in variable interest rates affecting annual interest expense by $7.2 million - A 1.0% change in variable interest rates would increase or decrease annual interest expense by $7.2 million based on outstanding debt as of December 31, 2022[270] - The company uses foreign currency forward contracts and cross-currency interest rate swaps to manage foreign currency risk, where a hypothetical 10% change in the U.S. dollar's value would change the fair value of these contracts by approximately $68.2 million[272] Debt Obligations by Interest Rate Type (as of Dec 31, 2022) | Debt Type | Total Amount | Average Interest Rate | | :--- | :--- | :--- | | Fixed rate debt | $1,000.0 M | 4.438% | | Variable rate debt | $723.3 M | 5.726% | Financial Statements and Supplementary Data This section indicates that the company's audited consolidated financial statements and supplementary data are included in the report, beginning on page F-1 - The financial statements and supplementary data required by this Item are included commencing on page F-1[274] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on any matter of accounting principles or practices, or financial statement disclosure - None[275] Controls and Procedures Management, including the CEO and CFO, concluded the company's disclosure controls and procedures were effective as of December 31, 2022, excluding the recently acquired Standard Bariatrics from internal control assessment, with no material changes to internal controls during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[276] - The assessment of internal control over financial reporting excluded Standard Bariatrics, which was acquired on September 27, 2022, as its financial impact was less than 1% of consolidated net revenues and total assets[277] - No change in internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, internal controls[278] Other Information On February 21, 2023, the Board of Directors amended the company's Bylaws to grant stockholders owning at least 20% of common stock for one year the right to call a special meeting - On February 21, 2023, the Board of Directors amended the company's Bylaws to allow one or more stockholders owning at least 20% of outstanding common stock for at least one year to call a special meeting[279][280] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - None[283] PART III Directors, Executive Officers and Corporate Governance Information regarding executive officers is in Part I, while other director and corporate governance details are incorporated by reference from the 2023 proxy statement - Information required by this item is incorporated by reference from the Proxy Statement for the 2023 Annual Meeting[286] Executive Compensation Information regarding executive compensation, including the Compensation Discussion and Analysis, is incorporated by reference from the 2023 proxy statement - Information required by this item is incorporated by reference from the Proxy Statement for the 2023 Annual Meeting[287] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership is incorporated by reference from the 2023 proxy statement, with 2,843,121 securities remaining available for future issuance under equity compensation plans as of December 31, 2022 - Information regarding security ownership is incorporated by reference from the Proxy Statement for the 2023 Annual Meeting[288] Equity Compensation Plan Information as of December 31, 2022 | Plan Category | Number of Securities to be Issued Upon Exercise (A) | Weighted-Average Exercise Price (B) | Number of Securities Remaining Available for Future Issuance (C) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 1,228,848 | $230.58 | 2,843,121 | Certain Relationships and Related Transactions, and Director Independence Information concerning related party transactions and director independence is incorporated by reference from the 2023 proxy statement - Information required by this item is incorporated by reference from the Proxy Statement for the 2023 Annual Meeting[290] Principal Accounting Fees and Services Information regarding principal accounting fees and services, including audit and non-audit fees, is incorporated by reference from the 2023 proxy statement - Information required by this item is incorporated by reference from the Proxy Statement for the 2023 Annual Meeting[291] PART IV Exhibits, Financial Statement Schedules This section references the Index to Consolidated Financial Statements and Schedule on page F-1 and lists all exhibits filed with or incorporated by reference into the Form 10-K - This section lists all exhibits filed with or incorporated by reference into the Form 10-K report[294][295][296] Form 10-K Summary The company has elected not to include a voluntary summary of the Form 10-K information - The company has elected not to include a summary of the Form 10-K[298] Financial Statements Consolidated Statements of Income For 2022, Teleflex reported net revenues of $2.79 billion, a slight decrease from 2021, with income from continuing operations at $362.9 million and diluted EPS from continuing operations at $7.67 Consolidated Statements of Income (in thousands) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net revenues | $2,791,041 | $2,809,563 | $2,537,156 | | Gross profit | $1,531,087 | $1,549,602 | $1,324,874 | | Income from continuing operations | $362,916 | $485,119 | $335,801 | | Net income | $363,139 | $485,374 | $335,324 | | Diluted EPS from continuing operations | $7.67 | $10.23 | $7.10 | Consolidated Balance Sheets As of December 31, 2022, Teleflex had total assets of $6.93 billion, total liabilities of $2.91 billion, and total shareholders' equity of $4.02 billion, with significant goodwill and intangible assets Consolidated Balance Sheet Highlights (in thousands) | | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $6,928,063 | $6,871,722 | | Total current assets | $1,410,983 | $1,429,118 | | Goodwill | $2,536,730 | $2,504,202 | | Intangibles assets, net | $2,306,165 | $2,289,067 | | Total Liabilities | $2,906,095 | $3,116,974 | | Total current liabilities | $581,492 | $680,119 | | Long-term borrowings | $1,624,023 | $1,740,102 | | Total Shareholders' Equity | $4,021,968 | $3,754,748 | Consolidated Statements of Cash Flows For 2022, net cash provided by operating activities was $342.8 million, a significant decrease from 2021, with net cash used in investing at $259.4 million and financing at $217.5 million, resulting in a net decrease in cash of $153.1 million Consolidated Statements of Cash Flows (in thousands) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $342,806 | $652,139 | $437,143 | | Net cash (used in) provided by investing activities | ($259,410) | $156,737 | ($837,783) | | Net cash (used in) provided by financing activities | ($217,506) | ($715,822) | $455,163 | | Net (decrease) increase in cash | ($153,050) | $69,204 | $74,797 | | Cash and cash equivalents at end of year | $292,034 | $445,084 | $375,880 | Notes to Consolidated Financial Statements The notes detail significant accounting policies, acquisitions like Standard Bariatrics for $211.8 million, the 2022 restructuring plan with $39-48 million in expected charges, revenue breakdown by product category (Vascular Access largest at $683.6 million), total borrowings of $1.72 billion, and compliance with debt covenants Net Revenues by Global Product Category (in thousands) | Product Category | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Vascular access | $683,612 | $700,240 | $657,703 | | Interventional | $445,018 | $427,500 | $382,435 | | Surgical | $392,917 | $377,756 | $317,200 | | Anesthesia | $388,890 | $380,140 | $302,293 | | Interventional urology | $322,832 | $341,661 | $290,022 | | OEM | $272,624 | $245,681 | $220,246 | | Other | $285,148 | $336,585 | $367,257 | - On September 27, 2022, the company acquired Standard Bariatrics, Inc. for a total consideration of $211.8 million, including $173.0 million in cash and $38.8 million in estimated contingent consideration[378] - A new strategic restructuring plan was initiated in November 2022, with total estimated charges of $39 million to $48 million, primarily for termination benefits and costs to transfer manufacturing operations[388][389] Borrowings as of Dec 31, 2022 (in thousands) | Facility | Amount | | :--- | :--- | | Revolving credit facility | $148,250 | | Term loan facility | $500,000 | | 4.625% Senior Notes due 2027 | $500,000 | | 4.25% Senior Notes due 2028 | $500,000 | | Securitization program | $75,000 | | Total Borrowings | $1,723,250 |