10-K 1 tfx-10k_20131231.htm 10-K

 

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

(Mark One)

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013 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.)

 

 

 

155 South Limerick Road, Limerick,
Pennsylvania

 

19468

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (610) 948-5100

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange On Which Registered

Common Stock, par value $1 per share

 

New York Stock Exchange

 

 

 

Securities registered pursuant to Section 12(g) of the Act:

NONE

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x     No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes  ¨    No  x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer ¨

 

Non-accelerated filer ¨

 

Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  ¨    No  x

The aggregate market value of the Common Stock of the registrant held by non-affiliates of the registrant (30,123,650 shares) on June 30, 2013 (the last business day of the registrant’s most recently completed fiscal second quarter) was $2,334,281,638 (1) . The aggregate market value was computed by reference to the closing price of the Common Stock on such date.

The registrant had 41,216,674 Common Shares outstanding as of February 14, 2014.

DOCUMENT INCORPORATED BY REFERENCE:

Certain provisions of the registrant’s definitive proxy statement in connection with its 2013 Annual Meeting of Shareholders, to be filed within 120 days of the close of the registrant’s fiscal year, are incorporated by reference in Part III hereof.

(1) For the purposes of this definition only, the registrant has defined “affiliate” as including executive officers and directors of the registrant and owners of more than five percent of the common stock of the registrant, without conceding that all such persons are “affiliates” for purposes of the federal securities laws.

 

 

 

 

 


 

TELEFLEX INCORPORATED

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013

TABLE OF CONTENTS

 

 

  

Page

PART I

  

 

Item 1:

 

BUSINESS

  

4

Item 1A:

 

RISK FACTORS

  

15

Item 1B:

 

UNRESOLVED STAFF COMMENTS

  

28

Item 2:

 

PROPERTIES

  

29

Item 3:

 

LEGAL PROCEEDINGS

  

30

Item 4:

 

MINE SAFETY DISCLOSURES

  

30

PART II

  

 

Item 5:

 

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

  

31

Item 6:

 

SELECTED FINANCIAL DATA

  

33

Item 7:

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  

34

Item 7A:

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  

57

Item 8:

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  

57

Item 9:

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

  

58

Item 9A:

 

CONTROLS AND PROCEDURES

  

58

Item 9B:

 

OTHER INFORMATION

  

58

PART III

  

 

Item 10:

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

  

59

Item 11:

 

EXECUTIVE COMPENSATION

  

59

Item 12:

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

  

59

Item 13:

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

  

59

Item 14:

 

PRINCIPAL ACCOUNTING FEES AND SERVICES

  

59

PART IV

  

 

Item 15:

 

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

  

60

SIGNATURES

  

61

 

Subsidiaries of the Company

 

 

 

Consent of Independent Registered Public Accounting Firm

 

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER, PURSUANT TO RULE 13a-14(a) UNDER THE EXCHANGE ACT

 

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER, PURSUANT TO RULE 13a-14(a) UNDER THE EXCHANGE ACT

 

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER, PURSUANT TO RULE 13a-14(b) UNDER THE EXCHANGE ACT

 

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER, PURSUANT TO RULE 13a-14(b) UNDER THE EXCHANGE ACT

 

 

 

 

 

2


 

Information Concerning Forward-Looking Statements

All statements made in this Annual Report on Form 10-K, 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, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements due to a number of factors, including:

·

changes in business relationships with and purchases by or from major customers or suppliers, including delays or cancellations in shipments;

·

demand for and market acceptance of new and existing products;

·

our ability to integrate acquired businesses into our operations, realize planned synergies and operate such businesses profitably in accordance with expectations;

·

our ability to effectively execute our restructuring programs;

·

the impact of recently passed healthcare reform legislation and 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 and sovereign debt issues;

·

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 this Annual Report on Form 10-K. 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.

 

 

 

3


 

PART I

ITEM 1.

BUSINESS

Teleflex Incorporated is referred to herein as “we,” “us,” “our,” “Teleflex” and the “Company.”

THE COMPANY

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 to hospitals and healthcare providers in more than 150 countries 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 manufacture our products at 27 manufacturing sites, with major manufacturing operations located in the Czech Republic, Germany, Malaysia, Mexico and the United States.

We are focused on achieving consistent, sustainable and profitable growth by increasing our market share and improving our operating efficiencies through:

·

the development of new products and product line extensions;

·

the investment in new technologies and broadening their applications;

·

the expansion of the use of our products in existing markets, as well as the introduction of our products into new geographic markets;

·

achieving economies of scale as we continue to expand, by leveraging our direct sales force and distribution network with new products, and increasing efficiencies in our manufacturing and distribution facilities; and

·

the broadening of our product portfolio through select acquisitions, licensing arrangements and partnerships that enhance, extend or expedite our development initiatives or our ability to increase our market share.

Our research and development capabilities, commitment to engineering excellence and focus on low-cost manufacturing enable us to consistently bring cost effective, innovative products to market that improve the safety, efficacy and quality of healthcare. Our research and development initiatives focus on developing new, innovative products for existing and new therapeutic applications as well as enhancements to, and line extensions of, existing products. We introduced 27 new products and line extensions during 2013. Our portfolio of existing products and pipeline of potential new products consist primarily of Class I and Class II devices, which require 510(k) clearance by the United States Food and Drug Administration, or FDA, for sale in the United States. We believe that 510(k) clearance reduces our research and development costs and risks, and typically results in a shorter timetable for new product introductions as compared to the premarket approval, or PMA, process that would be required for Class III devices.

We also continue to broaden our product portfolio with select acquisitions.  During 2013, we acquired:

·

Vidacare Corporation, a provider of intraosseous, or inside the bone, access devices, which complements our vascular access and specialty product portfolios in our critical care product group;

·

the assets of Ultimate Medical Pty. Ltd. and its affiliates, a supplier of airway management devices with a variety of laryngeal mask airways and other related products, which complement the anesthesia product portfolio in our critical care product group; and

·

Eon Surgical, Ltd., a developer of a minimally invasive microlaparoscopy surgical platform technology designed to enhance surgeons’ ability to perform scarless surgery while producing better patient outcomes, which complements the product portfolio in our surgical care product group.

Similarly, in 2012, we broadened our product portfolio through the acquisition of substantially all of the assets of LMA International N.V. (LMA), a global provider of laryngeal masks whose products are used in anesthesia and emergency care.  This acquisition enhanced our anesthesia product portfolio.  In addition, consistent with our strategy to invest in new technologies and research and development to support our future growth, we completed four late-stage technology acquisitions during 2012.

4


 

See Note 3 to the consolidated financial statements included in this Annual Report on Form 10-K  for a discussion of the acquisitions.

OUR PRODUCTS

We categorize our broad-based platform of products into four groups: Critical Care, Surgical Care, Cardiac Care and OEM and Development Services (“OEM”). The following charts set forth our net revenues by product group as a percentage of our total consolidated net revenues for the years ended December 31, 2013, 2012 and 2011.

 

logo

 

The following table sets forth our net revenues for 2013, 2012 and 2011 by product group.

 

 

2013

 

 

2012

 

 

2011

 

 

(Dollars in millions)

Critical Care

$

1,182.7

 

$

1,040.3

 

$

1,005.4

 

Surgical Care

 

306.5

 

 

291.1

 

 

276.9

 

Cardiac Care

 

75.9

 

 

79.4

 

 

80.6

 

OEM and Development Services

 

131.2

 

 

140.2

 

 

129.6

 

Total net revenues

$

1,696.3

 

$

1,551.0

 

$

1,492.5

 

 

We generally serve three end-markets: hospitals and healthcare providers, medical device manufacturers and home care. These markets are influenced by a number of factors, including demographics, utilization and reimbursement patterns. The following charts set forth the percentage of net revenues for the years ended December 31, 2013, 2012 and 2011 derived from each of our end markets.

 

logo

 

The following charts set forth the percentage of our net revenues for the years ended December 31, 2013, 2012 and 2011 by major geographic region, based on the Teleflex facility generating the sale.

 

5


 

logo

Critical Care

We are a leading provider of specialty products for critical care, which is predominantly comprised of single-use products. Our critical care products are used in a wide range of procedures for vascular access, anesthesia and airway management, respiratory therapy, treatment of urologic conditions and other specialty procedures. The large majority of our critical care products are sold to the hospitals and healthcare providers, with a smaller percentage sold to alternate sites, such as home care, emergency medical services (EMS), long term care centers, primary care centers, hospice and animal health facilities. Our critical care product group is our largest product group, representing 70 percent of net revenues in 2013.

Vascular Access

Our vascular access products, which accounted for 33 percent of our Critical Care net revenues in 2013, facilitate a variety of critical care therapies, including the administration of intravenous medications and other therapies and the measurement of blood pressure and taking of blood samples through a single puncture site.

Our vascular access catheters and related devices consist principally of the following:

·

ARROW® central venous catheters, or CVCs, are inserted in the neck or shoulder area, come in multiple lengths and up to four channels, or lumens. The ARROW CVC has a pressure injectable option which gives clinicians who perform contrast-enhanced CT scans the ability to use an indwelling pressure injectable ARROW CVC to inject contrast dye for their scan without having to insert a second catheter.

·

ARROW arterial catheterization sets facilitate arterial pressure monitoring and blood withdrawal for glucose, blood-gas and electrolyte measurement in a wide variety of critical care and intensive care settings.

·

ARROW peripherally inserted central catheters, or PICCs, are soft, flexible catheters that are inserted in the upper arm and advanced into the superior vena cava to administer various types of intravenous medications and therapies. ARROW PICCs have a pressure injectable option that can withstand the higher pressures required by the injection of contrast media for CT scans.

·

ARROW percutaneous sheath introducers are used to insert cardiovascular and other catheterization devices into the vascular system during critical care procedures.

·

ARROW jugular axillo-subclavian central catheters, or JACC, with Chlorag+ard® technology provide an alternative to traditional acute CVCs and peripheral central venous access. Introduced in 2013, this CVC for acute or long-term use combines antimicrobial and antithrombogenic protection with smaller french sizes to meet the unique challenges posed by patients today. This product is ideal for patients with renal issues, chronic patients with poor peripheral access or those with a history of or risk for venous thrombosis.

·

The ARROW VPS, is an advanced vascular positioning system that facilitates precise placement of a PICC or CVC within the heart. The ARROW VPS analyzes multiple metrics, in real time, from its biosensor to help clinicians navigate through the vasculature and precisely identify the correct catheter tip placement in the heart. Approved by the FDA as an alternative to chest x-ray confirmation, the ARROW VPS helps to shorten hospital stays while lowering costs associated with catheter insertion procedures. In 2013, we launched the next generation of our ARROW VPS, the ARROW VPS G4TM, which provides further enhancements to our VPS technology, such as statement of final catheter position, improved sterile field capability and integration with hospital data management systems.

6


 

·

The Vidacare EZ-IO® system, added to our vascular product portfolio through our acquisition of Vidacare Corporation in December 2013, provides immediate vascular access for the delivery of medications and fluids via the intraosseous route, or in the bone, when traditional vascular access is difficult or impossible. In emergency situations, EZ IO enables fast access to deliver lifesaving therapies to help stabilize a patient until a traditional catheter can be inserted.

The large majority of our CVCs are treated with the ARROWg+ard or ARROWg+ard Blue Plus antimicrobial surface treatments to reduce the risk of catheter related bloodstream infection. ARROWg+ard Blue Plus provides antimicrobial treatment of the interior lumens and hubs of each catheter. The Chlorag+ard technology, an option on our PICC catheters, provides both antimicrobial and anti thrombogenic protection for up to 30 days. These surface treatments help reduce healthcare acquired conditions, such as Catheter Related Blood Stream Infection (CRBSI), potentially saving the hospitals significant cost under the new pay for performance standards.

We also offer many of our vascular access catheters in a Maximal Barrier Precautions Tray. The tray is available for CVCs, PICCs and multi access catheters (MAC) and includes a full body drape, coated or non-coated catheter and other accessories. These kits are designed to assist healthcare providers in complying with guidelines for reducing catheter-related bloodstream infections that have been established by a variety of health regulatory agencies, such as the Centers for Disease Control and Prevention and the Joint Commission on the Accreditation of Healthcare Organizations. Our newer ErgoPACK system provides components which are packaged in the tray in the order in which they will be needed during the procedure and incorporates features intended to enhance ease of use and patient and provider safety.

We believe that our vascular product portfolio offers the opportunity to reduce injuries to the healthcare provider, expedite placement of a central venous catheter, reduce patient exposure to x-rays, expedite infusion of medication and reduce the risk of catheter related infection and thrombosis for the patient. Moreover, we believe our products can help hospitals achieve reduced costs, improved quality and patient outcomes and increased patient satisfaction.

Anesthesia

Our anesthesia products, described below, include airway and pain management products and accounted for 31 percent of our Critical Care product net revenues in 2013.

Airway Management

Our airway management products, marketed under the LMA® and Rusch® brands, are designed to help eliminate airway related complications and improve procedural efficiencies for patients in surgical, critical care and emergency settings.

The LMA laryngeal mask products are used in anesthesia and emergency care. The Rusch brand of products includes reusable and disposable laryngoscope blades and handles, endotracheal tubes, endobronchial tubes, oral and nasal airways, endobronchial blockers, and other accessories.

As a result of our acquisition of the Ultimate Medical business in 2013, we now offer Ultimate Medical's broad range of laryngeal mask airways, including the Cuff Pilot™, an integrated cuff pressure indicator for single-use airway management devices. The Cuff Pilot is a single-use device that provides constant inside-the-cuff pressure indication, enabling at-a-glance clinical assessments. The Cuff Pilot technology is currently used with our Ultimate Medical portfolio of laryngeal masks and has potential application for use with LMATM laryngeal masks and Rusch endotracheal and tracheostomy tubes.

In 2013, we introduced the Rusch TruLite™ Laryngoscope System, a disposable laryngoscope blade and handle system for single-patient use. Rusch single use laryngoscope eliminates the potential risk of patient cross-contamination and the cost of maintaining reusable laryngoscopes.

In 2012, we acquired the EZ-Blocker Endobronchial Blocker, which is designed to provide an improved alternative to double lumen endobronchial tubes and single balloon bronchial blockers to achieve lung isolation. The EZ-Blocker Endobronchial Blocker's Y-shaped distal end enables effective placement of the balloons in the right or left bronchus when performing thoracic surgical procedures, while also enabling secure placement at the carina. This placement minimizes the need to manipulate the catheter after placement, reducing the potential of cuffs becoming dislodged.

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Pain Management

Our portfolio of pain management products are marketed under the Arrow brand and are designed to provide pain relief during a broad range of surgical and obstetric procedures, thereby helping clinicians better manage each patient’s individual pain while reducing complications and associated costs. Our pain management products include epidural catheters and trays, spinal needles and trays and peripheral nerve block needles, catheters, trays and ambulatory pain pumps.

In 2013, we expanded our pain management portfolio by adding the Arrow AutoFuser® disposable pain pump. The AutoFuser pump is designed to provide an accurate and flexible method to deliver analgesic medication for continuous peripheral nerve block or site-specific applications, helping physicians to take control of patients' post-operative pain to promote faster recovery and reduce overall length of stay. AutoFuser pain pumps are available in three different sizes with a selection of fixed or variable basal infusion rates, allowing physicians to customize their patients' pain protocol. The parallel bolus feature enables patients to administer a controlled amount of additional anesthetic to the target site without interrupting the continuous infusion of medication, providing an effective method to manage pain, which is a common post-operative challenge.

This AutoFuser pain pump can be used in conjunction with the recently introduced Arrow FlexBlock™ continuous peripheral nerve block catheter. The FlexBlock catheter features an echogenic, coil-reinforced design that offers a combination of ultrasound visibility, flexibility and excellent kink resistance.

We offer a variety of single shot nerve block needles, including the ARROW UltraQuik™, StimuQuik® and StimuQuik ECHO, providing solutions to clinicians performing peripheral nerve blocks, whether they use ultrasound only, nerve stimulation only, or a combined approach. We commenced sales of Arrow UltraQuik peripheral nerve block needles in 2013. These echogenic needles are designed to help increase overall block success for clinicians who use ultrasound-guidance when performing single-injection peripheral nerve blocks. UltraQuik needles maintain many of the same features as the Arrow StimuQuik ECHO needles, including five grooved rings at the distal tip of the needle to help clinicians identify the needle tip under ultrasound.

Respiratory Care

Our respiratory care products accounted for 15 percent of our Critical Care product net revenues in 2013. Our Hudson RCI brand has been a leader in respiratory care for more than 65 years, providing innovative products designed to help clinicians improve patient outcomes while reducing costs. Our respiratory products are used in a variety of care settings and include oxygen therapy products, including oxygen masks, cannulas, humidifiers and tubing; aerosol therapy products, including small and large volume nebulizers, peak flow meters and aerosol chambers; spirometry products, including incentive breathing exercisers; and ventilation management products, including ventilator circuits, humidification devices and bacteria/virus filters.

In 2013, for the second consecutive year, we were among the six companies to receive the Zenith Award awarded by the American Association for Respiratory Care (AARC) in recognition of the quality products, programs and support provided to the respiratory community.

In 2013 we received FDA 510(k) clearance for our ISO-Gard® Mask with ClearAir Technology, a new product that helps to reduce clinician exposure to hazardous waste anesthetic gases (WAG), which are commonly used in surgical procedures globally. When patients are recovering in the post anesthesia care unit (PACU) of a hospital, they typically exhale these gases into the nurses’ breathing zone and work environment. The Occupational Safety and Health Administration (OSHA) has noted of several potential adverse health effects from WAG exposure, including nausea, dizziness, headaches and fatigue.

The ISO-Gard Mask is designed to reduce WAG within a nurse’s breathing zone to minimize the cumulative effect of low-level exposure to these hazardous gases in the PACU. The multi-purpose mask collects and removes, or scavenges, WAG while simultaneously delivering oxygen to the patient. The patent-pending ClearAir technology creates a unidirectional flow of oxygen through the nasal/oral area of the patient for inhalation, while negative pressure or suction is applied to the port in the lower portion of the mask to scavenge the patient’s exhalation.   By providing a means to reduce the amount of WAG within the breathing zone of the caregiver, hospitals can better comply with OSHA and the National Institute for Occupational Safety and Health’s recommendations for workplace safety.

8


 

Specialty

Our specialty products accounted for 21 percent of our Critical Care product net revenues in 2013. Specialty products include interventional access products as well as products provided to specialty market customers. Interventional access products focus on dialysis, oncology and critical care at hospitals.  Products sold to specialty market customers, including home care, pre-hospital and other alternative channels of care, focus on urology, respiratory and anesthesia products.  

Our specialty product line of urology products provides bladder management for patients in the hospital and individuals in the home care markets. The product portfolio consists principally of a wide range of catheters (including Foley, intermittent, external and suprapubic), urine collectors, catheterization accessories and products for operative endourology marketed under the Rusch brand name.

The Gibeck® TRACH-VENT® HME family of products are designed to provide humidification for spontaneously breathing tracheostomized patients. In November 2012, we introduced the Gibeck TRACH VENT T with 5mm Collar. This HME (Heat and Moisture Exchanger) provides optimal moisture via Gibeck Microwell paper while accommodating all patient sizes.

Over the past few years, we have continued to expand our specialty product offerings to include a wider range of intermittent catheters, catheter insertion kits and accessories used mainly for people with spinal cord injury, spina bifida, and multiple sclerosis. Many of these products are designed to support user safety and infection prevention efforts. For example, an intermittent catheter with hydrophilic coating, an ergothan tip, protective sleeve and sterile saline solution is marketed in our EMEA region. In the United States, we recently expanded our hydrophilic coated intermittent catheter line to include female lengths, coudés for difficult catheterizations, as well as complete sterile insertion kits for both standard (male) and female lengths. The uncoated intermittent catheter line in the United States was also expanded recently to include a full range of female length catheters and a complete offering of sterile insertion kits for the standard (male), coudé, and female styles.

Sales of our specialty intermittent catheters in the United States have benefited from a change in reimbursement policy. Home care markets are subject to local and regional reimbursement regulations that can impact volumes and pricing. In the United States, reimbursement regulations were implemented in 2008 that permit reimbursement for up to 200 catheters per month, replacing the previous limit of four catheters per month. The change promoted a shift from re-useable catheters, with their inherent risk of infections, to single-use intermittent catheters.

Our interventional access products are used in a wide range of applications, including dialysis, oncology and critical care. Dialysis products include the ARROW branded long term hemodialysis catheters, antimicrobial acute hemodialysis catheters and the ARROW-Trerotola™ Percutaneous Thrombectomy Device. Our long term hemodialysis catheter portfolio offers both antegrade and retrograde insertion options for both split and step tip configurations. The most recent addition of the NextStep® Retrograde Femoral Length catheter completed the product portfolio in June 2013 after FDA 510(k) clearance. The ARROW acute hemodialysis catheters are available with ARROWg+ard antimicrobial technology which reduces the risk catheter related bacteremia.  

In addition, our recent acquisition of Vidacare expanded our specialty products portfolio by adding the Vidacare EZ-IO Intraosseous Vascular Access, OnControl® Bone Marrow and OnControl Bone Access systems to the products we offer to our interventional access and specialty markets customers.  As previously described, the Vidacare EZ-IO Intraosseous Vascular Access system provides immediate vascular access via the intraosseous route, enabling emergency care providers to quickly administer critical medications and fluids, particularly when traditional vascular access is difficult or impossible.  Vidacare’s OnControl Bone Marrow System enables rapid and safe access for hematology and oncology diagnostic practices. The Vidacare OnControl Bone Access System provides rapid and safe access for surgical bone applications, such as vertebroplasty and the biopsy of the vertebral body and bone lesions.

The ARROW Polysite® Low Profile Hybrid Port received FDA 510(k) clearance in December 2013. Available with or without pressure injection capability, the hybrid design combines a lightweight plastic body for patient comfort and a strong titanium reservoir for durability.

Interventional access products also include several ARROW branded products for Critical Care applications, including diagnostic and drainage kits, embolectomy balloons, and reinforced percutaneous sheath introducers.

9


 

Surgical Care

Our surgical care products sales represented 18 percent of our net revenues in 2013. Our surgical products, which are predominantly comprised of single-use products, include: ligation and closure products, including appliers, clips and sutures used in a variety of surgical procedures; access ports used in minimally invasive surgical procedures, including robotic surgery; and fluid management products used for chest drainage. Our surgical products also include reusable hand-held instruments for general and specialty surgical procedures. We market our surgical products under the Deknatel, Pilling, Pleur-evac, Taut and Weck brand names.

In 2013 we added a microlaparoscopic product line to the surgical portfolio, designed to enhance surgeons’ ability to perform scarless surgery while producing better patient outcomes. Microlaparoscopy, unlike NOTES (Natural Orifice Translumenal Endoscopic Surgery), or single incision surgery, provides surgeons a mechanism for performing minimally invasive procedures without significant changes in technique. The technology may be utilized for an entire procedure or as an adjunct to existing approaches that require additional access without adding to larger incisions and the associated risks. This product line is expected to generate revenues in late 2014.

In 2012 we launched the Weck EFxTM Endo Fascial Closure System, a port site closure device used in laparoscopic surgical procedures. The Weck EFx System encompasses a design for port site closure that enables reproducible fascial closure in varying body types with a controlled suture delivery. This approach to port site closure is designed to minimize complications and costs associated with port-site herniation.

Hem-o-lok, a significant part of the Weck portfolio, is a unique locking polymer ligation clip that combines the security of a suture with the speed of a metal clip for open and laparoscopic surgery. Hem-o-lok clips have special applications in robotic, laparoscopic and cardiovascular surgery.

Cardiac Care

Cardiac Care products accounted for approximately 4 percent of net revenues in 2013. Products in this category include diagnostic catheters and capital equipment. Our diagnostic catheters include thermodilution and wedge pressure catheters; specialized angiographic catheters, such as Berman and Reverse Berman catheters; therapeutic delivery catheters, such as temporary pacing catheters; sheaths for femoral and trans-radial aortic access used in diagnostic and therapeutic procedures; and intra-aortic balloon, or IAB, catheters. Capital equipment includes our intra-aortic balloon pump, or IABP, consoles. IABP products are used to augment oxygen delivery to the cardiac muscle and reduce the oxygen demand after cardiac surgery, serious heart attack or interventional procedures. We market our cardiac care products under the Arrow brand name.

The IAB and IABP product lines feature the AutoCAT 2 WAVE console and the FiberOptix catheter, which together utilize fiber optic technology for arterial pressure signal acquisition and enable the patented WAVE timing algorithm to support the broadest range of patient heart rhythms, including severely arrhythmic patients.

OEM and Development Services

Product development and production services marketed to original equipment manufacturers, or OEMs, represented 8 percent of our net revenues in 2013. Our OEM division, which includes the TFX OEM® and Deknatel® OEM nameplates, provides custom-engineered extrusions, diagnostic and interventional catheters, sheath/dilator sets (introducers) and kits, sutures, performance fibers, and bioresorbable resins and fibers. We offer an extensive portfolio of integrated capabilities, including engineering, material selection, regulatory affairs, prototyping, testing and validation, manufacturing, assembly, and packing.

HISTORY AND RECENT DEVELOPMENTS

Teleflex was founded in 1943 as a manufacturer of precision mechanical push/pull controls for military aircraft. From this original single market, single product orientation, we have grown and evolved through entries into new businesses, development of new products, introduction of products into new geographic or end-markets and through acquisitions of companies. Throughout our history, we have continually focused on providing innovative, technology-driven, specialty-engineered products that help our customers meet their business requirements.

Over the past several years, we have significantly changed the composition of our portfolio of businesses, expanding our presence in the medical device industry, while divesting all of our businesses serving the aerospace, automotive, industrial and marine markets. The most significant of these transactions occurred in 2007 with our acquisition of Arrow

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International, a leading global supplier of catheter-based medical technology products used for vascular access and cardiac care, and the divestiture of our automotive and industrial businesses. Our acquisition of Arrow significantly expanded our single-use product offerings for critical care, enhanced our global footprint and added to our research and development capabilities. With the divestitures of our marine business and cargo container and systems businesses in 2011, we became exclusively a medical device company.

We expect to continue to increase the size of our business through a combination of acquisitions and organic growth initiatives. From time to time, we explore and engage in discussions regarding acquisitions that would augment our existing medical device platform.

GOVERNMENT REGULATION

We are subject to comprehensive government regulation both within and outside the United States relating to the development, manufacture, sale and distribution of our products.

Regulation of Medical Devices in the United States

All of our medical devices manufactured or sold in the United States are subject to the Federal Food, Drug, and Cosmetic Act (“FDC Act”), as implemented and enforced by the FDA. The FDA and, in some cases, other government agencies administer requirements for the design, testing, safety, effectiveness, manufacturing, labeling, storage, record keeping, clearance, approval, advertising and promotion, distribution, post-market surveillance, import and export of our medical devices.

Unless an exemption applies, each medical device that we market must first receive either clearance (by submitting a premarket notification (“510(k)”)) or approval (by filing a premarket approval application (“PMA”)) from the FDA pursuant to the FDC Act. To obtain 510(k) clearance, a manufacturer must demonstrate that the proposed device is substantially equivalent to a legally marketed device, referred to as the predicate device. Substantial equivalence is established by the applicant showing that the proposed device has the same intended use as the predicate device, and it either has the same technological characteristics or has been shown to be equally safe and effective and does not raise different questions of safety and effectiveness as compared to the predicate device.  The FDA’s 510(k) clearance process usually takes from four to twelve months, but it can last longer. A device that is not eligible for the 510(k) process because there is no predicate device may be reviewed through the de novo process. A device not eligible for 510(k) clearance must follow the PMA approval pathway, which requires proof of the safety and effectiveness of the device to the FDA’s satisfaction.  The process of obtaining PMA approval is much more costly, lengthy and uncertain than the 510(k) process. It generally takes from one to three years or even longer. Our portfolio of existing products and pipeline of potential new products consist primarily of Class I and Class II devices that require 510(k) clearance.  In addition, modifications made to devices after they receive clearance or approval may require a new 510(k) clearance or approval of a PMA or PMA supplement. We cannot be sure that 510(k) clearance or PMA approval will be obtained for any device that we propose to market.

A clinical trial is almost always required to support a PMA application and is sometimes required for a 510(k).  The sponsor of a clinical study must comply with and conduct the study in accordance with the applicable federal regulations, including FDA’s investigational device exemption (“IDE”) requirements, and good clinical practice (“GCP”).  Clinical trials must also be approved by an institutional review board, or IRB, which is an appropriately constituted group that has been formally designated to review and monitor biomedical research involving human subjects and which has the authority to approve, require modifications in, or disapprove research to protect the rights, safety, and welfare of the human research subject.  The FDA may order the temporary, or permanent, discontinuation of a clinical trial at any time, or impose other sanctions, if it believes that the clinical trial either is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients.  An IRB may also require the clinical trial at the site to be halted for failure to comply with the IRB’s requirements, or may impose other conditions.

After a device is placed on the market, numerous regulatory requirements continue to apply. Those regulatory requirements include the following:

·

device listing and establishment registration;

·

adherence to the Quality System Regulation (“QSR”) which requires stringent design, testing, control, documentation, complaint handling and other quality assurance procedures;

·

labeling requirements;

·

FDA prohibitions against the promotion of off-label uses or indications;

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·

adverse event reporting;

·

post-approval restrictions or conditions, including post-approval clinical trials or other required testing;

·

post-market surveillance requirements;

·

the FDA’s recall authority, whereby it can ask for the recall of products from the market; and

·

voluntary corrections or removals reporting and documentation.

In September 2013, the FDA issued final regulations and draft guidance documents regarding the Unique Device Identification (“UDI”) System, which will require manufacturers to mark certain medical devices with unique identifiers. While the FDA expects that the UDI System will help track products during recalls and improve patient safety, it will require us to make changes to our manufacturing and labeling, which could increase our costs.  The UDI System is being implemented in stages based on device risk, with the first requirements taking effect in September 2014 and the last taking effect in September 2020.

Our manufacturing facilities, as well as those of certain of our suppliers, are subject to periodic and for-cause inspections to verify compliance with the QSR as well as other regulatory requirements.

If the FDA were to find that we or certain of our suppliers have failed to comply with applicable regulations, it could institute a wide variety of enforcement actions, ranging from issuance of a warning or untitled letter to more severe sanctions, such as product recalls or seizures, civil penalties, consent decrees, injunctions, criminal prosecution, operating restrictions, partial suspension or total shutdown of production, refusal to permit importation or exportation, refusal to grant, or delays in granting, clearances or approvals or withdrawal or suspension of existing clearances or approvals. The FDA also has the authority to request repair, replacement or refund of the cost of any medical device manufactured or distributed by us.  Any of these actions could have an adverse effect on our business.

Regulation of Medical Devices Outside of the United States

Medical device laws also are in effect in many of the markets outside of the United States in which we do business. These laws range from comprehensive device approval requirements for some or all of our products to requests for product data or certifications. Inspection of and controls over manufacturing, as well as monitoring of device-related adverse events, are components of most of these regulatory systems.

Healthcare Laws

We are subject to various federal, state and local laws in the United States targeting fraud and abuse in the healthcare industry.  These laws prohibit us from, among other things, soliciting, offering, receiving or paying any remuneration to induce the referral or use of any item or service reimbursable under Medicare, Medicaid or other federally or state financed healthcare programs.  Violations of these laws are punishable by imprisonment, criminal fines, civil monetary penalties and exclusion from participation in federal healthcare programs.  In addition, we are subject to federal and state false claims laws in the United States that prohibit the submission of false payment claims under Medicare, Medicaid or other federally or state funded programs.  Certain marketing practices, such as off-label promotion, and violations of federal anti-kickback laws may also constitute violations of these laws.

We are also subject to various federal and state reporting and disclosure requirements related to the healthcare industry.  Recent rules issued by the Centers for Medicare & Medicaid Services (CMS) require us to collect and, beginning in March 2014, report information on payments or transfers of value to physicians and teaching hospitals, as well as investment interests held by physicians and their immediate family members. The reported data will be posted in searchable form on a public website beginning September 30, 2014.  Failure to submit required information may result in civil monetary penalties.  In addition, several states now require medical device companies to report expenses relating to the marketing and promotion of device products and to report gifts and payments to individual physicians in these states.  Other states prohibit various other marketing-related activities.  The federal government and still other states require the posting of information relating to clinical studies and their outcomes. The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with the different compliance and/or reporting requirements among a number of jurisdictions increases the possibility that a healthcare company may run afoul of one or more of the requirements, resulting in increased compliance costs that could adversely impact our results of operations.

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Other Regulatory Requirements

We are also subject to the United States Foreign Corrupt Practices Act and similar anti-bribery laws applicable in jurisdictions outside the United State that generally prohibit companies and their intermediaries from improperly offering or paying anything of value to non-United States government officials for the purpose of obtaining or retaining business. Because of the predominance of government-sponsored healthcare systems around the world, most of our customer relationships outside of the United States are with governmental entities and are therefore subject to such anti-bribery laws. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that have experienced governmental corruption to some degree, and in certain circumstances strict compliance with anti-bribery laws may conflict with local customs and practices. In the sale, delivery and servicing of our medical devices and software outside of the United States, we must also comply with various export control and trade embargo laws and regulations, including those administered by the Department of Treasury’s Office of Foreign Assets Control (“OFAC”) and the Department of Commerce’s Bureau of Industry and Security (“BIS”) which may require licenses or other authorizations for transactions relating to certain countries and/or with certain individuals identified by the United States government. Despite our global trade and compliance program, our internal control policies and procedures may not always protect us from reckless or criminal acts committed by our employees or agents. Violations of these requirements are punishable by criminal or civil sanctions, including substantial fines and imprisonment.

COMPETITION

The medical device industry is highly competitive. We compete with many companies, ranging from small start-up enterprises to companies that are larger and more established than us and have access to significantly greater financial resources. Furthermore, extensive product research and development and rapid technological advances characterize the market in which we compete. We must continue to develop and acquire new products and technologies for our businesses to remain competitive. We believe that we compete primarily on the basis of clinical superiority and innovative features that enhance patient benefit, product reliability, performance, customer and sales support, and cost-effectiveness. Our major competitors include C. R. Bard, Inc., Covidien and CareFusion.

SALES AND MARKETING

Our product sales are made directly to hospitals, healthcare providers, distributors and to original equipment manufacturers of medical devices through our own sales forces and through independent representatives and through independent distributor networks.

BACKLOG

Most of our products are sold to hospitals or healthcare providers on orders calling for delivery within a few days or weeks, with longer order times for products sold to medical device manufacturers. Therefore, our backlog of orders is not indicative of probable revenues in any future 12-month period.

PATENTS AND TRADEMARKS

We own a portfolio of patents, patents pending and trademarks. We also license various patents and trademarks. Patents for individual products extend for varying periods according to the date of patent filing or grant and the legal term of patents in the various countries where patent protection is obtained. Trademark rights may potentially extend for longer periods of time and are dependent upon national laws and use of the marks. All capitalized product names throughout this document are trademarks owned by, or licensed to, us or our subsidiaries. Although these have been of value and are expected to continue to be of value in the future, we do not consider any single patent or trademark, except for the Teleflex and Arrow brands, to be essential to the operation of our business.

SUPPLIERS AND MATERIALS

Materials used in the manufacture of our products are purchased from a large number of suppliers in diverse geographic locations. We are not dependent on any single supplier for a substantial amount of the materials used or components supplied for our overall operations. Most of the materials and components we use are available from multiple sources, and where practical, we attempt to identify alternative suppliers. Volatility in commodity markets, particularly steel and plastic resins, can have a significant impact on the cost of producing certain of our products. We may not be able to successfully pass these cost increases through to all of our customers, particularly original equipment manufacturers.

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RESEARCH AND DEVELOPMENT

We are engaged in both internal and external research and development. Our research and development costs principally relate to our efforts to bring innovative new products to the markets we serve, and our efforts to enhance the clinical value, ease of use, safety and reliability of our existing product lines. Our research and development efforts support our strategic objectives to provide safe and effective products that reduce infections, improve patient and clinician safety, enhance patient outcomes and enable less invasive procedures. Our research and development expenditures were $65.0 million, $56.3 million and $48.7 million for the years-ended December 31, 2013, 2012 and 2011, respectively.

We also acquire or license products and technologies that are consistent with our strategic objectives and enhance our ability to provide a full range of product and service options to our customers.

SEASONALITY

Portions of our revenues are subject to seasonal fluctuations. Incidence of flu and other disease patterns as well as the frequency of elective medical procedures affect revenues related to single-use products.  Historically, we have experienced higher sales in the fourth quarter as a result of these factors.

EMPLOYEES

We employed approximately 11,400 full-time and temporary employees at December 31, 2013. Of these employees, approximately 3,000 were employed in the United States and 8,400 in countries other than the United States. Approximately 5 percent of our employees in the United States and in other countries were covered by union contracts or collective-bargaining arrangements. We believe we have good relationships with our employees.

ENVIRONMENTAL

We are subject to various environmental laws and regulations both within and outside the United States. Our operations, like those of other medical device companies, involve the use of substances regulated under environmental laws, primarily in manufacturing and sterilization processes. While we continue to make capital and operational expenditures relating to compliance with existing environmental laws and regulations, we cannot ensure that our costs of complying with current or future environmental protection, health and safety laws and regulations will not exceed our estimates or have a material adverse effect on our business, financial condition, results of operations and cash flows. Further, we cannot ensure that we will not be subject to additional environmental claims for personal injury or cleanup in the future based on our past, present or future business activities.

INVESTOR INFORMATION

We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Therefore, we file reports, proxy statements and other information with the Securities and Exchange Commission (SEC). Copies of such reports, proxy statements, and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

You can access financial and other information about us in the Investors section of our website, which can be accessed at www.teleflex.com. We make available through our website, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed with or furnished to the SEC under Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after electronically filing or furnishing such material to the SEC. The information on our website is not part of this Annual Report on Form 10-K. The reference to our website address is intended to be an inactive textual reference only.

We are a Delaware corporation incorporated in 1943. Our executive offices are currently located at 155 South Limerick Road, Limerick, PA 19468. Our telephone number is (610) 948-5100. We expect to relocate our corporate offices in the first half of 2014 to 550 East Swedesford Road, Suite 400, Wayne, PA 19087.

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EXECUTIVE OFFICERS

The names and ages of our executive officers and the positions and offices held by each such officer are as follows:

 

Name

 

Age

 

Positions and Offices with Company

Benson F. Smith

 

66

 

Chairman, President, Chief Executive Officer and Director

Liam Kelly

 

47

 

Executive Vice President and President, International

Thomas E. Powell

 

52

 

Executive Vice President and Chief Financial Officer

 

Mr. Smith has been our Chairman, President and Chief Executive Officer since January 2011, and has served as a Director since April 2005. Prior to January 2011, Mr. Smith was the managing partner of Sales Research Group, a research and consulting organization. From 1999 to January 2011, he also served as the Chief Executive Officer of BFS & Associates LLC, which specialized in strategic planning and venture investing. From 2000 until 2005, Mr. Smith also served as a speaker and author at The Gallup Organization, a global research-based consultancy firm. Prior to that, Mr. Smith worked for C.R. Bard, Inc., a company specializing in medical devices, for approximately 25 years, where he held various executive and senior level positions, most recently as President and Chief Operating Officer from 1994 to 1998.

Mr. Kelly has been our Executive Vice President, President, International since June 2012. He previously held several positions with regard to our EMEA segment, including President from June 2011 to June 2012, Executive Vice President from November 2009 to June 2011, and Vice President of Marketing from April 2009 to November 2009. Prior to joining Teleflex, Mr. Kelly held various senior level positions with Hill-Rom Holdings, Inc., a medical device company, from October 2002 to August 2009, serving as its Vice President of International Marketing and R&D from August 2006 to February 2009.

Mr. Powell has been our Executive Vice President and Chief Financial Officer since February 2013. From March 2012 to February 2013, Mr. Powell was Senior Vice President and Chief Financial Officer. He joined Teleflex in August 2011 as Senior Vice President, Global Finance. Prior to joining Teleflex, Mr. Powell served as Chief Financial Officer and Treasurer of Tomotherapy Incorporated, a medical device company, from June 2009 until June 2011. In 2008, he served as Chief Financial Officer of Textura Corporation, a software provider. From April 2001 until January 2008, Mr. Powell was employed by Midway Games, Inc., a software provider, serving as its Executive Vice President, CFO and Treasurer from September 2001 until January 2008. Mr. Powell has also held leadership positions with Dade Behring, Inc. (now Siemens Healthcare Diagnostics), PepsiCo, Bain & Company, Tenneco Inc. and Arthur Andersen & Company.

Our officers are elected annually by our board of directors. Each officer serves at the discretion of the board.

ITEM 1A.

RISK FACTORS

We are subject to risks that could adversely affect our business, financial condition and results of operations. These risks include, but are not limited to the following:

We face strong competition. Our failure to successfully develop and market new products could adversely affect our business.

The medical device industry is highly competitive. We compete with many domestic and foreign medical device companies ranging from small start-up enterprises that might sell only a single or limited number of competitive products or compete only in a specific market segment, to companies that are larger and more established than us, have a broad range of competitive products, participate in numerous markets and have access to significantly greater financial and marketing resources than we do.

In addition, the medical device industry is characterized by extensive product research and development and rapid technological advances. The future success of our business will depend, in part, on our ability to design and manufacture new competitive products and enhance existing products. Our product development efforts may require us to make substantial investments. There can be no assurance that unforeseen problems will not occur with respect to the development, performance or market acceptance of new technologies or products, such as our inability to:

identify viable new products;

obtain adequate intellectual property protection;

gain market acceptance of new products; or

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successfully obtain regulatory approvals.

In addition, our competitors currently may be developing, or may develop in the future, products that provide better features, clinical outcomes or economic value than those that we currently offer or subsequently develop. Our failure to successfully develop and market new products or enhance existing products could have an adverse effect on our business, financial condition and results of operations.

Our customers depend on third party coverage and reimbursements and the failure of healthcare programs to provide coverage and reimbursement, or the reduction in levels of reimbursement, for our medical products could adversely affect us.

The ability of our customers to obtain coverage and reimbursement for our products is important to our business. Demand for many of our existing and new medical products is, and will continue to be, affected by the extent to which government healthcare programs and private health insurers reimburse our customers for patients’ medical expenses in the countries where we do business. Even when we develop or acquire a promising new product, demand for the product may be limited unless reimbursement approval is obtained from private and governmental third party payors. Internationally, healthcare reimbursement systems vary significantly, with medical centers in some countries having fixed budgets, regardless of the extent of patient treatment. Other countries require application for, and approval of, government or third party reimbursement. Without both favorable coverage determinations by, and the financial support of, government and third party insurers, the market for many of our medical products would be adversely affected. We cannot be sure that third party payors will maintain the current level of coverage and reimbursement to our customers for use of our existing products. Adverse coverage determinations or any reduction in the amount of reimbursement could harm our business by reducing potential customers’ selection of our products and the prices they are willing to pay.

In addition, as a result of their purchasing power, third party payors are implementing cost cutting measures such as seeking discounts, price reductions or other incentives from medical products suppliers and imposing limitations on coverage and reimbursement for medical technologies and procedures. These trends could compel us to reduce prices for our existing products and potential new products and could cause a decrease in the size of the market or a potential increase in competition that could negatively affect our business, financial condition and results of operations.

We may not be successful in achieving expected operating efficiencies and sustaining or improving operating expense reductions, and may experience business disruptions associated with restructuring, facility consolidations, realignment, cost reduction and other strategic initiatives.

Over the past several years we have implemented a number of restructuring, realignment and cost reduction initiatives, including the realignment of our North American organizational structure, facility consolidations and reductions in our workforce. While we have realized some efficiencies from these actions, we may not realize the benefits of these initiatives to the extent we anticipated. Further, such benefits may be realized later than expected, and the ongoing difficulties in implementing these measures may be greater than anticipated, which could cause us to incur additional costs or result in business disruptions. In addition, if these measures are not successful or sustainable, we may undertake additional realignment and cost reduction efforts, which could result in significant additional charges. Moreover, if our restructuring and realignment efforts prove ineffective, our ability to achieve our other strategic goals and business plans may be adversely affected.

In addition, as part of our efforts to increase operating efficiencies, we began, in 2012, and are continuing to transition our businesses to a single enterprise resource planning, or ERP, system. In the third quarter of 2013, we completed the initial phase of this transition without experiencing any significant disruptions to our business or operations.  However, in the event we encounter any problems with future phases of this transition, we could experience business disruptions, which could adversely affect customer relationships and divert the attention of management away from daily operations. In addition, any delays in the implementation of the ERP system could cause us to incur additional unexpected costs. Should we experience such difficulties, our business, cash flows and results of operations could be adversely affected.

We are subject to extensive government regulation, which may require us to incur significant expenses to ensure compliance. Our failure to comply with those regulations could have a material adverse effect on our business, results of operations and financial condition.

Our products are classified as medical devices and are subject to extensive regulation in the United States by the FDA and by comparable government agencies in other countries. The regulations govern the development, design, approval, manufacturing, labeling, importing and exporting and sale and marketing of many of our products. Moreover,

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these regulations are subject to future change. Failure to comply with applicable regulations could lead to adverse effects on our business, which could include:

partial suspension or total shutdown of manufacturing;

product shortages;

delays in product manufacturing;

product seizures;

recalls;

criminal prosecution;

injunctions;

fines or civil penalties;

operating restrictions;

denial of requests for regulatory clearance or approval of new products;

withdrawal or suspension of required clearances, approvals or licenses; and

prohibitions against exporting of products to, or importing products from, countries outside the United States.

 

We could be required to expend significant financial and human resources to remediate failures to comply with applicable regulations and quality assurance guidelines. In addition, civil and criminal penalties, including exclusion under Medicaid or Medicare, could result from regulatory violations. Any one or more of these events could have a material adverse effect on our business, financial condition and results of operations.

In the United States, before we can market a new medical device, or a new use of, or claim for, or significant modification to, an existing product, we generally must first receive either 510(k) clearance or approval of a premarket approval, or PMA, application from the FDA. In order for us to obtain 510(k) clearance, the FDA must determine that our proposed product is “substantially equivalent” to a device legally on the market, known as a “predicate” device. To establish substantial equivalence, the applicant must show that the proposed device has the same intended use as the predicate device, and it either has the same technological characteristics, or it has been shown to be equally safe and effective and does not raise different questions of safety and effectiveness as compared to the predicate device. Obtaining PMA approval is more difficult, requiring us to demonstrate the safety and effectiveness of the device based, in part, on data obtained in human clinical trials. Similarly, most major markets for medical devices outside the United States also require clearance, approval or compliance with certain standards before a product can be commercially marketed. The process of obtaining regulatory clearances and approvals to market a medical device, particularly from the FDA and certain foreign governmental authorities, can be costly and time consuming, and clearances and approvals might not be granted for new products on a timely basis, if at all. In addition, once a device has been cleared or approved, a new clearance or approval may be required before the device may be modified or its labeling changed. Furthermore, the FDA or a foreign governmental authority may make its review and clearance or approval process more rigorous, which could require us to generate additional clinical or other data, and expend more time and effort, in obtaining future product clearances or approvals. The regulatory clearance and approval process may result in, among other things, delayed realization of product revenues, substantial additional costs or limitations on indicated uses of products, any one of which could have a material adverse effect on our financial condition and results of operations.

Even after a product has received marketing approval or clearance, such product approval or clearance can be withdrawn or limited due to unforeseen problems with the device or issues relating to its application. Violations of FDA requirements for medical devices could result in FDA enforcement actions, including:

warning or untitled letters;

fines or civil penalties;

delays in obtaining new regulatory clearances;

product seizures or recalls;

injunctions;

criminal prosecution;

advisories or other field actions; and

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operating restrictions.

Medical devices are cleared or approved for one or more specific intended uses. Promoting a device for an off-label use could result in government enforcement action.

Furthermore, our facilities are subject to periodic inspection by the FDA and other federal, state and foreign government authorities, which require manufacturers of medical devices to adhere to certain regulations, including the FDA’s Quality System Regulation, which requires periodic audits, design controls, quality control testing and documentation procedures, as well as complaint evaluations and investigation. The FDA also requires the reporting of certain adverse events and may require the reporting of recalls or other field safety corrective actions. Issues identified through such inspections and reports may result in FDA enforcement action through any of the actions discussed above. Moreover, issues identified through such inspections and reports may require significant resources to resolve.

We may incur material losses and costs as a result of product liability and warranty claims that may be brought against us and recalls, which may adversely affect our results of operations and financial condition. Furthermore, as a medical device company, we face an inherent risk of damage to our reputation if one or more of our products are, or are alleged to be, defective.

Our businesses expose us to potential product liability risks that are inherent in the design, manufacture and marketing of our products. In particular, our medical device products are often used in surgical and intensive care settings with seriously ill patients. In addition, many of our products are designed to be implanted in the human body for varying periods of time. Product defects or inadequate disclosure of product-related risks with respect to products we manufacture or sell could result in patient injury or death. Product liability and warranty claims often involve very large or indeterminate amounts, including punitive damages. The magnitude of potential losses from product liability lawsuits may remain unknown for substantial periods of time, and the cost to defend against these lawsuits may be significant. We could experience material warranty or product liability losses in the future and incur significant costs to defend these claims.

In addition, if any of our products are, or are alleged to be, defective, we may voluntarily participate, or be required by regulatory authorities to participate, in a recall of that product. In the event of a recall, we may experience lost sales and be exposed to individual or class-action litigation claims. Moreover, negative publicity regarding a quality or safety issue, whether accurate or inaccurate, could reduce market acceptance of our products, harm our reputation, decrease demand for our products, result in the loss of customers, lead to product withdrawals or harm our ability to successfully launch and market our products in the future.Product liability, warranty and recall costs may have a material adverse effect on our business, financial condition and results of operations.

The ongoing volatility in the domestic and global financial markets combined with a continuation of constrained global credit markets could adversely impact our operating results, financial condition and liquidity.

We are subject to risks arising from adverse changes in general domestic and global economic conditions, including the economic slowdown and disruption of credit markets in recent years. The credit and capital markets experienced extreme volatility and disruption in recent years, leading to recessionary conditions and depressed levels of consumer and commercial spending. These recessionary conditions have caused customers to reduce, delay or cancel purchases of our products and services. While recent economic indicators suggest improvement in the United States and global economy, we cannot predict the duration or extent of any economic recovery or the extent to which our customers will return to more normalized spending behaviors. If the recessionary conditions worsen, our customers may terminate existing purchase orders or reduce the volume of products or services they purchase from us.

Adverse economic and financial market conditions may also cause our suppliers to be unable to meet their commitments to us or may cause them to make changes in the credit terms they extend to us, such as shortening the required payment period for our accounts payable or reducing the maximum amount of trade credit available to us. These types of actions could significantly affect our liquidity and could have a material adverse effect on our results of operations.

Additionally, our customers, particularly in the European region, have extended or delayed payments for products and services already provided, which may lead to collectability concerns regarding our accounts receivable from these customers. To date, we have not experienced an inordinate amount of payment defaults by our customers, and we have sufficient lending commitments in place to enable us to fund our foreseeable additional operating needs. However, in light of the ongoing volatility in the domestic and global financial markets, combined with a continuation of constrained global credit markets there is a risk that our customers and suppliers may be unable to access liquidity. As of December 31, 2013 and  2012, our aggregate net receivables in Italy, Spain, Portugal and Greece were $97.9 million and $101.0 million,

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respectively. In 2013, 2012 and 2011, net revenues from these countries were approximately 8%, 9% and 9% of total net revenues, respectively, and average days that accounts receivable were outstanding were 260, 288 and 318 days, respectively. Although we maintain allowances for doubtful accounts to cover the estimated losses which may occur when customers cannot make their required payments, we cannot be assured that we will continue to experience the same loss rate in the future given the volatility in the worldwide economy. If our allowance for doubtful accounts is insufficient to address receivables we ultimately determine are uncollectible, we would be required to incur additional charges, which could materially adversely affect our operating results. Moreover, our inability to collect outstanding receivables could adversely affect our financial condition and cash flow from operations.

In addition, adverse economic and financial market conditions may result in future charges to recognize impairment in the carrying value of our goodwill and other intangible assets, which would not directly affect our liquidity but could have a material adverse effect on our reported financial results.

Our strategic initiatives, including acquisitions, may not produce the intended growth in revenue and operating income.

Our strategic initiatives include making significant investments that are designed to achieve revenue growth and margin improvement targets. If we do not achieve the expected benefits from these investments or otherwise fail to execute on our strategic initiatives, we may not achieve the growth improvement we are targeting and our results of operations may be adversely affected.

In addition, as part of our strategy for growth, we have made, and may continue to make, acquisitions and divestitures and enter into strategic alliances such as joint ventures and joint development agreements. However, we may not be able to identify suitable acquisition candidates, complete acquisitions or integrate acquisitions successfully, and our strategic alliances may not prove to be successful. In this regard, acquisitions involve numerous risks, including difficulties in the integration of acquired operations, technologies, services and products and the diversion of management’s attention from other business concerns. Even if we are successful in making an acquisition, the products and technologies that we acquire may not be successful or may require significantly greater resources and investments than we originally anticipated. We could also experience negative effects on our results of operations and financial condition from acquisition-related charges, amortization of intangible assets and asset impairment charges, and other issues that could arise in connection with the acquisition of a company or business, including issues related to internal control over financial reporting, regulatory or compliance issues and potential adverse short-term effects on results of operations through increased costs or otherwise.  Although our management will endeavor to evaluate the risks inherent in any particular transaction, there can be no assurance that we will identify all such risks or the magnitude of the risks. In addition, prior acquisitions have resulted, and future acquisitions could result, in the incurrence of substantial additional indebtedness and other expenses. Future acquisitions may also result in potentially dilutive issuances of equity securities. There can be no assurance that difficulties encountered with acquisitions will not have a material adverse effect on our business, financial condition and results of operations.

An interruption in our manufacturing or distribution operations or our supply of raw materials may adversely affect our business.

Many of our key products are manufactured at or distributed from single locations, and the availability of alternate facilities is limited. If operations at one or more of our facilities is suspended due to natural disasters or other events, we may not be able to timely manufacture or distribute one or more of our products at previous levels or at all. Furthermore, our ability to establish replacement facilities or to substitute suppliers may be delayed due to regulations and requirements of the FDA and other regulatory authorities regarding the manufacture of our products. In addition, in the event of delays or cancellations in shipments of raw materials by our suppliers, we may not be able to timely manufacture or supply the affected products at previous levels or at all. The manufacture of our products is also highly exacting and complex, due in part to strict regulatory requirements. Problems in the manufacturing process, including equipment malfunction, failure to follow specific protocols and procedures, defective raw materials and environmental factors, could lead to launch delays, product shortage, unanticipated costs, lost revenues and damage to our reputation. A failure to identify and address manufacturing problems prior to the release of products to our customers may also result in a quality or safety issue.  A reduction or interruption in manufacturing or distribution, or our inability to secure suitable alternative sources of raw materials or components, could have a material adverse effect on our business, results of operations and financial condition.

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Our ability to attract, train, develop and retain key employees is important to our success.

Our success depends, in part, on our ability to continue to retain our key personnel, including our executive officers and other members of our senior management team. Our success also depends, in part, on our ability to attract, train, develop and retain other key employees, including research and development, sales, marketing and operations personnel. Achieving this objective may be difficult due to many factors, including:

the intense competition for skilled personnel in our industry;

fluctuations in global economic and industry conditions;

changes in our organizational structure;

our restructuring initiatives;

competitors’ hiring practices; and

the effectiveness of our compensation programs.

Our inability to attract, train, develop and retain such personnel could have an adverse effect on our results of operations and financial condition.

We are subject to healthcare fraud and abuse laws, regulation and enforcement; our failure to comply with those laws could have a material adverse effect on our results of operations and financial condition.

We are subject to healthcare fraud and abuse regulation and enforcement by the federal government and the states and foreign governments in which we conduct our business. The laws that may affect our ability to operate include:

the federal healthcare anti-kickback statute, which prohibits, among other things, persons from knowingly and willfully offering or paying remuneration to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs, or soliciting payment for such referrals, purchases, orders and recommendations;

federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, false or fraudulent claims for payment from the federal government, including Medicare, Medicaid or other third-party payors;

the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which prohibit schemes to defraud any healthcare benefit program and false statements relating to healthcare matters; and

state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers.

If our operations are found to be in violation of any of the laws described above or any other governmental regulations, we may be subject to penalties, including civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, the exclusion from participation in federal and state healthcare programs and imprisonment, any of which could adversely affect our ability to operate our business and our financial results. The risk of our being found to have violated these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations.

Further, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively, the “Healthcare Reform Act”), imposes new reporting and disclosure requirements on device manufacturers for any “transfer of value” made or distributed to prescribers and other healthcare providers. Our first report is due March 30, 2014, and the reported information will be made publicly available in a searchable format beginning September 30, 2014. In addition, device manufacturers will also be required to report and disclose any investment interests held by physicians and their immediate family members during the preceding calendar year. Failure to submit required information may result in civil monetary penalties for each payment, transfer of value or ownership or investment interests not reported in an annual submission, up to an aggregate of $150,000 per year (and up to an aggregate of $1 million per year for “knowing failures”).

In addition, there has been a recent trend of increased federal and state regulation of payments made to healthcare providers. Some states, such as California, Connecticut, Nevada and Massachusetts, mandate implementation of compliance programs that include the tracking and reporting of gifts, compensation for consulting and other services, and other remuneration to healthcare providers. The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with the different compliance and/or reporting requirements among a

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number of jurisdictions increases the possibility that a healthcare company may run afoul of one or more of the requirements, resulting in increased compliance costs that could adversely impact our results of operations.

Health care reform may have a material adverse effect on our industry and our business.

Political, economic and regulatory developments have effected fundamental changes in the healthcare industry. The Healthcare Reform Act substantially changes the way health care is financed by both government and private insurers, encourages improvements in the quality of health care products and services, and significantly impacts the United States  pharmaceutical and medical device industries. Among other things, the Healthcare Reform Act:

establishes a 2.3% excise tax on sales of medical devices with respect to any entity that manufactures or imports specified medical devices offered for sale in the United States, beginning in 2013;

establishes a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research;

implements payment system reforms, including a national pilot program to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain health care services through bundled payment models; and

creates an independent payment advisory board that will submit recommendations to reduce Medicare spending if projected Medicare spending exceeds a specified growth rate.

In 2013, we paid $11.5 million with respect to the medical device excise tax. However, we cannot predict at this time the full impact of the Healthcare Reform Act or other healthcare reform measures that may be adopted in the future on our financial condition, results of operations and cash flow.

We are subject to risks associated with our non-United States operations.

We have significant manufacturing and distribution facilities, research and development facilities, sales personnel and customer support operations in a number of countries outside the United States, including Canada, Belgium, the Czech Republic, France, Germany, Ireland, Malaysia, Mexico, and Singapore. As of December 31, 2013, approximately 37% of our net property, plant and equipment was located outside the United States and 74% of our full-time and temporary employees were employed in countries outside of the United States. In addition, in 2013, approximately 50% of our net revenues (based on Teleflex location) were derived from operations outside the United States.

Our international operations are subject to risks inherent in doing business outside the United States, including:

exchange controls, currency restrictions and fluctuations in currency values;

trade protection measures;

potentially costly and burdensome import or export requirements;

laws and business practices that favor local companies;

changes in non-United States medical reimbursement policies and procedures;

subsidies or increased access to capital for firms that currently are or may emerge as competitors in countries in which we have operations;

substantial foreign tax liabilities, including potentially negative consequences from changes in tax laws;

restrictions and taxes related to the repatriation of foreign earnings;

differing labor regulations;

additional United States and foreign government controls or regulations;

difficulties in the protection of intellectual property; and

unsettled political and economic conditions and possible terrorist attacks against American interests.

In addition, the United States Foreign Corrupt Practices Act (the “FCPA”) and similar worldwide anti-bribery laws in non-United States jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-United States officials for the purpose of obtaining or retaining business. The FCPA also imposes accounting standards and requirements on publicly traded United States corporations and their foreign affiliates, which, among other things, are intended to prevent the diversion of corporate funds to the payment of bribes and other improper payments,

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and to prevent the establishment of “off the books” slush funds from which such improper payments can be made. Because of the predominance of government-sponsored health care systems around the world, many of our customer relationships outside of the United States are with governmental entities and are therefore subject to such anti-bribery laws. Our policies mandate compliance with these anti-bribery laws. However, we operate in many parts of the world that have experienced governmental corruption to some degree.  Despite meaningful measures that we undertake to facilitate lawful conduct, which include training and compliance programs and internal control policies and procedures, we may not always prevent reckless or criminal acts by our employees or agents, and may be exposed to liability due to pre-acquisition conduct of employees or agents of businesses or operations we may acquire. Violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction and have a material adverse effect on our business, financial condition and results of operations. We also could be subject to severe penalties, including criminal and civil penalties, disgorgement, further changes or enhancements to our procedures, policies and controls, personnel changes and other remedial actions.

Furthermore, we are subject to the export controls and economic embargo rules and regulations of the United States, including the Export Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control within the Department of the Treasury, as well as other laws and regulations administered by the Department of Commerce. These regulations limit our ability to market, sell, distribute or otherwise transfer our products or technology to prohibited countries or persons. While we train our employees and contractually obligate our distributors to comply with these regulations, we cannot assure that a violation will not occur, whether knowingly or inadvertently. Failure to comply with these rules and regulations may result in substantial civil and criminal penalties, including fines and the disgorgement of profits, the imposition of a court-appointed monitor, the denial of export privileges and debarment from participation in United States government contracts.

The risks relating to our foreign operations may have a material adverse effect on our international operations or on our business, results of operations and financial condition generally.

Foreign currency exchange rate, commodity price and interest rate fluctuations may adversely affect our results.

We are exposed to a variety of market risks, including the effects of changes in foreign currency exchange rates, commodity prices and interest rates. We expect revenues from products manufactured in, and sold into, non-United States markets to continue to represent a significant portion of our net revenues. Our consolidated financial statements reflect translation of financial statements denominated in non-United States currencies to United States dollars, our reporting currency. When the United States dollar strengthens or weakens in relation to the foreign currencies of the countries in which we sell or manufacture our products, such as the euro, our United States dollar-reported revenue and income will fluctuate. Although we have entered into forward contracts with several major financial institutions to hedge a portion of projected cash flows denominated in non-functional currency in order to reduce the effects of currency rate fluctuations, changes in the relative values of currencies may, in some instances, have a significant effect on our results of operations.

Many of our products have significant plastic resin content. We also use quantities of other commodities, such as aluminum. Increases in the prices of these commodities could increase the costs of our products and services. We may not be able to pass on these costs to our customers, particularly with respect to those products we sell under group purchase agreements, which could have a material adverse effect on our results of operations and cash flows.

Increases in interest rates may adversely affect the financial health of our customers and suppliers and thus adversely affect their ability to buy our products and supply the components or raw materials we need, which could have a material adverse effect on our results of operations and cash flows.

Fluctuations in our effective tax rate and changes to tax laws may adversely affect our results.

As a company with significant operations outside of the United States, we are subject to taxation in numerous countries, states and other jurisdictions. Our effective tax rate is derived from a combination of applicable tax rates in the various countries, states and other jurisdictions in which we operate. In preparing our financial statements, we estimate the amount of tax that will become payable in each of the jurisdictions in which we operate. Our effective tax rate may, however, differ from the estimated amount due to numerous factors, including a change in the mix of our profitability from country to country, changes in accounting for income taxes and changes in tax laws. Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations, which could have an adverse effect on our business and results of operations.

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In addition, unfavorable results of tax audits and changes in tax laws in jurisdictions in which we operate could adversely affect our results of operations and cash flows.

We depend upon relationships with physicians and other health care professionals.

Research and development for some of our products is dependent on our maintaining strong working relationships with physicians and other healthcare professionals. We rely on these professionals to provide us with considerable knowledge and experience regarding the development and use of our products. Physicians assist us as researchers, product consultants, inventors and public speakers. If we fail to maintain our working relationships with physicians and receive the benefits of their knowledge and advice, our products may not be developed in a manner that is responsive to the needs and expectations of the professionals who use and support our products, which could have a material adverse effect on our business, financial condition and results of operations.

Our technology is important to our success, and our failure to protect our intellectual property rights could put us at a competitive disadvantage.

We rely on the patent, trademark, copyright and trade secret laws of the United States and other countries to protect our proprietary rights. Although we own numerous United States and foreign patents and have submitted numerous patent applications, we cannot be assured that any pending patent applications will issue, or that any patents, issued or pending, will provide us with any competitive advantage or will not be challenged, invalidated or circumvented by third parties. In addition, we rely on confidentiality and non-disclosure agreements with employees and take other measures to protect our know-how and trade secrets. The steps we have taken may not prevent unauthorized use of our technology by competitors or other persons who may copy or otherwise obtain and use these products or technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. There is no guarantee that current and former employees, contractors and other parties will not breach their confidentiality agreements with us, misappropriate proprietary information or copy or otherwise obtain and use our information and proprietary technology without authorization or otherwise infringe on our intellectual property rights. Moreover, there can be no assurance that others will not independently develop the know-how and trade secrets or develop better technology than our own, which could reduce or eliminate any competitive advantage we have developed. Our inability to protect our proprietary technology could adversely affect our business.

Our products or processes may infringe the intellectual property rights of others, which may cause us to pay unexpected litigation costs or damages or prevent us from selling our products.

We cannot be certain that our products do not and will not infringe issued patents or other intellectual property rights of third parties. We may be subject to legal proceedings and claims in the ordinary course of our business, including claims of alleged infringement of the intellectual property rights of third parties. Any such claims, whether or not meritorious, could result in litigation and divert the efforts of our personnel. If we are found liable for infringement, we may be required to enter into licensing agreements (which may not be available on acceptable terms or at all) or to pay damages and to cease making or selling certain products. We may need to redesign some of our products or processes to avoid future infringement liability. Any of the foregoing could be detrimental to our business.

Other pending and future litigation may lead us to incur significant costs and have an adverse effect on our business.

We also are party to various lawsuits and claims arising in the normal course of business involving, among other things, contracts, intellectual property, import and export regulations, employment and environmental matters. The defense of these lawsuits may divert our management’s attention, and we may incur significant expenses in defending these lawsuits. In addition, we may be required to pay damage awards or settlements, or become subject to injunctions or other equitable remedies, that could have a material adverse effect on our financial condition and results of operations. While we do not believe that any litigation in which we are currently engaged would have such an adverse effect, the outcome of litigation, including regulatory matters, is often difficult to predict, and we cannot assure that the outcome of pending or future litigation will not have a material adverse effect on our business, financial condition or results of operations.  

Our substantial indebtedness could adversely affect our business, financial condition or results of operations.

As of December 31, 2013, we had total consolidated indebtedness of $1,286 million.

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Our substantial level of indebtedness increases the risk that we may be unable to generate cash sufficient to pay amounts due in respect of our indebtedness. It could also have significant effects on our business. For example, it could:

increase our vulnerability to general adverse economic and industry conditions;

require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes;

limit our ability to borrow additional funds for such general corporate purposes;

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

restrict us from exploiting business opportunities; and

place us at a competitive disadvantage compared to our competitors that have less indebtedness.

If we do not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to pay our indebtedness or to fund our other liquidity needs, we may be forced to:

refinance all or a portion of our indebtedness on or before the maturity thereof;

sell assets;

reduce or delay capital expenditures; or

seek to raise additional capital.

We may not be able to effect any of these actions on commercially reasonable terms or at all. Our ability to refinance our indebtedness will depend on our financial condition at the time, the restrictions in the instruments governing our outstanding indebtedness and other factors, including market conditions.

Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, could have a material adverse effect on our business, financial condition and results of operations.

Our debt agreements impose restrictions on our business, which could prevent us from capitalizing on business opportunities and taking some corporate actions and may adversely affect our ability to respond to changes in our business and manage our operations.

Our revolving credit agreement and the indenture governing our 6.875% senior subordinated notes contain covenants that, among other things, impose significant restrictions on our business. The restrictions that these covenants place on us and our restricted subsidiaries include limitations on our and their ability to:

incur additional indebtedness or issue disqualified stock or preferred 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;

enter into transactions with our affiliates;

permit layering of debt;

designate subsidiaries as unrestricted; and

use the proceeds of permitted sales of our assets.

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In addition, our revolving credit agreement also contains financial covenants. A breach of any covenants under any one or more of these debt agreements could result in a default, which if not cured or waived, could result in the acceleration of all our debts. In addition, any debt agreements we enter into in the future may further limit our ability to enter into certain types of transactions.

The contingent conversion features of our convertible notes, if triggered, may adversely affect our financial condition.

In August 2010, we issued $400 million in aggregate principal amount of convertible senior subordinated notes due 2017, which we refer to as the “Convertible Notes.” The Convertible Notes are convertible under certain circumstances, including the attainment of a closing price per share of our common stock equal to 130% of the conversion price (approximately $79.72) for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter.  Because our closing stock price during the 30 consecutive trading days ending on December 31, 2013 exceeded 130% of the conversion price for at least 20 trading days, the Convertible Notes are currently convertible into shares of our common stock.  As a result, the Convertible Notes are classified as a current liability, which, in turn, has resulted in a material reduction of our net working capital. At this time, we have elected the net settlement method to satisfy the conversion obligation, under which we may settle the principal amount of the Convertible Notes in cash and settle the excess conversion value in shares, plus cash in lieu of fractional shares. While we believe we have sufficient liquidity to repay the principal amounts due through a combination of utilizing our existing cash on hand and accessing our credit facility as well as raising money in the capital markets, if necessary, our use of these funds could adversely affect our results of operations and liquidity. See Note 8 to the consolidated financial statements included in this Annual Report on Form 10-K for a further discussion regarding the conversion terms of the Convertible Notes.

The convertible note hedge transactions and warrant transactions entered into in connection with the issuance of our Convertible Notes may affect the value of our common stock.

In connection with our issuance of the Convertible Notes, we entered into privately negotiated hedge transactions with third parties, which we refer to as the hedge counterparties. The hedge transactions cover, subject to customary anti-dilution adjustments, the number of shares of our common stock that underlie the Convertible Notes and are expected to reduce our exposure to potential dilution with respect to our common stock and/or reduce our exposure to potential cash payments that may be required to be made by us upon conversion of the Convertible Notes. Separately, we also entered into privately negotiated warrant transactions relating to the same number of shares of our common stock with the hedge counterparties with a strike price of $74.648, subject to customary anti-dilution adjustments, pursuant to which we may be obligated to issue shares of our common stock. The warrant transactions could have a dilutive effect with respect to our common stock or, if we so elect, obligate us to make cash payments to the extent that the market price per share of our common stock exceeds the strike price of the warrants on any expiration date of the warrants. In addition, under applicable accounting guidance, changes in the share price of our common stock can have a significant impact on the number of shares that we must include in the fully diluted earnings per share calculation with respect to the Convertible Notes and warrants, which, in turn, could impact our reported financial results. Based on the average market price of our common stock during 2013, 0.6 million shares issuable upon exercise of the warrants were included in the total diluted shares outstanding for the year ended December 31, 2013. For additional information, see “Financing Arrangements” under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Annual Report on Form 10-K.

In connection with establishing their initial hedges of the convertible note hedge transactions and the warrant transactions, the hedge counterparties (and/or their affiliates) entered into various cash-settled over-the-counter derivative transactions with respect to our common stock concurrently with, or shortly following, the pricing of the Convertible Notes. The hedge counterparties (and/or their affiliates) may, in their sole discretion, with or without notice, modify their hedge positions from time to time (and are likely to do so during any conversion period related to the conversion of the Convertible Notes) by entering into or unwinding various over-the-counter derivative transactions with respect to shares of our common stock, and/or by purchasing or selling shares of our common stock or Convertible Notes in privately negotiated transactions and/or open market transactions. The effect, if any, of these transactions and activities on the market price of our common stock will depend in part on market conditions and cannot be ascertained at this time, but any of these activities could adversely affect the value of our common stock.

We are subject to counterparty risk with respect to the convertible note hedge transactions.

Each hedge counterparty is a financial institution or the affiliate of a financial institution, and we will be subject to the risk that one or more hedge counterparties may default under the Convertible Note hedge transactions. Our exposure to

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the credit risk of each hedge counterparty will not be secured by any collateral. If a hedge counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under the Convertible Note hedge transaction with that hedge counterparty. Our exposure will depend on many factors but, generally, the increase in our exposure will be correlated to the increase in our stock market price and in volatility of our common stock. In addition, upon a default by a hedge counterparty, we may suffer adverse tax consequences and dilution with respect to our common stock. We can provide no assurances as to the financial stability or viability of the hedge counterparties.

We may issue additional shares of our common stock or instruments convertible into our common stock, including in connection with conversions of our Convertible Notes, which could lower the price of our common stock.

We are not restricted from issuing additional shares of our common stock or other instruments convertible into our common stock. As of December 31, 2013, we had outstanding approximately 41.2 million shares of our common stock, options to purchase approximately 1.3 million shares of our common stock (of which approximately 0.7 million were vested as of that date), approximately 0.4 million of restricted stock awards (which are expected to vest over the next three years) and approximately 20,000 shares of our common stock to be distributed from our deferred compensation plan. In addition, as of December 31, 2013, 17.1 million shares of our common stock are reserved for issuance upon the exercise of stock options, upon conversion of the Convertible Notes and upon the exercise of the warrants issued in connection with the Convertible Notes. We cannot predict the size of future issuances or the effect, if any, that they may have on the market price for our common stock.

If we issue additional shares of our common stock or instruments convertible into our common stock, it may materially and adversely affect the price of our common stock. Furthermore, the exercise of some or all of the outstanding stock options and warrants, and the conversion of some or all of the Convertible Notes may dilute the ownership interests of existing stockholders, and any sales in the public market of such shares of our common stock issuable upon any exercise of stock options or warrants, or conversion of the Convertible Notes could adversely affect prevailing market prices of our common stock. In addition, the issuance and sale, including through exercise of stock options and warrants, of substantial amounts of common stock or conversion of the Convertible Notes into shares of our common stock could depress the price of our common stock.

Disruption of critical information systems or material breaches in the security of our systems may adversely affect our business and customer relationships.

We rely on information technology systems to process, transmit, and store electronic information in our day-to-day operations. We also rely on our technology infrastructure, among other functions, to interact with customers and suppliers, fulfill orders and bill, collect and make payments, ship products, provide support to customers, fulfill contractual obligations and otherwise conduct business. Our internal information technology systems, as well as those systems maintained by third-party providers, may be subjected to computer viruses or other malicious codes, unauthorized access attempts, and cyber-attacks, any of which, if successful, could result in data leaks or otherwise compromise our confidential or proprietary information and disrupt our operations. Cyber-attacks are becoming more sophisticated and frequent, and there can be no assurance that our protective measures will prevent security breaches that could have a significant impact on our business, reputation and financial results. If we fail to monitor, maintain or protect our information technology systems and data integrity effectively or fail to anticipate, plan for or manage significant disruptions to these systems, we could, among other things, lose existing customers, have difficulty preventing fraud, have disputes with customers, physicians and other health care professionals, be subject to regulatory sanctions or penalties, incur expenses or lose revenues or suffer other adverse consequences.  Any of these events could have a material adverse effect on our business, results of operations or financial condition.

New regulations related to conflict minerals may increase our costs and adversely affect our business.

The SEC has promulgated final rules pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding disclosure of the use of tin, tantalum, tungsten and gold, known as conflict minerals, included in components of products either manufactured by public companies or for which public companies have contracted to manufacture. These new rules require due diligence to determine whether such minerals originated from the Democratic Republic of Congo (the “DRC”) or an adjoining country and whether such minerals helped finance the armed conflict in the DRC. The first conflict minerals report required by the new rules is due by May 31, 2014 and annually thereafter. At this time, we have determined that certain of our products contain the specified minerals, and we have developed a process to enable us to identify where such minerals originated.  We expect to incur costs associated with complying with these disclosure requirements, including costs related to determining the sources of the specified minerals used in our products. In

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addition, the implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in our products. Our customers may require our products be free of conflict minerals, and our revenues and margins may be harmed if we are unable to provide assurances to our customers that our products are “DRC conflict free” (generally, the product does not contain conflict minerals originating in the DRC or an adjoining country that directly or indirectly finance or benefit specified armed groups) or to procure conflict free minerals at a reasonable price, or at all, or are unable to pass through any increased costs associated with meeting these demands.  We also may face reputational challenges if the due diligence procedures we implement do not enable us to verify the origins of all conflict minerals or to determine that any conflict minerals used in products we manufacture or in products manufactured by others for us are DRC conflict-free..

Our operations expose us to the risk of material environmental liabilities.

We are subject to numerous foreign, federal, state and local environmental protection and health and safety laws governing, among other things:

the generation, storage, use and transportation of hazardous materials;

emissions or discharges of substances into the environment; and

the health and safety of our employees.

These laws and regulations are complex, change frequently and have tended to become more stringent over time. In 2013, our costs related to compliance with, or liabilities under these laws totaled $0.9 million. We cannot provide assurance that our costs of complying with current or future environmental protection and health and safety laws, or our liabilities arising from past or future releases of, or exposures to, hazardous substances, which may include claims for personal injury or cleanup, will not exceed our estimates or will not adversely affect our financial condition and results of operations.

Our workforce covered by collective bargaining and similar agreements could cause interruptions in our provision of products and services.

As of December 31, 2013, approximately 5 percent of our employees in the United States and in other countries were covered by union contracts or collective-bargaining arrangements. In addition, for the fiscal year ended December 31, 2013, approximately 1% of our net revenues were generated by operations for which a significant part of our workforce is covered by collective bargaining agreements and similar agreements. It is likely that a portion of our workforce will remain covered by collective bargaining and similar agreements for the foreseeable future. Strikes or work stoppages could occur that would adversely impact our relationships with our customers and our ability to conduct our business.

We may not pay dividends on our common stock in the future.

Holders of our common stock are entitled to receive dividends only as our board of directors may declare out of funds legally available for such payments. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, earnings, compliance with debt instruments, legal requirements and other factors as our board of directors deems relevant. We cannot assure you that our cash dividend will not be reduced, or eliminated, in the future.

Certain provisions of our corporate governing documents, Delaware law and our Convertible Notes could discourage, delay, or prevent a merger or acquisition.

Provisions of our certificate of incorporation and bylaws could impede a merger, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer for our common stock. For example, our certificate of incorporation authorizes our board of directors to determine the number of shares in a series, the consideration, dividend rights, liquidation preferences, terms of redemption, conversion or exchange rights and voting rights, if any, of unissued series of preferred stock, without any vote or action by our stockholders. Thus, our board of directors can authorize and issue shares of preferred stock with voting or conversion rights that could adversely affect the voting or other rights of holders of our common stock. We are also subject to Section 203 of the Delaware General Corporation Law, which imposes restrictions on mergers and other business combinations between us and any holder of 15% or more of our common stock. These provisions could have the effect of delaying or deterring a third party from acquiring us even if an acquisition might be in the best interest of our stockholders, and accordingly could reduce the market price of our common stock.

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Certain provisions in the Convertible Notes and the indenture governing the Convertible Notes could make it more difficult or more expensive for a third party to acquire us. For example, if an acquisition event constitutes a “fundamental change,” as defined in the indenture, holders of the Convertible Notes will have the right to require us to purchase their notes in cash. In addition, if an acquisition event constitutes a “make-whole fundamental change,” as defined in the indenture, we may be required to increase the conversion rate for holders who convert their notes in connection with such acquisition event. In either case, and in other cases, our obligations under the Convertible Notes and the indenture could increase the cost of acquiring us or otherwise discourage a third party from acquiring us or removing incumbent management, and accordingly could reduce the market price of our common stock.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

Not applicable.

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ITEM 2.

PROPERTIES

We own or lease approximately 68 properties consisting of plants, engineering and research centers, distribution warehouses, offices and other facilities. We believe that the properties are maintained in good operating condition and are suitable for their intended use. In general, our facilities meet current operating requirements for the activities currently conducted within the facilities.

Our major facilities (those with 50,000 or greater square feet) are as follows:

 

Location

  

Square
Footage

 

  

Owned or
Leased

Olive Branch, MS

 

 

627,000

  

  

Leased

Nuevo Laredo, Mexico

  

 

277,000

  

  

Leased

Asheboro, NC

  

 

204,000

  

  

Owned

Reading, PA

  

 

166,000

  

  

Owned

Research Triangle Park, NC

  

 

147,000

  

  

Owned

Kernen, Germany

  

 

145,000

  

  

Leased

Chihuahua, Mexico

  

 

112,000

  

  

Owned

Zdar nad Sazavou, Czech Republic

  

 

108,000

  

  

Owned

Tongeren, Belgium

  

 

108,000

  

  

Leased

Kamunting, Malaysia

  

 

102,000

  

  

Owned

Everett, MA

  

 

100,000

  

  

Leased

Tecate, Mexico

  

 

96,000

  

  

Leased

Hradec Kralove, Czech Republic

  

 

92,000

  

  

Owned

Chelmsford, MA

 

 

91,000

 

 

Leased

Arlington Heights, IL

  

 

86,000

  

  

Leased

Kamunting, Malaysia

  

 

82,000

  

  

Leased

Kernen, Germany

  

 

73,000

  

  

Owned

Jaffrey, NH

  

 

65,000

  

  

Owned

Limerick, Ireland

  

 

55,000

  

  

Leased

Bad Liebenzell, Germany

  

 

53,000

  

  

Leased

Ramseur, NC

  

 

52,000

  

  

Leased

 

Each of the facilities included in the table above generally are utilized by more than one of our reporting segments.

In addition to the properties listed above, we own or lease approximately 600,000 square feet of warehousing, manufacturing and office space located in the United States, Canada, Mexico, South America, Europe, Asia and Africa. We also own or lease several properties that are no longer being used in our operations, which we are actively marketing for sale or sublease. At December 31, 2013, four unused owned properties were classified as held for sale.

In August 2013, we entered into a lease agreement for approximately 130,000 square feet of office space in Morrisville, North Carolina, which we will use to consolidate two separate office facilities in the Research Triangle Park area of North Carolina.  The lease has a term of 10 years with two optional 5-year extensions.  Occupancy and lease commencement is expected to be in the second half of 2014.

In December 2012, we entered into a lease agreement for approximately 84,000 square feet of office space in Wayne, Pennsylvania, which we intend to use as our new corporate headquarters commencing in the first half of 2014. The lease has a term of 10 years and 8 months from the commencement date with an option to renew for an additional ten years.

 

 

29


 

ITEM 3.

LEGAL PROCEEDINGS

The Company is 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, intellectual property, employment and environmental matters. As of December 31, 2013 and 2012, the Company has recorded reserves of approximately $6.8 million and $2.3 million in connection with such contingencies, representing its best estimate of the cost within the range of estimated possible loss that will be incurred to resolve these matters. Of the $6.8 million reserved for at December 31, 2013, $1.4 million pertains to discontinued operations. 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.

ITEM  4.

MINE SAFETY DISCLOSURES

Not applicable.

 

 

30


 

PART II

 

 

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed on the New York Stock Exchange, Inc. (symbol “TFX”). Our quarterly high and low stock prices and dividends for 2013 and 2012 are shown below.

Price Range and Dividends of Common Stock

 

2013

 

High

 

Low

 

Dividends

 

First Quarter

 

$

84.58

 

$

71.84

 

$

0.34

 

Second Quarter

 

$

87.46

 

$

73.83

 

$

0.34

 

Third Quarter

 

$

82.41

 

$

74.42

 

$

0.34

 

Fourth Quarter

 

$

99.13

 

$

81.05

 

$

0.34

 

 

2012

 

High

 

Low

 

Dividends

 

First Quarter

 

$

63.91

 

$

57.78

 

$

0.34

 

Second Quarter

 

$

64.79

 

$

57.26

 

$

0.34

 

Third Quarter

 

$

70.78

 

$

59.96

 

$

0.34

 

Fourth Quarter

 

$

71.59

 

$

65.07

 

$

0.34

 

 

The terms of our senior credit facility and our 6.875% senior subordinated notes due 2019 limit our ability to repurchase shares of our stock and pay cash dividends. Under the most restrictive of these provisions, on an annual basis $147 million of retained earnings was available for dividends and stock repurchases at December 31, 2013. On February 19, 2014, the Board of Directors declared a quarterly dividend of $0.34 per share on our common stock, which is payable on March 14, 2014 to holders of record on March 4, 2014. As of February 19, 2014, we had approximately 628 holders of record of our common stock.

On June 14, 2007, our Board of Directors authorized the repurchase of up to $300 million of our outstanding common stock. Through December 31, 2013, no shares have been purchased under this Board authorization. See “Stock Repurchase Programs” contained in “Management Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this report for more information.

Stock Performance Graph

The following graph provides a comparison of five year cumulative total stockholder returns of Teleflex common stock, the Standard & Poor’s (S&P) 500 Stock Index and the S&P 500 Healthcare Equipment & Supply Index. The annual changes for the five-year period shown on the graph are based on the assumption that $100 had been invested in Teleflex common stock and each index on December 31, 2008 and that all dividends were reinvested.

31


 

MARKET PERFORMANCE

 

logo

 

Company / Index

2008

2009

2010

2011

2012

2013

Teleflex Incorporated

100

111

114

132

157

210

S&P 500 Index

100

126

146

149

172

228

S&P 500 Healthcare Equipment & Supply Index

100

129

125

124

146

186

 

32


 

 

 

 

ITEM 6.

SELECTED FINANCIAL DATA

 

The selected financial data in the following table includes the results of operations for acquired companies from the respective date of acquisition.

 

 

2013(2)

 

2012(2)

 

2011(2)

 

2010

 

2009

 

 

(Dollars in thousands, except per share)

 

Statement of Income Data(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

$

1,696,271

 

$

1,551,009

 

$

1,492,528

 

$

1,397,722

 

$

1,394,906

 

Income (loss)  from continuing operations before interest, loss on extinguishments of debt and taxes

$

233,261

 

$

(97,375

)(3)

$

229,570

 

$

230,290

 

$

246,487

 

Income (loss) from continuing operations

$

152,183

 

$

(181,782

)(3)

$

119,322

 

$

87,672

(4)

$

124,189

 

Amounts attributable to common shareholders for income (loss) from continuing operations

 

151,316

 

$

(182,737

)(3)

$

118,301

 

$

86,811

(4)

$

123,557

 

Per Share Data(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations — basic

$

3.68

 

$

(4.47

)

$

2.92

 

$

2.18

(4)

$

3.11

 

Income (loss) from continuing operations — diluted

$

3.46

 

$

(4.47

)

$

2.90

 

$

2.16

(4)

$

3.09

 

Cash dividends

$

1.36

 

$

1.36

 

$

1.36

 

$

1.36

 

$

1.36

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

4,209,007

 

$

3,733,687

 

$

3,924,103

 

$

3,643,155

 

$

3,839,005

 

Long-term borrowings, less current portion

$

930,000

 

$

965,280

 

$

954,809

 

$

813,409

 

$

1,192,491

 

Shareholders’ equity

$

1,913,527

 

$

1,778,950

 

$

1,980,588

 

$

1,783,376

 

$

1,580,241

 

Statement of Cash Flows Data(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities from continuing operations

$

229,871

 

$

193,853

 

$

94,357

 

$

143,834

(6)

$

113,999

(6)

Net cash (used in) provided by  investing activities from continuing operations

$

(372,638

)

$

(368,258

)

$

306,670

 

$

152,138

 

$

288,877

 

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

$

232,598

 

$

(64,888

)

$

(11,106

)

$

(335,499

)

$

(401,918

)

Free cash flow(5)

$

166,291

 

$

128,459

 

$

49,775

 

$

114,504

 

$

89,200

 

 

 

 

 

Certain financial information is presented on a rounded basis, which may cause minor differences.

 

 

 

 

(1)

 

Amounts exclude the impact of certain businesses which have been presented in our consolidated financial results as discontinued operations.

 

(2)

 

Amounts include the impact of businesses acquired during the period. See Note 3 to the consolidated financial statements included in this Annual Report on Form 10-K for further discussion on Company acquisitions.

 

(3)

 

Includes a pretax goodwill impairment charge of $332.1 million, or $315.1 million net of tax. See Note 7 to the consolidated financial statements included in this Annual Report on Form 10-K for a discussion on the goodwill impairment charge.

 

(4)

 

Includes a $29.7 million, net of tax, or a $0.74 per share loss (basic and diluted) on extinguishments of debt.

 

(5)

 

Free cash flow is calculated by subtracting capital expenditures from cash provided by operating activities from continuing operations. Free cash flow is considered a non-GAAP financial measure. We use this financial measure for internal managerial purposes and to evaluate period-to-period comparisons. This financial measure is used in addition to and in conjunction with results presented in accordance with generally accepted accounting principles, or GAAP, and should not be relied upon to the exclusion of GAAP financial measures. Management believes that free cash flow is a useful measure to investors because it facilitates an assessment of funds available to satisfy current and future obligations, pay dividends and fund acquisitions. Free cash flow is not a measure of cash available for discretionary expenditures since we have certain non-discretionary obligations, such as debt service, that are not deducted from the measure. We strongly encourage investors to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. The following is a reconciliation of free cash flow to the most comparable GAAP measure.

 

33


 

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

(Dollars in thousands)

 

Net cash provided by operating activities from continuing operations

$

229,871

 

$

193,853

 

$

94,357

 

$

143,834

(6

)

$

113,999

(6

)

Less: Capital expenditures

 

63,580

 

 

65,394

 

 

44,582

 

 

29,330

 

 

 

24,799

 

 

Free cash flow

$

166,291

 

$

128,459

 

$

49,775

 

$

114,504

 

 

$

89,200

 

 

 

(6)

 

2009 cash flow from continuing operations reflects the impact of estimated tax payments made in connection with businesses divested of $97.5 million and 2010 cash flow reflects the impact of a refund of $59.5 million of the estimated tax payments.

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are 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 sell our products to hospitals and healthcare providers in more than 150 countries 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 categorize our products into four groups: Critical Care, Surgical Care, Cardiac Care and Original Equipment Manufacturer and Development Services (“OEM”). Critical Care, representing our largest product group, includes medical devices used in vascular access, anesthesia, respiratory care and specialty markets; Surgical Care includes surgical instruments and devices; and Cardiac Care includes cardiac assist devices and equipment. OEM designs and manufactures instruments and devices for other medical device manufacturers.

Effective January 1, 2014, we realigned our operating segments.  The Vascular, Anesthesia/Respiratory and Surgical businesses, which previously comprised much of the Americas operating segment, are now separate operating segments. Additionally, the Company made changes to the allocation methodology of certain costs, including manufacturing variances and research and development costs, among the businesses to improve accountability. Because the change in segment reporting structure became effective in the first quarter of 2014, the segment information presented in this document does not reflect this change.

Through an extensive acquisition and divestiture program, we have significantly expanded our presence in the medical technology industry, while divesting all of our businesses serving the aerospace, automotive, industrial and marine markets. The following is a listing of our more significant acquisitions and divestitures that have occurred since the beginning of 2011. With respect to divested businesses listed below, we have reported results of operations, cash flows and (gains) losses on the disposition of these businesses as discontinued operations for all periods presented. See Note 18 to the consolidated financial statements included in this Annual Report on Form 10-K for additional information regarding our significant divestitures.

Medical Device Business Transactions

 

·

December 2013 — Acquired Vidacare Corporation, a provider of intraosseous, or inside the bone, access devices (“Vidacare”), which complements the vascular access and specialty product portfolios;

·

June 2013 — Acquired the assets of Ultimate Medical Pty. Ltd. and its affiliates, a supplier of airway management devices with a full range of laryngeal mask airways, which complements our anesthesia product portfolio;

·

June 2013 — Acquired Eon Surgical, Ltd., a developer of a minimally invasive microlaparoscopy surgical platform technology designed to enhance a surgeon’s ability to perform scarless surgery while producing better patient outcomes, which complements our surgical care product portfolio;

·

October 2012 — Acquired substantially all of the assets of LMA International N.V. (LMA), a global provider of laryngeal masks whose products are used in anesthesia and emergency care, which enhanced our anesthesia product portfolio.

·

2012 — Completed four late-stage technology acquisitions in furtherance of our strategy to invest in new technologies and research and development to support our future growth.

34


 

We may be required to pay contingent consideration in connection with some of the acquisitions listed above. The amount of contingent consideration we ultimately will pay will be based upon the achievement of specified objectives, including regulatory approvals and sales targets. For additional information on the contingent consideration, see Note 3  to the consolidated financial statements included in this Annual Report on Form 10-K.

Former Aerospace Segment Divestiture

In December 2011, we sold the cargo systems and container businesses for approximately $280 million and realized a gain of $126.8 million, net of tax.

Former Commercial Segment Divestiture

In March 2011, we sold the marine businesses that were engaged in the design, manufacture and distribution of steering and throttle controls and engine and drive assemblies for the recreational marine market, heaters for commercial vehicles and burner units for military field feeding appliances for $123.1 million, consisting of $101.6 million in cash, net of $1.5 million of cash included in the marine business as part of the net assets sold, plus a subordinated promissory note in the amount of $4.5 million (which has subsequently been repaid in full) and the assumption by the buyer of approximately $15.5 million in liabilities related to the marine business. We realized a gain of $57.3 million, net of tax benefits, in connection with the sale.

Looking ahead, our strategy is to continue to be opportunistic and focus our attention on adding a combination of technology and strategic acquisitions to further strengthen our existing product portfolio within the medical technology industry.  Additionally, we will continue to identify opportunities to expand our margins by evaluating our existing product portfolio and shedding product lines that do not meet our financial criteria as well as optimizing our overall facility footprint to further reduce our cost base.

Health Care Reform

On March 23, 2010 the Patient Protection and Affordable Care Act was signed into law. This legislation will have a significant impact on our business. For medical device companies such as Teleflex, the expansion of medical insurance coverage should lead to greater utilization of the products we manufacture, but this legislation also contains provisions designed to contain the cost of healthcare, which could negatively affect pricing of our products. In addition, commencing in 2013, the legislation imposes a 2.3% excise tax on sales of medical devices. For the year ended December 31, 2013, we paid medical device excise taxes of $11.5 million, which is included in selling, general and administrative expenses.

Global Economic Conditions

Global economic conditions have had adverse impacts on market activities including, among other things, failure of financial institutions, falling asset values, diminished liquidity, and reduced demand for products and services. In response, we adjusted production levels and engaged in new restructuring activities and we continue to review and evaluate our manufacturing, warehousing and distribution processes to maximize efficiencies through the elimination of redundancies in our operations and the consolidation of facilities. Although, on a consolidated basis, the economic conditions did not have a significant adverse impact on our financial position, results of operations or liquidity, healthcare policies and practice trends vary by country, and the impact of the global economic downturn was felt to varying degrees in each of our regional markets over the last three years. The continuation of the present broad economic trends of weak economic growth, constricted credit and public sector austerity measures in response to growing public budget deficits could adversely affect our operations and our liquidity.

Hospitals in some regions of the United States experienced a decline in admissions, a weaker payor mix, and a reduction in elective procedures.  Hospitals consequently took actions to reduce their costs, including limiting their capital spending. Distributors in the supply chain generally have reduced inventory levels and have not replenished inventories to pre-recession levels. The impact of these actions is most pronounced in capital goods markets, which affected our surgical instrument and cardiac assist businesses. More recently, the economic environment has improved somewhat, but has not returned to pre-recession levels, and challenges persist, particularly in some European countries, as discussed below. Approximately 92 percent of our net revenues come from single-use products primarily used in critical care and surgical applications, and our sales volume could be negatively impacted if hospital admission rates or payor mix change as a result of continuing high unemployment rates (and subsequent loss of insurance coverage by consumers). Conversely, our sales volume could be positively impacted if there are additional insured individuals resulting from the Patient Protection and Affordable Care Act.  

35


 

In Europe, some countries have taken austerity measures due to the current economic climate. Elective surgeries have been delayed and hospital budgets have been reduced. In certain countries (mainly Germany) we have seen changes in the local reimbursement to home care patients and pricing impacts on business awarded through the tendering process. These markets have introduced more buying groups and group purchasing organizations, or GPOs, resulting in reductions in commodity product pricing. It is possible that funding for publically funded healthcare institutions could be affected in the future as governments make further spending adjustments and enact healthcare reform measures to lower overall healthcare costs. The public healthcare systems in certain countries in Western Europe, most notably Greece, Spain, Portugal and Italy, have experienced significantly reduced liquidity due to recessionary conditions, which has resulted in a slowdown in payments to us. We believe this situation will continue and may worsen unless and until these countries are able to find alternative means of funding their respective public healthcare sectors.

In Asia, recovery from the global recession has varied by country. China has announced plans for major healthcare investment targeted at second tier cities and hospitals, which may provide future growth opportunities for us, while slow economic growth and continued pursuit of reimbursement cuts by the public hospital sector in Japan is expected to limit growth in that market.

Results of Operations

The following comparisons exclude the impact of discontinued operations (see Note 18 to the consolidated financial statements included in this Annual Report on Form 10-K and “Discontinued Operations” in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for discussion of discontinued operations). Discussion of constant currency excludes the impact of translating the results of international subsidiaries at different currency exchange rates from year to year. Certain financial information is presented on a rounded basis, which may cause minor differences.

Revenues

Information regarding net revenues by product group is provided in the following table:

 

 

 

Year Ended December 31

 

 

% Increase/(Decrease)

 

 

 

2013

 

 

2012

 

 

2011

 

 

2013 vs 2012

 

2012 vs 2011

 

 

 

(Dollars in millions)

 

 

Critical Care

$

1,182.7

 

$

1,040.3

 

$

1,005.4

 

 

13.7

 

3.5

 

Surgical Care

 

306.5

 

 

291.1

 

 

276.9

 

 

5.3

 

5.1

 

Cardiac Care

 

75.9

 

 

79.4

 

 

80.6

 

 

(4.5

)

(1.5

)

OEM and Development Services

 

131.2

 

 

140.2

 

 

129.6

 

 

(6.5

)

8.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Revenues

$

1,696.3

 

$

1,551.0

 

$

1,492.5

 

 

9.4

 

3.9

 

 

36


 

The following table presents the percentage increases or decreases in product group net revenues during the years ended December 31, 2013 and 2012 compared to the respective prior years on a constant currency basis, the impact of foreign currency fluctuations on those revenues and the total increase or decrease in net revenues for the periods presented:

 

 

% Increase/ (Decrease)

 

2013 vs 2012

 

2012 vs 2011

 

 

Constant Currency(1)

 

Currency Impact

 

Total Change

 

 

Constant Currency(1)

 

Currency Impact

 

Total Change

 

Critical Care

13.4

 

0.3

 

13.7

 

 

6.5

 

(3.0

)

3.5

 

Surgical Care

4.5

 

0.8

 

5.3

 

 

7.9

 

(2.8

)

5.1

 

Cardiac Care

(4.1

)

(0.4

)

(4.5

)

 

2.4

 

(3.9

)

(1.5

)

OEM and Development Services

(7.0

)

0.5

 

(6.5

)

 

9.5

 

(1.3

)

8.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Change

9.0

 

0.4

 

9.4

 

 

6.8

 

(2.9

)

3.9

 

(1)

Constant currency is a non-GAAP financial measure that measures the change in net revenues between current and prior year periods by excluding the impact of translating the results of international subsidiaries at different currency exchange rates from period to period. The constant currency increase/decrease percentage is calculated by translating the prior year period’s local currency net revenues into an amount reflecting the current year period’s foreign currency exchange rates and calculating the percentage difference between net revenues for the current year period and net revenues for the prior year period. Management believes this measure is useful to investors because it eliminates items that do not reflect our day-to-day operations. In addition, management uses this financial measure for internal managerial purposes, when publicly providing guidance on possible future results, and to assist in our evaluation of period-to-period comparisons. This financial measure may not be comparable to similarly titled measures used by other companies, is presented in addition to results presented in accordance with GAAP and should not be relied upon as a substitute for GAAP financial measures.

Comparison of 2013 and 2012

Net revenues for the twelve months ended December 31, 2013 increased 9.4% to $1,696.3 million from $1,551.0 million in the twelve months ended December 31, 2012. The $145.3 million increase in net revenues is largely due to the businesses acquired during 2012 and 2013, which generated net revenues of approximately $121.1 million in 2013, including approximately $110.3 million generated by the LMA business. Net revenues further benefited from new products ($19.2 million) primarily in the Americas, EMEA and OEM, price increases ($15.2 million) in the Americas, EMEA and Asia, volume gains in Asia ($9.3 million) and EMEA ($1.3 million) and the favorable impact of foreign currency exchange rates ($5.7 million). These increases were partly offset by volume declines in the Americas ($14.7 million), in anesthesia, respiratory, vascular, surgical and cardiac products, and OEM ($11.8 million), primarily on lower sales of catheters and performance fibers.

Critical Care net revenues increased 13.7% in 2013 to $1,182.7 million from $1,040.3 million in 2012. On a constant currency basis, net revenues increased 13.4% over the corresponding prior year period. The increase in net revenues for the twelve months ended December 31, 2013 was due primarily to higher sales of anesthesia products as well as higher sales of vascular, urology and interventional access products. The growth in sales of anesthesia products was primarily related to the acquisition of the LMA business. The increase in net revenues for the twelve months ended December 31, 2013 was partially offset by a decline in sales of respiratory products.

Surgical Care net revenues increased 5.3% in 2013 to $306.5 million from $291.1 million in 2012. On a constant currency basis, net revenues increased 4.5% over the corresponding prior year period. The increase in net revenues for the twelve months ended December 31, 2013 was due to higher sales of ligation, suture and access products, partially offset by a decline in sales of general surgical instrument products.

Cardiac Care net revenues decreased 4.5% to $75.9 million in 2013 from $79.4 million in 2012. On a constant currency basis, net revenues decreased 4.1% over the corresponding prior year period. The decrease in net revenues for the twelve months ended December 31, 2013 was primarily due to a decline in sales of intra-aortic balloon pumps.

OEM net revenues decreased 6.5% to $131.2 million in 2013 from $140.2 million in 2012. On a constant currency basis, net revenues decreased 7.0% over the corresponding prior year period. The decrease in net revenues for the twelve months ended December 31, 2013 was due to a decline in sales of catheter, extrusion and performance fiber products.

Comparison of 2012 and 2011

Net revenues increased 3.9% in 2012 to $1,551.0 million from $1,492.5 million in 2011. The $58.5 million increase in net revenues was largely due to higher volume (approximately $39.7 million), reflecting core growth in all segments,

37


 

acquisitions (approximately $25.3 million), primarily from our acquisition of LMA (approximately $24.4 million), price increases (approximately $18.6 million) across all segments and new products (approximately $17.5 million) in North America and EMEA. These increases were partly offset by the $42.3 million unfavorable impact of foreign currency exchange rates in 2012.

Critical Care net revenues increased 3.5% in 2012 to $1,040.3 million from $1,005.4 million in 2011. Excluding the impact of foreign currency exchange rates, net revenues increased 6.5% over the corresponding prior year period. The increase in net revenues was due to higher sales of vascular access, anesthesia, urology and respiratory products.

Surgical Care net revenues increased 5.1% in 2012 to $291.1 million from $276.9 million in 2011. Excluding the impact of foreign currency exchange rates, net revenues increased 7.9% over the corresponding prior year period. The increase in net revenues was due to higher sales of ligation, general surgical instrument and closure products.

Cardiac Care net revenues decreased 1.5% in 2012 to $79.4 million from $80.6 million in 2011. Excluding the impact of foreign currency exchange rates, net revenues increased 2.4% over the corresponding prior year period. The increase in net revenues was due to higher sales of intra-aortic pumps and catheters.

OEM net revenues increased 8.2% in 2012 to $140.2 million from $129.6 million in 2011. Excluding the impact of foreign currency exchange rates, net revenues increased 9.5% over the corresponding prior year period. The increase in net revenues was due to higher sales of specialty suture and catheter fabrication products.

Gross profit

 

 

 

2013

 

 

2012

 

 

2011

 

 

 

(Dollars in millions)

 

Gross profit

$

838.9

 

$

748.2

 

$

708.8

 

Percentage of revenues

 

49.5

%

 

48.2

%

 

47.5

%

Comparison of 2013 and 2012

For the twelve months ended December 31, 2013, gross profit as a percentage of revenues increased 130 basis points compared to the corresponding prior year period. The increase is principally due to the inclusion of higher margin sales from the LMA and Vidacare businesses, price increases in the Americas, EMEA and Asia, new products in the Americas, EMEA and OEM, manufacturing efficiencies in EMEA and OEM and the favorable impact of foreign currency exchange rates. In addition, gross profit in the 2012 period was adversely affected by inventory write-offs for excess, slow moving and damaged product in Asia. These benefits were partly offset by higher warehousing and freight costs in the Americas, EMEA and Asia, lower volumes in the Americas and OEM and higher product costs in the Americas and Asia.

Comparison of 2012 and 2011

For the twelve months ended December 31, 2013, gross profit as a percentage of revenues increased 70 basis points compared to the corresponding prior year period. The increase is primarily due to price increases in all segments and lower manufacturing costs in North America. In addition, 2011 gross profit reflected charges related to a stock keeping unit (“SKU”) rationalization program we implemented to eliminate SKUs that provided low sales volume or insufficient margins to help improve future profitability.  The increases were partly offset by the unfavorable impact of foreign currency exchange rates, higher manufacturing costs in EMEA and inventory write-offs for excess and slow moving product and damaged product in Asia.

Selling, general and administrative

 

 

 

2013

 

 

2012

 

 

2011

 

 

 

(Dollars in millions)

 

Selling, general and administrative

$

502.2

 

$

454.5

 

$

423.9

 

Percentage of revenues

 

29.6

%

 

29.3

%

 

28.4

%

38


 

Comparison of 2013 and 2012

Selling, general and administrative expenses increased $47.7 million during the twelve months ended December 31, 2013 compared to the twelve months ended December 31, 2012. The increase is largely due to expenses associated with the businesses acquired ($36.4 million), including $29.6 million in expenses associated with the LMA business, the excise tax associated with the Patient Protection and Affordable Care Act ($11.5 million), higher employee related expenses, increased costs associated with the conversion of several of our locations to a new enterprise resource planning system ($4.2 million), acquisition costs ($3.2 million) primarily related to the acquisition of Vidacare in the fourth quarter 2013, higher legal costs ($5.8 million) due to increases in the legal reserve resulting from new developments during the year related to certain ongoing litigation, including a verdict against us with respect to a non-operating joint venture, and professional fees and the impact of foreign currency exchange rates ($1.1 million). The increases were partly offset by $12.3 million reversals of contingent consideration related to the acquisitions of Hotspur Technologies Inc. ("Hotspur") ($8.5 million), Semprus BioSciences Corp. (“Semprus”) ($2.4 million) and the assets of Axiom Technology Partners LLP (“Axiom”) ($1.4 million) after determining that certain conditions for the payment of certain contingent consideration would not be satisfied. Selling, general and administrative expenses in 2012 also reflected the loss of $7.6 million from foreign currency forward exchange contracts entered into in anticipation of the acquisition of the LMA business.

Comparison of 2012 and 2011

Selling, general and administrative expenses increased $30.6 million in 2012. The increase is primarily due to higher general and administrative costs across all segments, principally with respect to higher employee related costs ($15.1 million), incremental operating expenses associated with the businesses acquired ($14.7 million), a $7.6 million loss on foreign currency forward exchange contracts entered into in anticipation of the acquisition of the LMA business, acquisition related costs ($7.2 million) and higher selling costs ($4.8 million), generated by increased revenue and support of new products. These increases were partly offset by favorable foreign currency exchange rates ($11.1 million). In addition, 2011 expenses included increases in the valuation allowance with respect to the Greek government bonds that we received in 2011 in settlement of trade receivables due to us from sales to the public hospital system in Greece ($4.5 million); approximately $2.2 million of net separation costs for our former CEO (comprised of $5.5 million of payments under his employment agreement, less approximately $3.3 million of stock option and restricted share forfeitures) and increases in litigation reserves ($1.7 million).

During the third quarter of 2012, we entered into forward exchange contracts for Singapore dollars and US dollars in anticipation of the acquisition of the LMA business. In accordance with FASB guidance, a forecasted transaction is not eligible for hedge accounting if the forecasted transaction involves a business combination. Therefore, gains and losses relating to this arrangement were recognized as incurred. We realized a pre-tax loss of $7.6 million upon settlement of the forward exchange contracts. 

Research and development

 

 

 

2013

 

 

2012

 

 

2011

 

 

 

(Dollars in millions)

 

Research and development

$

65.0

 

$

56.3

 

$

48.7

 

Percentage of revenues

 

3.8

%

 

3.6

%

 

3.3

%

Comparison of 2013 and 2012

The increase in research and development expenses is primarily due to the businesses acquired in 2012.

Comparison of 2012 and 2011

The increase in research and development expenses in 2012, compared to 2011, principally reflects continued investment in the new technologies obtained in the second quarter of 2012 through acquisitions and increased investments related to vascular products in North America.

Goodwill impairment

In the first quarter 2012, we changed our North America reporting unit structure from a single reporting unit to five reporting units comprised of Vascular, Anesthesia/Respiratory, Cardiac, Surgical and Specialty. We allocated the assets and liabilities of our North America Segment among the new reporting units based on their respective operating activities,

39


 

and then allocated goodwill among the reporting units using a relative fair value approach, as required by FASB Accounting Standards Codification (“ASC”) Topic 350.

Following this allocation, we performed goodwill impairment tests on these new reporting units. As a result of these tests, we determined that three of the reporting units in our North America Segment were impaired, and, in the first quarter of 2012, we recorded goodwill impairment charges of $220 million in our Vascular reporting unit, $107 million in our Anesthesia/Respiratory reporting unit and $5 million in our Cardiac reporting unit in the first quarter of 2012.

Restructuring and other impairment charges

 

 

 

2013

 

 

2012

 

 

2011

 

 

 

(Dollars in millions)

 

LMA restructuring program

$

12.2

 

$

2.5

 

$

 

2013 restructuring charges

 

10.2

 

 

 

 

 

2012 restructuring charges

 

4.2

 

 

2.4

 

 

 

2011 restructuring program

 

0.8

 

 

 

 

3.0

 

2007 Arrow integration program

 

0.2

 

 

(1.9

)

 

0.5

 

In-process research and development impairment

 

7.4

 

 

 

 

 

Long-lived asset impairment

 

3.5

 

 

 

 

 

Investments in affiliates impairment

 

 

 

 

 

2.5

 

Total

$

38.5

 

$

3.0

 

$

6.0

 

LMA Restructuring Program

In connection with the acquisition of LMA in 2012, we formulated a plan related to the future integration of LMA and our businesses. The integration plan focuses on the closure of LMA corporate functions and the consolidation of manufacturing, sales, marketing, and distribution functions in North America, Europe and Asia. Approximately $14.7 million has been charged to restructuring and other impairment charges over the term of this restructuring program. Of this amount, $5.5 million related to employee termination costs, $8.2 million related to termination of certain distributor agreements and $1.0 million related to facility closure costs and other actions. During the twelve months ended December 31, 2013, we incurred restructuring charges of $12.2 million under this program primarily related to employee termination benefits and contract termination costs. During 2012, we incurred restructuring charges of $2.5 million under this program primarily related to employee severance costs. As of December 31, 2013, we have a reserve of $4.7 million in connection with this program.  We expect future restructuring expenses associated with the LMA restructuring program, if any, to be nominal. We anticipate realizing annual pre-tax savings in the range of $15-$20 million by the end of 2014 when these restructuring actions are complete.  

2013 Restructuring Charges

In 2013, we initiated programs to consolidate certain administrative and manufacturing facilities in North America and warehouse facilities in Europe and terminate certain European distributor agreements in an effort to reduce costs. We estimate that we will incur an aggregate of up to approximately $11 million in restructuring and other impairment charges over the term of this restructuring program. Of this amount, $5 million relates to employee termination costs, $3 million relates to termination of certain distributor agreements and $3 million relates to facility closures costs and other actions, of which $2 million is associated with charges related to expected post-closing obligations related to acquired businesses. For the twelve month ended December 31, 2013, we incurred restructuring charges of $10.2 million under this program, primarily related to employee termination benefits, contract termination costs and charges related to post-closing obligations associated with its acquired businesses. As of December 31, 2013, we have a reserve of $4.2 million in connection with these projects. We expect to realize annual pre-tax savings in the range of $7-$10 million by the end of 2015 when these restructuring actions are complete.

2012 Restructuring Charges

In 2012, we identified opportunities to improve our supply chain strategy by consolidating three of our North American warehouses into one centralized warehouse, and lower costs and improve operating efficiencies through the termination of certain distributor agreements in Europe, the closure of certain North American facilities and workforce reductions. These projects will entail costs related to reductions in force, contract terminations related to distributor agreements and

40


 

leases, and facility closure and other costs. During 2013, we incurred restructuring charges of $4.2 million and, as of December 31, 2013, we had recorded a reserve of $1.5 million related to these projects. We expect to complete the projects within the next twelve months. We expect future restructuring expenses associated with this restructuring program, if any, to be nominal.

2011 Restructuring Program

In 2011, we initiated a restructuring program at three facilities to consolidate operations and reduce costs. In connection with this program, we recorded contract termination costs of approximately $2.6 million associated with a lease termination, as we vacated 50% of the premises during 2011. In addition, we recorded approximately $0.4 million for employee termination benefits in connection with workforce consolidations. In 2013, we incurred approximately $0.8 million in contract termination costs and facility closure costs in connection with our exit from the remaining portion of the leased facility. The 2011 restructuring program was completed during 2013.

2007 Arrow Integration Program

In connection with our acquisition of Arrow International, Inc. (“Arrow”) in 2007, we formulated a plan to integrate Arrow and our other businesses. Costs related to actions that affected employees and facilities of Teleflex were charged to earnings and included in restructuring and other impairment charges within the consolidated statement of operations. In 2012 we reversed approximately $2.0 million of contract termination costs related to a settlement of a dispute involving the termination of a European distributor agreement that was established in connection with our acquisition of Arrow. The Arrow integration plan was completed during 2013.

Impairment Charges

In-process research and development impairments

In the fourth quarter 2013, we recorded a $2.9 million in-process research and development (“IPR&D”) charge after we made the decision to abandon a research and development project associated with our vascular business.

In the first quarter 2013, we recorded a $4.5 million IPR&D charge pertaining to a research and development project associated with the Axiom acquisition because technological feasibility had not yet been achieved and we determined that the subject technology had no future alternative use.

In May 2012, we acquired Semprus, a biomedical research and development company that developed a polymer surface treatment technology intended to reduce thrombus related complications. As of December 31, 2013, we continue to experience difficulties with respect to the development of the Semprus technology, which we are attempting to resolve through further research and testing.  Failure to resolve these issues may result in a reduction of the expected future cash flows related to the Semprus technology and could result in recognition of impairment charges with respect to the related assets, which could be material.  As of December 31, 2013, we have recorded net assets of $42 million related to this investment.

Long-lived asset impairment

In the third quarter 2013, we recorded $3.5 million in impairment charges related to assets held for sale that had a carrying value in excess of their appraised fair value.  

Investments in affiliates impairment

During 2011, we recognized net impairment charges of $2.5 million related to the decline in value of our investments in affiliates that are considered to be other than temporary. In making this determination, we considered multiple factors, including our intent and ability to hold investments, operating losses of investees that demonstrate an inability to recover the carrying value of the investments, the investee’s liquidity and cash position and market acceptance of the investee’s products and services.

For additional information regarding our restructuring programs and impairment charges, see Note 4 to the consolidated financial statements included in this Annual Report on Form 10-K.

41


 

Interest income and expense

 

 

 

2013

 

 

2012

 

 

2011

 

 

 

(Dollars in millions)

 

Interest expense

$

56.9

 

$

69.6

 

$

70.3

 

Average interest rate on debt during the year

 

3.92

%

 

4.15

%

 

5.18

%

Interest income

$

(0.6

)

$

(1.6

)

$

(1.3

)

 

Interest expense decreased for the twelve months ended December 31, 2013, compared to the corresponding period in 2012, primarily because 2012 interest expense included amortization expense related to our termination of an interest rate swap (approximately $11.1 million for the twelve months ended December 31, 2012).  We terminated our agreement related to the interest rate swap, covering a notional amount of $350 million, in 2011. The unrealized losses within accumulated other comprehensive income associated with our interest rate swap were reclassified into our statement of income (loss) during 2012.

Interest expense decreased $0.7 million in 2012 compared to 2011 due to lower average interest rates, partially offset by approximately $15 million higher average outstanding debt.

Loss on extinguishments of debt

 

 

 

2013

 

 

2012

 

 

2011

 

 

 

(Dollars in millions)

 

Loss on extinguishments of debt

$

1.3

 

$

 

$

15.4

 

 

During the third quarter of 2013, the Company refinanced its $775.0 million senior credit facility comprised of a $375.0 million term loan and a $400.0 million revolving credit facility with a new $850.0 million senior credit facility consisting solely of a revolving credit facility. In connection with the refinancing the Company recognized debt extinguishment costs of $1.3 million related to unamortized debt issuance costs.

During 2011, we recorded losses on the extinguishment of debt of $15.4 million as a result of the prepayment, in the first quarter of 2011, of the remaining outstanding principal amount of our senior notes issued in 2004 (the “2004 Notes”) and the $125 million repayment, in the second quarter of 2011, of term loan borrowings under our senior credit facility. In connection with the prepayment of our 2004 Notes, we recognized debt extinguishment costs of approximately $14.6 million related to the prepayment “make-whole” amount of $13.9 million paid to the holders of the 2004 Notes and the write-off of $0.7 million of unamortized debt issuance costs that we incurred prior to the prepayment of the 2004 Notes. During the second quarter of 2011, we recorded a $0.8 million write-off of unamortized debt issuance costs as a loss on extinguishment of debt in connection with the $125 million repayment of term loan borrowings. See Note 8 to the consolidated financial statements included in this Annual Report on Form 10-K for further information.  

Taxes on income from continuing operations

 

 

 

2013

 

 

2012

 

 

2011

 

 

 

 

 

Effective income tax rate

 

13.4

%

 

(9.9)

%

 

17.8

%

The effective income tax rate in 2013 was 13.4% compared to (9.9%) in 2012. Taxes on income from continuing operations in 2013 were $23.5 million compared to $16.4 million in 2012. The effective tax rate for 2013 was impacted by the realization of net tax benefits resulting from the expiration of statutes of limitation for U.S. federal and state and foreign matters, tax benefits associated with U.S. and foreign tax return filings and the realization of tax benefits resulting from the resolution of a foreign tax matter.

The effective income tax rate in 2012 was (9.9%) compared to 17.8% in 2011. Taxes on income from continuing operations in 2012 were $16.4 million compared to $25.8 million in 2011. The effective income tax rate in 2012 was impacted by a $332 million goodwill impairment charge recorded in the first quarter of 2012, for which only $45 million was tax deductible.

42


 

Segment Results

Segment Net Revenues

 

 

 

Year Ended December 31

 

 

% Increase/(Decrease)

 

 

 

2013

 

 

2012

 

 

2011

 

 

2013 vs 2012

 

2012 vs 2011

 

 

 

(Dollars in millions)

 

 

 

Americas

$

800.5

 

$

726.8

 

$

688.0

 

 

10.1

 

5.6

 

EMEA

 

557.4

 

 

510.3

 

 

525.3

 

 

9.2

 

(2.9

)

Asia

 

207.2

 

 

173.7

 

 

149.6

 

 

19.3

 

16.1

 

OEM

 

131.2

 

 

140.2

 

 

129.6

 

 

(6.5

)

8.2

 

   Segment Net Revenues

$

1,696.3

 

$

1,551.0

 

$

1,492.5

 

 

9.4

 

3.9

 

Segment Operating Profit

 

 

 

Year Ended December 31

 

 

% Increase/(Decrease)

 

 

 

2013

 

 

2012

 

 

2011

 

 

2013 vs 2012

 

2012 vs 2011

 

 

 

(Dollars in millions)

 

 

 

Americas

$

97.4

 

$

91.7

 

$

90.1

 

 

6.3

 

1.8

 

EMEA

 

76.2

 

 

54.7

 

 

74.3

 

 

39.2

 

(26.3

)

Asia

 

70.8

 

 

59.4

 

 

47.1

 

 

19.1

 

26.2

 

OEM

 

27.3

 

 

31.7

 

 

24.7

 

 

(13.7

)

28.2

 

   Segment Operating  Profit(1)

$

271.7

 

$

237.5

 

$

236.2

 

 

14.4

 

0.6

 

 

(1)

See Note 16 to the consolidated financial statements included in this Annual Report on Form 10-K for a reconciliation of segment operating profit to our consolidated income/(loss) from continuing operations before interest, loss on extinguishments of debt and taxes.

The following is a discussion of our segment operating results.

 

Comparison of 2013 and 2012

Americas

Americas net revenues for the twelve months ended December 31, 2013 increased 10.1% compared to the corresponding period in 2012. The increase was primarily due to businesses acquired in 2012 and 2013, which added net revenues of $67.1 million, including $60.5 million generated by the LMA business and $5.8 million generated by the Vidacare business; new product sales ($13.6 million), primarily of vascular and anesthesia/respiratory products; and price increases ($8.8 million), principally related to surgical care products, vascular products and Latin America. These increases in net revenues were partly offset by lower volumes ($14.7 million), primarily in anesthesia/respiratory products, vascular products, surgical instruments and cardiac products and the unfavorable impact of foreign currency exchange rates ($1.1 million).

Americas segment operating profit for the twelve months ended December 31, 2013 increased 6.3% compared to the corresponding period in 2012. The increase was primarily due to the operating profit generated by certain of the businesses acquired in 2012 and 2013 including LMA ($25.4 million) and Vidacare ($3.5 million), the reversal of contingent consideration related to the Hotspur, Semprus and Axiom acquisitions ($11.1 million), price increases ($8.8 million) and new product sales ($5.1 million).  The increases in operating profit for the twelve months ended December 31, 2013 were partially offset by the excise tax associated with the Patient Protection and Affordable Care Act ($11.3 million), volume declines ($9.9 million), higher general and administrative costs ($7.9 million), higher raw material costs ($6.5 million) primarily in specialty products and anesthesia/respiratory products, increased research and development costs ($4.8 million) driven by the continued investment in new technologies obtained through acquisitions in 2012 and 2013, incremental operating costs associated with those same acquisitions ($4.0 million) and higher manufacturing costs ($3.8 million) primarily in anesthesia respiratory products.

EMEA

EMEA net revenues for the twelve months ended December 31, 2013 increased 9.2% compared to the corresponding period in 2012. The increase was primarily due to businesses acquired in 2012 and 2013, which added net revenues of $25.6 million, including $24.2 million generated by the LMA business; the favorable impact of foreign currency exchange rates ($11.6 million), price increases ($5.7 million) including the benefit of selling direct to customers in some markets rather than to a third party distributor, new product sales ($2.9 million) and volume gains ($1.3 million).

43


 

EMEA segment operating profit for the twelve months ended December 31, 2013 increased 39.2% compared to the corresponding period in 2012.  The increase in operating profit reflects lower manufacturing costs ($6.2 million), due to improved absorption and lower overhead costs as a result of process improvements; margin improvements driven by price increases resulting from conversions from distributor to direct sales in some markets as well as other price increases ($4.6 million), the operating profit generated by the businesses acquired ($2.1 million), primarily the LMA business ($3.6 million), partially offset by higher research and development costs related to the Semprus acquisition ($1.2 million); the favorable impact of foreign currency exchange rates ($2.3 million) and lower material costs ($1.9 million). These increases in operating profit were partly offset by higher warehousing and freight costs ($3.2 million), including costs to consolidate a distribution facility in France. In 2012, EMEA segment operating profit was adversely impacted by a $7.6 million loss from foreign currency forward exchange contracts entered into in anticipation of the acquisition of the LMA business.

Asia

Asia net revenues for the twelve months ended December 31, 2013 increased 19.3% compared to the corresponding period in 2012. The increase was primarily due to $28.3 million of net revenues generated by the businesses acquired in 2012 and 2013, including $25.6 million generated by the LMA business, volume gains of $9.3 million (volume gains in China and Southeast Asia were largely offset by lower volumes in Japan), price increases ($1.1 million) and new products ($0.3 million). These increases were partly offset by the unfavorable impact of foreign currency exchange rates ($5.5 million).

Asia segment operating profit for the twelve months ended December 31, 2013 increased 19.1% compared to the corresponding period in 2012. The increase in segment operating profit for the twelve months ended December 31, 2013 was due to the operating profit generated by the businesses acquired in 2012 and 2013 ($7.7 million), primarily the LMA business ($7.2 million), volume gains ($6.7 million) and price increases ($1.1 million), partly offset by higher warehouse and freight costs ($2.2 million) associated with the volume gains in China and Southeast Asia, higher raw material costs ($2.2 million) in Japan and an unfavorable impact from foreign currency transaction losses ($2.2 million) . In addition, during the twelve months ended December 31, 2012, Asia segment operating profit was adversely affected by inventory write-offs for excess, slow moving and damaged product ($4.9 million).

OEM

OEM net revenues for the twelve months ended December 31, 2013 decreased 6.5% compared to the corresponding period in 2012. The decrease was due to lower volume, primarily due to a decline in sales of catheter and performance fiber products, partly offset by new product sales.

OEM segment operating profit for the twelve months ended December 31, 2013 decreased 13.7% compared to the corresponding period in 2012. The decrease is due to lower volumes partly offset by lower manufacturing and operating costs.

 

Comparison of 2012 and 2011

Americas

Americas net revenues increased 5.6% in 2012 compared to the corresponding period in 2011. The increase includes approximately $14.6 million related to acquisitions in 2012, primarily LMA; $9.5 million related to new product sales, primarily in vascular, anesthesia, respiratory and surgical products; price increases of approximately $9.6 million, primarily in surgical, vascular and Latin America products; and approximately $6.4 million due to higher volume, primarily in anesthesia, respiratory, Latin America and surgical products.

Americas segment operating profit increased 1.8% in 2012 compared to the corresponding period in 2011. The increase reflects the favorable impact of higher net revenues and lower manufacturing costs. These increases were partly offset by higher selling, general and administrative expenses ($28.5 million) and higher research and development expenses ($7.6 million). The increase in selling, general and administrative expenses is largely due to employee related costs, operating expenses and acquisition costs associated with the businesses acquired in 2012 ($11.7 million) and higher sales and marketing expenses (approximately $4.0 million), primarily in support of new products. The increase in research and development expenses is due to costs associated with the new technologies obtained in the second quarter of 2012 through acquisitions ($5.6 million), In addition, 2011 included a SKU rationalization charge (approximately $1.3 million) to eliminate SKUs based on low sales volumes or insufficient margins.

44


 

EMEA

EMEA net revenues decreased 2.9% in 2012 compared to the corresponding period in 2011. The decrease reflects the unfavorable impact of foreign currency exchange rates (approximately $39.1 million). The foreign currency exchange rate impact was partly offset by higher volume of approximately $13.1 million, primarily in urology, surgical and anesthesia products, partly offset by a decline in cardiac products, 2012 acquisitions ($5.6 million), primarily LMA, new product sales ($3.5 million) and price increases ($1.8 million).

EMEA segment operating profit decreased 26.3% in 2012 compared to the corresponding period in 2011.  The decrease was primarily due to the unfavorable impact of foreign currency exchange rates ($13.3 million), operating expenses and acquisition costs associated with 2012 acquisitions ($8.7 million), a loss on foreign currency forward exchange contracts entered into in anticipation of the acquisition of substantially all of the assets of LMA ($7.6 million) and higher manufacturing costs, partly offset by higher revenues. In addition, EMEA segment operating profit in 2011 included an increase in the valuation allowance related to the Greek government bonds ($4.5 million).

Asia

Asia net revenues increased 16.1% in 2012 compared to the corresponding period in 2011. The increase was due to higher volume of approximately $15.5 million, mostly due to sales growth in the Asia Pacific region, particularly in China, $5.1 million related to acquisitions in 2012, primarily LMA, and $4.1 million related to price increases.

Asia segment operating profit increased 26.2% in 2012 compared to the corresponding period in 2011. The increase is due to the increase in revenues, partly offset by inventory write-offs for excess, slow moving and damaged product (approximately $4.9 million) and operating expenses and acquisitions costs associated with acquisitions we completed in 2012 ($1.4 million).

OEM

OEM net revenues increased 8.2% in 2012 compared to the corresponding period in 2011. The increase was due to higher volume of approximately $4.7 million, which benefited from core growth, new products ($4.5 million) and price increases ($3.1 million).

OEM segment operating profit increased 28.2% in 2012 compared to the corresponding period in 2011. The increase reflects the higher net revenues and lower manufacturing costs, partly offset by higher general and administrative costs.

 

Liquidity and Capital Resources

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our principal source of liquidity is operating cash flows. In addition to operating cash flows, other significant factors that affect our overall management of liquidity include: capital expenditures, acquisitions, pension funding, dividends, adequacy of available bank lines of credit and access to capital markets.

We currently do not foresee any difficulties in meeting our cash requirements or accessing credit as needed in the next twelve months. 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, as discussed above in Global Economic Conditions, although there have been recent improvements, the domestic and global financial markets remain volatile and the global credit markets are constrained, which creates risk that our customers and suppliers may be unable to access liquidity. Consequently, we continue to monitor our credit risk, particularly related to countries in Europe. As of December 31, 2013, our net receivables from publicly funded hospitals in Italy, Spain, Portugal and Greece were $63.1 million compared to $70.6 million as of December 31, 2012. For the twelve months ended December 31, 2013, 2012 and 2011, net revenues from these countries was approximately 8%, 9% and 9%, respectively, of total net revenues, and average days that current and long-term accounts receivables were outstanding were 260, 288 and 318 days, respectively. As of December 31, 2013 and 2012 net current and long-term accounts receivables from these countries were approximately 31% and 34%, respectively, of consolidated net current and long-term accounts receivables. 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 2014 and beyond. See Critical Accounting Estimates for additional information regarding the critical accounting estimates related to our accounts receivable.

45


 

During 2013, we completed the acquisitions of Vidacare Corporation and Ultimate Medical Pty. Ltd., whose products complement the product portfolios in our Critical Care product group, and Eon Surgical, Ltd, whose technology complements the product portfolio in our Surgical Care product group.  The aggregate fair value of the consideration paid for these acquisitions was $307.0 million. We allocated the fair value of the $307.0 million consideration paid to assets acquired of $401.2 million, less liabilities assumed of $94.2 million. The assets acquired included intangibles for intellectual property, in-process research and development, customer lists, tradenames and goodwill, aggregating approximately $378.8 million. See Note 3 to the consolidated financial statements included in this Annual Report on Form 10-K for additional information regarding our acquisitions.

During 2013, we also refinanced our senior credit facility, replacing our existing $375.0 million term loan and our existing $400.0 million revolving credit facility with an $850.0 million dollar revolving credit facility. We used borrowings under the new revolving credit facility to pay down the $375 million principal on the term loan and to fund the related refinancing costs of $6.4 million. The new $850 million senior credit facility bears interest at an applicable rate elected by us equal to either the “base rate” (the greater of either the federal funds effective rate plus 0.5%, the prime rate or one month LIBOR plus 1.0%) plus an applicable margin of 0.25% to 1.00%, or a “LIBOR rate” for the period corresponding to the applicable interest period of the borrowings plus an applicable margin of 1.25% to 2.00%.  As of December 31, 2013, the interest rate on the $850 million senior credit facility was 1.92% (comprised of the LIBOR rate of 0.17% plus a spread of 1.75%).

In 2012, we completed four late-stage technology acquisitions and expanded our anesthesia product portfolio through the acquisition of all of the assets of LMA International N.V. The aggregate fair value of the consideration paid was approximately $422.2 million, which includes initial consideration of approximately $367.9 million, contingent consideration arrangements related to the businesses acquired, which were valued at $55.8 million, and a subsequent $1.5 million favorable working capital adjustment. As of December 31, 2013, the maximum aggregate amount of remaining actual contingent consideration that we could be required to pay is $62 million. We allocated the fair value of the $422.2 million consideration paid to assets acquired of $470.5 million, net of liabilities assumed of $48.3 million. The assets acquired included intangibles for technology, in-process research and development, customer lists, tradenames and goodwill, aggregating approximately $380.5 million.

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. Of our $432.0 million of cash and cash equivalents at December 31, 2013, $374.3 million was held at foreign subsidiaries. We are not aware of any restrictions on repatriation of these funds and, subject to cash payment of additional United States income taxes or foreign withholding taxes, these funds could be repatriated, if necessary. Any additional taxes could be offset, at least in part, by foreign tax credits. The amount of any taxes required to be paid, which could be significant, and the application of tax credits would be determined based on income tax laws in effect at the time of such repatriation. We do not expect any such repatriation to result in additional tax expense as taxes have been provided for on unremitted foreign earnings that we do not consider permanently reinvested.

In addition to the net cash provided by United States-based operating activities, we have foreign sources of cash available to help fund our debt service requirements in the United States. Accordingly, we repatriated approximately $67 million and $56 million in 2013 and 2012, respectively, of cash from our foreign subsidiaries to help fund debt service and other cash requirements.  These cash distributions are subject to tax in the United States at the corporate tax rate reduced by applicable foreign tax credits for foreign taxes paid on distributed earnings. Approximately $92.7 million of our $229.9 million of net cash provided by operating activities in 2013 was generated in the United States, and approximately $46.1 million of our $193.9 million of net cash provided by operating activities in 2012 was generated in the United States.

We have no scheduled principal payments under our senior credit facility until 2018. We anticipate our domestic interest payments for 2014 will be approximately $46.3 million. We plan to utilize cash from operations, both from United States as well as foreign based operations, and our revolving credit facility to meet quarterly debt service or other requirements.

Our Convertible Notes were reclassified to a current liability because a contingent conversion feature was triggered relating to our stock price. Refer to the “Financing Arrangements” section below for additional details.

We believe our cash flow from operations, available cash and cash equivalents, borrowings under our revolving credit facility and sales of accounts receivable under our securitization program will enable us to fund our operating requirements, capital expenditures and debt obligations for the next 12 months and the foreseeable future. See financial arrangements for further information relating to our debt obligations, including our 3.875% Convertible Senior Subordinated Notes.

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Cash Flows

The following table provides a summary of our cash flows for the periods presented:

 

 

Year Ended December 31,

 

 

2013

 

 

2012

 

 

2011

 

 

(Dollars in millions)

Cash flows from continuing operations provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

Operating activities

$

229.9

 

 

$

193.9

 

 

$

94.4

 

Investing activities

 

(372.6

)

 

 

(368.3

)

 

 

306.7

 

Financing activities

 

232.6

 

 

 

(64.9

)

 

 

(11.1

)

Cash flows used in discontinued operations

 

(3.3

)

 

 

(10.1

)

 

 

(2.8

)

Effect of exchange rate changes on cash and cash Equivalents

 

8.3

 

 

 

2.4

 

 

 

(11.6

)

Increase (decrease) in cash and cash equivalents

$

94.9

 

 

$

(247.0

)

 

$

375.6

 

Comparison of 2013 and 2012

 

Cash Flow from Operating Activities

Operating activities from continuing operations provided net cash of $229.9 million during 2013 compared to $193.9 million during 2012. The $36.0 million increase is primarily due to improved operations year-over-year, partially offset by net unfavorable year-over-year changes in working capital items, primarily inventories and prepaid expenses and other current assets. Inventories increased $8.9 million during 2013, as compared to a $2.0 million increase during 2012. The increase was due to sales volume growth, primarily in Asia. Prepaid expenses and other current assets increased $5.9 million during 2013, as compared to a $9.6 million decrease during 2012, primarily due to the collection of outstanding VAT claims in 2012.

 

Cash Flow from Investing Activities

 

Net cash used in investing activities from continuing operations was $372.6 million during 2013, reflecting net payments for businesses acquired of $309.0 million and capital expenditures of $63.6 million. The net payments for businesses acquired includes the acquisitions of Vidacare, EON Surgical, Ltd. and Ultimate Medical Pty. Ltd. for an aggregate amount of approximately $307.0 million; and an asset purchase of $3.4 million for in-process research and development related to the EON Surgical technology, partly offset by a $1.5 million working capital adjustment with respect to the consideration paid in connection with the LMA acquisition.

 

Cash Flow from Financing Activities 

 

Net cash used in financing activities from continuing operations was $232.6 million during 2013. On July 16, 2013, we refinanced our senior credit facility, which was comprised of a $375 million term loan and $400.0 million revolving credit facility, and replaced it with a new $850.0 million senior credit facility consisting solely of a revolving credit facility. We used borrowings under the new facility to repay the outstanding $375.0 million term loan and to pay costs of $6.4 million associated with the refinancing. During the fourth quarter of 2013, we borrowed an additional $298.0 million under the revolving credit facility to finance the acquisition of Vidacare. In addition, net cash used in financing activities included dividend payments of $55.9 million, contingent consideration payments of $17.0 million related to our acquisitions of VasoNova Inc. (“VasoNova”), Axiom, LMA, Hotspur and the guided imaging business of MEPY Benelux BVBA and payments to noncontrolling interest shareholders of $0.7 million, partly offset by $7.6 million in proceeds from the exercise of outstanding stock options issued under our stock compensation plans.

Comparison of 2012 and 2011

 

Cash Flow from Operating Activities

 

Operating activities from continuing operations provided net cash of approximately $193.9 million during 2012 compared to $94.4 million during 2011. The $99.5 million increase is primarily due to favorable year-over-year changes in working capital items, primarily accounts receivable (favorable year-over-year by $40.6 million), inventory (favorable year-over-year by $31.8 million) and prepaid expenses and other current assets (favorable year-over-year by $18.1 million). The year-over-year improvement in working capital from accounts receivable reflects a significant collection of receivables

47


 

from the Spanish government (approximately $17.5 million) during the second quarter of 2012, largely offset by higher net revenues in 2012 in the Americas and EMEA. The comparatively unfavorable change in accounts receivable in 2011 reflected the effect of the termination of a factoring agreement in Italy (approximately $30.4 million) and a slowdown in collections particularly in Italy, Spain and Greece (approximately $18.1 million). The year-over-year improvement in working capital related to inventories reflects a 2012 reduction in the build-up of inventory in 2011 and inventory write-offs of excess, slow moving and damaged product in Asia in 2012. The 2011 increase in inventory reflected a planned worldwide build-up of inventory primarily to improve service levels by accelerating fulfillment of customer orders. The inventory increases in 2011 also included a $7.1 million increase in the Asia Pacific region to stock a new distribution facility in Singapore. The year-over-year improvement in working capital from prepaid expenses and other current assets primarily reflects the collection of outstanding 2011 VAT claims in 2012. These favorable year-over-year comparisons were partly offset by a reduction in deferred tax liability associated with potential future repatriation of non-permanently reinvested foreign earnings in 2012.

 

Cash Flow from Investing Activities

 

Net cash used in investing activities from continuing operations was $368.3 million during 2012 reflecting payments for businesses acquired of $369.4 million, which includes the aggregate initial consideration we paid in connection with the acquisitions (principally LMA), and capital expenditures of $65.4 million, partly offset by the proceeds from sales of businesses and assets of $66.7 million. The proceeds from sales of businesses and assets include $45.1 million from the sale of our orthopedic business, $16.8 million that we received as a working capital adjustment pursuant to the terms of the agreement related to the sale of the cargo systems and container businesses of our former Aerospace Segment, $4.5 million from the payment of a subordinated promissory note related to the sale of the marine business of our former Commercial Segment and proceeds of $0.3 million from the sale of a building.

 

Cash Flow from Financing Activities 

 

Net cash used in financing activities from continuing operations was $64.9 million in 2012, primarily due to dividend payments of $55.6 million and approximately $17.6 million for contingent consideration payments related to our 2011 acquisition of VasoNova and our 2012 acquisitions of, Semprus, the assets of Axiom and the EZ Blocker product line, partly offset by $9.0 million in proceeds from the exercise of outstanding stock options issued under our stock compensation plans.

 

Financing Arrangements

 

The following table provides our net debt to total capital ratio:

 

 

 

2013

 

 

2012

 

 

 

(Dollars in millions)

 

Net debt includes:

 

 

 

 

 

 

 

 

Current borrowings

 

$

356.3

 

 

$

4.7

 

Long-term borrowings

 

 

930.0

 

 

 

965.3

 

Unamortized debt discount

 

 

48.4

 

 

 

59.7

 

Total debt

 

 

1,334.7

 

 

 

1,029.7

 

Less: Cash and cash equivalents

 

 

432.0

 

 

 

337.0

 

Net debt

 

$

902.7

 

 

$

692.7