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 Americasoperating 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
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; ·
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; ·
N.V. (LMA), a global provider of laryngeal masks whose products are used in
anesthesia and emergency care, which enhanced our anesthesia product
· 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
Former Commercial Segment Divestiture
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 millionin cash, net of $1.5 millionof 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 millionin 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
March 23, 2010the 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 Statesexperienced 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, Portugaland 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. Chinahas 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 Japanis 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.
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 $ 1,005.413.7 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 $ 1,492.59.4 3.9 36
-------------------------------------------------------------------------------- The following table presents the percentage increases or decreases in product group net revenues during the years ended
December 31, 2013and 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 Constant Currency Currency(1) Impact Total Change Currency(1) 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, 2013increased 9.4% to $1,696.3 millionfrom $1,551.0 millionin the twelve months ended December 31, 2012. The $145.3 millionincrease in net revenues is largely due to the businesses acquired during 2012 and 2013, which generated net revenues of approximately $121.1 millionin 2013, including approximately $110.3 milliongenerated 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 millionfrom $1,040.3 millionin 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, 2013was 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, 2013was partially offset by a decline in sales of respiratory products. Surgical Care net revenues increased 5.3% in 2013 to $306.5 millionfrom $291.1 millionin 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, 2013was 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 millionin 2013 from $79.4 millionin 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, 2013was primarily due to a decline in sales of intra-aortic balloon pumps. OEM net revenues decreased 6.5% to $131.2 millionin 2013 from $140.2 millionin 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, 2013was 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
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 Americaand EMEA. These increases were partly offset by the $42.3 millionunfavorable impact of foreign currency exchange rates in 2012. Critical Care net revenues increased 3.5% in 2012 to $1,040.3 millionfrom $1,005.4 millionin 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 millionfrom $276.9 millionin 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 millionfrom $80.6 millionin 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 millionfrom $129.6 millionin 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 $ 708.8Percentage 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 Americasand OEM and higher product costs in the Americasand 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 $ 423.9Percentage of revenues 29.6 % 29.3 % 28.4 % 38
Comparison of 2013 and 2012
Selling, general and administrative expenses increased
$47.7 millionduring the twelve months ended December 31, 2013compared 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 millionin 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 millionreversals 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 millionfrom 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 millionin 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 millionloss 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 millionof net separation costs for our former CEO (comprised of $5.5 millionof payments under his employment agreement, less approximately $3.3 millionof 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 millionupon settlement of the forward exchange contracts. Research and development 2013 2012 2011 (Dollars in millions) Research and development $ 65.0 $ 56.3 $ 48.7Percentage 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
In the first quarter 2012, we changed our
North Americareporting 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 millionin our Vascular reporting unit, $107 millionin our Anesthesia/Respiratory reporting unit and $5 millionin 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 -
2007 Arrow integration program 0.2 (1.9
In-process research and development impairment 7.4 -
Long-lived asset impairment 3.5 -
Investments in affiliates impairment - -
$ 38.5 $ 3.0 $ 6.0LMA 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, Europeand Asia. Approximately $14.7 millionhas been charged to restructuring and other impairment charges over the term of this restructuring program. Of this amount, $5.5 millionrelated to employee termination costs, $8.2 millionrelated to termination of certain distributor agreements and $1.0 millionrelated to facility closure costs and other actions. During the twelve months ended December 31, 2013, we incurred restructuring charges of $12.2 millionunder this program primarily related to employee termination benefits and contract termination costs. During 2012, we incurred restructuring charges of $2.5 millionunder this program primarily related to employee severance costs. As of December 31, 2013, we have a reserve of $4.7 millionin 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 millionby 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 Americaand warehouse facilities in Europeand terminate certain European distributor agreements in an effort to reduce costs. We estimate that we will incur an aggregate of up to approximately $11 millionin restructuring and other impairment charges over the term of this restructuring program. Of this amount, $5 millionrelates to employee termination costs, $3 millionrelates to termination of certain distributor agreements and $3 millionrelates to facility closures costs and other actions, of which $2 millionis 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 millionunder 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 millionin connection with these projects. We expect to realize annual pre-tax savings in the range of $7-$10 millionby 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
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 millionassociated with a lease termination, as we vacated 50% of the premises during 2011. In addition, we recorded approximately $0.4 millionfor employee termination benefits in connection with workforce consolidations. In 2013, we incurred approximately $0.8 millionin 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 Teleflexwere charged to earnings and included in restructuring and other impairment charges within the consolidated statement of operations. In 2012 we reversed approximately $2.0 millionof 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.
In-process research and development impairments
In the fourth quarter 2013, we recorded a
$2.9 millionin-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 millionIPR&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 millionrelated to this investment.
Long-lived asset impairment
In the third quarter 2013, we recorded
Investments in affiliates impairment
During 2011, we recognized net impairment charges of
$2.5 millionrelated 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 millionfor 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 millionin 2012 compared to 2011 due to lower average interest rates, partially offset by approximately $15 millionhigher average outstanding debt.
Loss on extinguishments of debt
2013 2012 2011 (Dollars in millions) Loss on extinguishments of debt
$ 1.3$ - $ 15.4During the third quarter of 2013, the Company refinanced its $775.0 millionsenior credit facility comprised of a $375.0 millionterm loan and a $400.0 millionrevolving credit facility with a new $850.0 millionsenior credit facility consisting solely of a revolving credit facility. In connection with the refinancing the Company recognized debt extinguishment costs of $1.3 millionrelated to unamortized debt issuance costs. During 2011, we recorded losses on the extinguishment of debt of $15.4 millionas 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 millionrepayment, 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 millionrelated to the prepayment "make-whole" amount of $13.9 millionpaid to the holders of the 2004 Notes and the write-off of $0.7 millionof 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 millionwrite-off of unamortized debt issuance costs as a loss on extinguishment of debt in connection with the $125 millionrepayment 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 millioncompared to $16.4 millionin 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 millioncompared to $25.8 millionin 2011. The effective income tax rate in 2012 was impacted by a $332 milliongoodwill impairment charge recorded in the first quarter of 2012, for which only $45 millionwas 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 $ 688.010.1 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 $ 1,492.59.4 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 $ 90.16.3 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 $ 236.214.4 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 Americasnet revenues for the twelve months ended December 31, 2013increased 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 milliongenerated by the LMA business and $5.8 milliongenerated 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). Americassegment operating profit for the twelve months ended December 31, 2013increased 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, 2013were 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 net revenues for the twelve months ended
December 31, 2013increased 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 milliongenerated 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, 2013increased 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 millionloss from foreign currency forward exchange contracts entered into in anticipation of the acquisition of the LMA business. Asianet revenues for the twelve months ended December 31, 2013increased 19.3% compared to the corresponding period in 2012. The increase was primarily due to $28.3 millionof net revenues generated by the businesses acquired in 2012 and 2013, including $25.6 milliongenerated by the LMA business, volume gains of $9.3 million(volume gains in Chinaand Southeast Asiawere 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). Asiasegment operating profit for the twelve months ended December 31, 2013increased 19.1% compared to the corresponding period in 2012. The increase in segment operating profit for the twelve months ended December 31, 2013was 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 Chinaand Southeast Asia, higher raw material costs ( $2.2 million) in Japanand an unfavorable impact from foreign currency transaction losses ( $2.2 million) . In addition, during the twelve months ended December 31, 2012, Asiasegment operating profit was adversely affected by inventory write-offs for excess, slow moving and damaged product ( $4.9 million).
OEM net revenues for the twelve months ended
December 31, 2013decreased 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
Comparison of 2012 and 2011
Americas Americasnet revenues increased 5.6% in 2012 compared to the corresponding period in 2011. The increase includes approximately $14.6 millionrelated to acquisitions in 2012, primarily LMA; $9.5 millionrelated 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 Americaproducts; and approximately $6.4 milliondue to higher volume, primarily in anesthesia, respiratory, Latin Americaand surgical products. Americassegment 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 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). Asianet 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 Pacificregion, particularly in China, $5.1 millionrelated to acquisitions in 2012, primarily LMA, and $4.1 millionrelated to price increases. Asiasegment 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 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, Portugaland Greecewere $63.1 millioncompared to $70.6 millionas 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, 2013and 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 Corporationand 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 millionconsideration 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 millionterm loan and our existing $400.0 millionrevolving credit facility with an $850.0 million dollarrevolving credit facility. We used borrowings under the new revolving credit facility to pay down the $375 millionprincipal on the term loan and to fund the related refinancing costs of $6.4 million. The new $850 millionsenior 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 LIBORplus 1.0%) plus an applicable margin of 0.25% to 1.00%, or a " LIBORrate" 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 millionsenior credit facility was 1.92% (comprised of the LIBORrate 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 millionfavorable 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 millionconsideration 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 millionof cash and cash equivalents at December 31, 2013, $374.3 millionwas held at foreign subsidiaries. We are not aware of any restrictions on repatriation of these funds and, subject to cash payment of additional United Statesincome 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 millionand $56 millionin 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 Statesat the corporate tax rate reduced by applicable foreign tax credits for foreign taxes paid on distributed earnings. Approximately $92.7 millionof our $229.9 millionof net cash provided by operating activities in 2013 was generated in the United States, and approximately $46.1 millionof our $193.9 millionof 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 Statesas 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. 46 --------------------------------------------------------------------------------
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 $ 94.4Investing 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 ) $ 375.6Comparison of 2013 and 2012
Operating activities from continuing operations provided net cash of
$229.9 millionduring 2013 compared to $193.9 millionduring 2012. The $36.0 millionincrease 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 millionduring 2013, as compared to a $2.0 millionincrease during 2012. The increase was due to sales volume growth, primarily in Asia. Prepaid expenses and other current assets increased $5.9 millionduring 2013, as compared to a $9.6 milliondecrease during 2012, primarily due to the collection of outstanding VAT claims in 2012.
Net cash used in investing activities from continuing operations was
$372.6 millionduring 2013, reflecting net payments for businesses acquired of $309.0 millionand 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 millionfor in-process research and development related to the EON Surgical technology, partly offset by a $1.5 millionworking capital adjustment with respect to the consideration paid in connection with the LMA acquisition.
Net cash used in financing activities from continuing operations was
$232.6 millionduring 2013. On July 16, 2013, we refinanced our senior credit facility, which was comprised of a $375 millionterm loan and $400.0 millionrevolving credit facility, and replaced it with a new $850.0 millionsenior credit facility consisting solely of a revolving credit facility. We used borrowings under the new facility to repay the outstanding $375.0 millionterm loan and to pay costs of $6.4 millionassociated with the refinancing. During the fourth quarter of 2013, we borrowed an additional $298.0 millionunder 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 millionrelated 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 millionin proceeds from the exercise of outstanding stock options issued under our stock compensation plans. Comparison of 2012 and 2011
Operating activities from continuing operations provided net cash of approximately
$193.9 millionduring 2012 compared to $94.4 millionduring 2011. The $99.5 millionincrease 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 Americasand 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 Asiain 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 millionincrease in the Asia Pacificregion 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.
Net cash used in investing activities from continuing operations was
$368.3 millionduring 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 millionfrom the sale of our orthopedic business, $16.8 millionthat 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 millionfrom 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 millionfrom the sale of a building.
Net cash used in financing activities from continuing operations was
$64.9 millionin 2012, primarily due to dividend payments of $55.6 millionand approximately $17.6 millionfor 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 millionin 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 $ 4.7Long-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 $ 692.7Total capital includes: Net debt $ 902.7 $ 692.7Shareholders' equity 1,913.5 1,779.0 Total capital $ 2,816.2 $ 2,471.7Percent of net debt to total capital 32 % 28 % The increase in percentage of net debt to total capital in 2013 compared to 2012 was largely due to the increase in total debt partially offset by an increase in cash and cash equivalents. The increase in total debt was a result of additional borrowings made during the year to fund acquisitions and the increase in cash and cash equivalents was primarily a result of improved operations.
Fixed rate borrowings comprised 49% and 63% of total borrowings at
48 -------------------------------------------------------------------------------- Our senior credit agreement and the indenture under which we issued our 6.875% Senior Subordinated Notes due 2019 (the "2019 Notes") contain covenants that, among other things, limit or restrict our ability, and the ability of our subsidiaries, to incur debt, create liens, consolidate, merge or dispose of certain assets, make certain investments, engage in acquisitions, pay dividends on, repurchase or make distributions in respect of capital stock and enter into swap agreements. Our senior credit agreement also requires us to maintain a consolidated leverage ratio of not more than 4.0:1 and a consolidated interest coverage ratio (generally, Consolidated EBITDA to Consolidated Interest Expense, each as defined in the senior credit agreement) of not less than 3.50:1 as of the last day of any period of four consecutive fiscal quarters calculated pursuant to the definitions and methodology set forth in the senior credit agreement. At
December 31, 2013, our consolidated leverage ratio was 3.60:1 and our interest coverage ratio was 8.80:1 both of which are in compliance with the limits described in the preceding sentence. The obligations under the senior credit agreement are guaranteed (subject to certain exceptions) by substantially all of the material domestic subsidiaries of the Company and (subject to certain exceptions and limitations) secured by a pledge on substantially all of the equity interests owned by the Company and each guarantor. At December 31, 2013, we had $680.0 millionin borrowings outstanding and approximately $5.9 millionin outstanding standby letters of credit under our $850.0 millionrevolving credit facility. This facility is used principally for seasonal working capital needs and, at certain times, to help fund acquisitions. The availability of loans under our revolving credit facility is dependent upon our ability to maintain our financial condition and our continued compliance with the covenants contained in our senior credit agreement. Moreover, additional borrowings would be prohibited if a Material Adverse Effect (as defined in the senior credit agreement) were to occur. Notwithstanding these restrictions, we believe our revolving credit facility provides us with significant flexibility to meet our foreseeable working capital needs. At our current level of EBITDA (as defined in the senior credit agreement) for the year ended December 31, 2013, we would have been permitted $146.7 millionof additional debt beyond the levels outstanding at December 31, 2013. Moreover, additional capacity would be available if borrowed funds were used to acquire a business or businesses through the purchase of assets or controlling equity interests so long as the aforementioned leverage and interest coverage ratios are met after calculating EBITDA on a proforma basis to give effect to the acquisition.
In addition, we have an accounts receivable securitization facility under which we sell a security interest in domestic accounts receivable for consideration of up to
$50.0 millionto a commercial paper conduit. As of December 31, 2013, the maximum amount available for borrowing under this facility was $43.9 million. This facility is utilized from time to time to provide increased flexibility in funding short term working capital requirements. The agreement governing the accounts receivable securitization facility contains certain covenants and termination events. An occurrence of an event of default or a termination event under this facility may give rise to the right of our counterparty to terminate this facility. As of December 31, 2013and 2012, we had $4.7 millionof outstanding borrowings under our accounts receivable securitization facility. Our 3.875% Convertible Senior Subordinated Notes due 2017 (the "Convertible Notes") are included in the dilutive earnings per share calculation using the treasury stock method. Under the treasury stock method, we must calculate the number of shares issuable under the terms of these notes based on the average market price of our common stock during the applicable reporting period, and include that number in the total diluted shares figure for the period. At the time we sold our convertible notes, we entered into convertible note hedge and warrant agreements that together are intended to have the economic effect of reducing the net number of shares that will be issued upon conversion of the notes by, in effect, increasing the conversion price of the Convertible Notes, from our economic standpoint, to $74.65. However, under accounting principles generally accepted in the United States of America("GAAP"), since the impact of the convertible note hedge agreements is anti-dilutive, we exclude from the calculation of fully diluted shares the number of shares of our common stock that we would receive from the counterparties to these agreements upon settlement. 49
-------------------------------------------------------------------------------- Under the treasury stock method, 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. The following table provides examples of how changes in our stock price would impact the number of additional shares included in the denominator of the fully diluted earnings per share calculation ("Total Treasury Stock Method Incremental Shares"). The table also reflects the impact on the number of shares we could expect to issue upon concurrent settlement of the Convertible Notes, the warrant and the convertible note hedge ("Incremental Shares Issued by
Teleflexupon Conversion"): Total Treasury Incremental Stock Method Shares Due to Shares Issued by Convertible Warrant Incremental Teleflex under Teleflex upon Share Price Note Shares Shares Shares(1) Note Hedge Conversion(2) $65370 - 370 (370) - $751,190 31 1,221 (1,190) 31 $851,817 794 2,611 (1,817) 794 $952,313 1,398 3,711 (2,313) 1,398 $1052,714 1,886 4,600 (2,714) 1,886 $1153,045 2,289 5,334 (3,045) 2,289
(1) Represents the number of incremental shares that must be included in the
calculation of fully diluted shares under GAAP.
(2) Represents the number of incremental shares to be issued by us upon
conversion of the convertible notes, assuming concurrent settlement of the
convertible note hedges and warrants. Our 3.875% Convertible Notes are convertible under certain circumstances, including in any fiscal quarter following an immediately preceding fiscal quarter in which the last reported sales price of our common stock for at least 20 days during a period of 30 consecutive trading days ending on the last day of such fiscal quarter exceeds 130% of the conversion price of the notes (approximately
$79.72). During the fourth quarter of 2013, the Company's closing stock price exceeded the 130% threshold described above and, accordingly, the Convertible Notes have been classified as a current liability as of December 31, 2013. The determination of whether or not the Convertible Notes are convertible under such circumstances is made each quarter until maturity or conversion. Consequently, the Convertible Notes may not be convertible in one or more future quarters if the common stock price-based contingent conversion threshold is not met in such quarters, in which case the Convertible Notes would again be classified as long-term debt unless another conversion event set forth in the Convertible Notes has occurred. The Company has elected a net settlement method to satisfy its conversion obligation, under which the Company 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 the Company believes it has sufficient liquidity to repay the principal amounts due through a combination of utilizing our existing cash on hand and accessing our credit facility, our use of these funds could adversely affect our results of operations and liquidity. The classification of the Convertible Notes as a current liability had no impact on our financial covenants.
For additional information regarding our indebtedness, please see Note 8 to the consolidated financial statements included in this Annual Report on Form 10-K.
Stock Repurchase Programs On
June 14, 2007, our Board of Directors authorized the repurchase of up to $300 millionof our outstanding common stock. Repurchases of our stock under the Board authorization may be made from time to time in the open market and may include privately-negotiated transactions as market conditions warrant and subject to regulatory considerations. The stock repurchase program has no expiration date and our ability to execute on the program will depend on, among other factors, cash requirements for acquisitions, cash generated from operations, debt repayment obligations, market conditions and regulatory requirements. In addition, our senior credit facility and our 2019 Notes limit our ability to repurchase shares and make other restricted payments. Accordingly, these provisions may limit our ability to repurchase shares under this Board authorization. Through December 31, 2013, no shares have been purchased under this Board authorization. 50 --------------------------------------------------------------------------------
Contractual obligations at
Payments due by period Less than 1-3 4-5 More than Total 1 year years Years 5 years (Dollars in thousands) Total borrowings(1)
$ 1,334,700 $ 404,700$ - $ 680,000 $ 250,000Interest obligations(2) 210,023 46,270 92,455 64,188 7,110 Operating lease obligations 110,363 21,704 30,753 22,439 35,467 Minimum purchase obligations(3) 1,733 1,733 - - - Other postretirement benefits 38,182 3,381
7,039 7,415 20,347 Total contractual obligations
(1) Convertible Senior Subordinated Notes due in 2017 are included in payment
due in less than 1 year due to the trigger of the conversion feature, which
is described in more detail in the "Financing Arrangements" section above.
Total borrowings also include
program. See to Note 8 to the consolidated financial statements included in
this Annual Report on Form 10-K for additional details regarding this
(2) Interest payments on floating rate debt are based on the interest rate in
that are enforceable and legally binding and that specify all significant
terms, including fixed or minimum quantities to be purchased, fixed, minimum
or variable pricing provisions based on prices in effect on a particular
date and the approximate timing of the transactions. These obligations
relate primarily to material purchase requirements. We have recorded a noncurrent liability for uncertain tax positions of
$55.2 millionand $62.0 millionas of December 31, 2013and December 31, 2012, respectively. Due to uncertainties regarding the ultimate resolution of ongoing or future tax examinations we are not able to reasonably estimate the amount of any income tax payments to settle uncertain income tax positions or the periods in which any such payments will be made. In 2013, cash contributions to all defined benefit pension plans were $17.7 million, and we estimate the amount of cash contributions will be approximately $9.3 millionin 2014. Due to the potential impact of future plan investment performance, changes in interest rates, changes in other economic and demographic assumptions and changes in legislation in the United Statesand other foreign jurisdictions, we are not able to reasonably estimate the timing and amount of contributions that may be required to fund our defined benefit plans for periods beyond 2014.
See Notes 13 and 14 to the consolidated financial statements included in this Annual Report on Form 10-K for additional information.
Critical Accounting Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. We have identified the following as critical accounting estimates, which are defined as those that are reflective of significant judgments and uncertainties, are the most pervasive and important to the presentation of our financial condition and results of operations and could potentially result in materially different results under different assumptions and conditions.
Accounting for Allowance for Doubtful Accounts
In the ordinary course of business, we grant non-interest bearing trade credit to our customers on normal credit terms. In an effort to reduce our credit risk, we (i) establish credit limits for all of our customer relationships, (ii) perform ongoing credit evaluations of our customers' financial condition, (iii) monitor the payment history and aging of our customers' receivables, and (iv) monitor open orders against an individual customer's outstanding receivable balance. 51 -------------------------------------------------------------------------------- An allowance for doubtful accounts is maintained for accounts receivable based on our historical collection experience and expected collectability of the accounts receivable, considering the period an account is outstanding, the financial position of the customer and information provided by credit rating services. The adequacy of this allowance is reviewed each reporting period and adjusted as necessary. In light of the volatility in global economic markets during the past several years, we instituted enhanced measures to facilitate customer-by-customer risk assessment when estimating the allowance for doubtful accounts. Such measures included, among others, monthly credit control committee meetings, at which customer credit risks are identified after review of, among other things, accounts that exceed specified credit limits, payment delinquencies and other customer problems. In addition, for some of our non-government customers, we instituted measures designed to reduce our risk exposures, including issuing dunning letters, reducing credit limits, requiring that payments accompany orders and instituting legal action with respect to delinquent accounts. With respect to government customers, we evaluate receivables for potential collection risks associated with the availability of government funding and reimbursement practices. Some of our customers, particularly in
Europe, have extended or delayed payments for products and services already provided. Collectability concerns regarding our accounts receivable from these customers, for the most part in Greece, Italy, Spain and Portugal, is the primary cause for the increase in the allowance. At December 31, 2013, these countries accounted for 31% of our total net current and long-term accounts receivable. Long-term receivables of $17.6 millionare included in other assets on the balance sheet at December 31, 2013. If the financial condition of these customers or the healthcare systems in these countries deteriorate such that the ability of an increasing number of customers to make payments is uncertain, additional allowances may be required in future periods. Our allowance for doubtful accounts was $10.7 millionat December 31, 2013and $7.8 millionat December 31, 2012which was 3.3% and 2.4%, respectively, of gross accounts receivable. 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. Distributor Rebates We offer rebates to certain distributors and reserve an estimate for the rebate as a reduction of revenues at the time of sale. In estimating rebates, we consider the lag time between the point of sale and the payment of the distributor's rebate claim, distributor-specific trend analyses, contractual commitments, including stated rebate rates, historical experience and other relevant information. We adjust reserves to reflect differences between estimated and actual experience, and record such adjustment as a reduction of sales in the period of adjustment. Historical adjustments to recorded reserves have not been significant and we do not expect significant revisions of these estimates in the future. The reserve for estimated rebates was $7.8 millionand $19.5 millionat December 31, 2013and 2012, respectively. The decrease in accrued rebates in 2013 as compared to 2012 was primarily due to our continued migration to a common global ERP platform, specifically, the integration of our LMA and Arrow businesses, which resulted in reduced processing lag time (from monthly to daily payments in many instances). There were no significant changes in estimates recorded during the year. We expect the reserve as of December 31, 2013to be paid within 90 days subsequent to year-end. Inventory Utilization Inventories are valued at the lower of cost or market. We maintain a reserve for excess and obsolete inventory that reduces the carrying value of our inventories to reflect the diminution of value resulting from product obsolescence, damage or other issues affecting marketability by an amount equal to the difference between the cost of the inventory and its estimated market value. Factors utilized in the determination of estimated market value include (i) current sales data and historical return rates, (ii) estimates of future demand, (iii) competitive pricing pressures, (iv) new product introductions, (v) product expiration dates, and (vi) component and packaging obsolescence. The adequacy of this reserve is reviewed each reporting period and adjusted as necessary. We regularly compare inventory quantities on hand against historical usage or forecasts related to specific items in order to evaluate obsolescence and excessive quantities. In assessing historical usage, we also qualitatively assess business trends to evaluate the reasonableness of using historical information as an estimate of future usage. 52 --------------------------------------------------------------------------------
Our inventory reserve was
Accounting for Long-Lived Assets and Investments
We assess the remaining useful life and recoverability of long-lived assets whenever events or circumstances indicate the carrying value of an asset may not be recoverable. The evaluation is based on various analyses, including undiscounted cash flow projections, which involves significant management judgment. Any impairment loss, if indicated, equals the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.
Accounting for Goodwill and Other Intangible Assets
Intangible assets may represent indefinite-lived assets (e.g., certain trademarks or brands), determinable-lived intangibles (e.g., certain other trademarks or brands, customer relationships, patents and technologies) or goodwill. Of these, only the costs of determinable-lived intangibles are amortized to expense over their estimated life. Determining the useful life of an intangible asset requires considerable judgment as different types of intangible assets will have different useful lives. Goodwill and indefinite-lived intangibles assets, primarily certain trademarks and brand names, are not amortized but are tested annually for impairment during the fourth quarter, using the first day of the quarter as the measurement date, or earlier upon the occurrence of certain events or substantive changes in circumstances that indicate an impairment may exist. Such conditions may include an economic downturn in a geographic market or a change in the assessment of future operations. Our impairment testing for goodwill is performed separately from our impairment testing of indefinite-lived intangibles. Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows to measure fair value. Assumptions used in our impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with internal projections and operating plans. We believe such assumptions and estimates are also comparable to those that would be used by other marketplace participants. Goodwill Goodwill impairment assessments are performed at a reporting unit level; our reporting units are generally businesses one level below the respective operating segment. We have a total of ten reporting units, eight of which carry goodwill on their balance sheets. In applying the goodwill impairment test, we may assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Qualitative factors may include, but are not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments, and entity specific factors such as strategies and financial performance. If, after completing the qualitative assessment, it is determined more likely than not that the fair value of a reporting unit is less than its carrying value, we proceed to a two-step quantitative impairment test. Alternatively, we may proceed directly to testing goodwill for impairment through the two-step impairment test without conducting the qualitative analysis. In the fourth quarter 2013, we elected to forgo the qualitative assessment and test each of our reporting units whose assets include goodwill through the two-step quantitative impairment test as discussed below. The first step of the two-step impairment test is to quantitatively compare the fair value of a reporting unit, including goodwill, with its carrying value. In performing the first step, we calculate fair values of the various reporting units using equal weighting of two methods; one which estimates the discounted cash flows (DCF) of each of the reporting units based on projected earnings in the future (the Income Approach) and one which is based on sales of similar businesses in actual transactions (the Market Approach). If the fair value exceeds the carrying value, there is no impairment. If the reporting unit carrying value exceeds the fair value, we recognize an impairment loss based on the amount by which the carrying value of goodwill exceeds its implied fair value. The implied fair value of goodwill is determined by deducting the fair value of a reporting unit's identifiable assets and liabilities from the fair value of the reporting unit as a whole, as if that reporting unit had just been acquired and the fair value of the individual assets acquired and liabilities assumed initially were being determined. Determining fair value requires the exercise of significant judgment. The more significant judgments and assumptions used in the Income Approach include (1) the amount and timing of expected future cash flows which are based primarily on our estimates of future sales, operating income, industry trends and the regulatory environment of the individual reporting units, (2) the expected long-term growth rates for each of our reporting units, which approximate the expected long-term growth rate of the global economy and of the medical device industry, and (3) discount rates that are used to discount future cash flows to their present values, which are based on an assessment of the risk inherent in the future 53
-------------------------------------------------------------------------------- cash flows of the respective reporting units along with various market based inputs. The more significant judgments and assumptions used in the Market Approach were (1) determination of appropriate revenue and EBITDA multiples used to estimate a reporting unit's fair value and (2) the selection of appropriate comparable companies to be used for purposes of determining those multiples. There were no changes to the underlying methods used in 2013 as compared to the prior year valuations of our reporting units. The DCF analysis utilized in the fourth quarter 2013 impairment test was performed over a ten year time horizon for each reporting unit. The discount rate was 10.0% for all reporting units. A perpetual growth rate of 2.5% was assumed for all reporting units. In addition, our current stock market capitalization was reconciled to the sum of the estimated fair values of the individual reporting units, plus a control premium, to ensure the fair value conclusions were reasonable in light of current market capitalization. The control premium implied by our analysis was approximately 32%, which was deemed to be within a reasonable range of observed average industry control premiums. No impairment in the carrying value of any of our reporting units was evident as a result of the assessment of their respective fair values as determined under the methodology described above in the fourth quarter 2013 impairment test. Our expected future growth rates estimated for purposes of the goodwill impairment test are based on our estimates of future sales, operating income and cash flow and are consistent with our internal budgets and business plans, which reflect a modest amount of core revenue growth coupled with the successful launch of new products each year; the effect of these growth indicators more than offset volume losses from products that are expected to reach the end of their life cycle. Under the Income Approach, significant changes in assumptions would be required for a reporting unit to fail the step one test. For example, an increase of over 1.0% in the discount rate or a decrease of over 10% percent in the compound annual growth rate of operating income would be required to indicate impairment for the reporting units. Nevertheless, while we believe the assumed growth rates of sales and cash flows are reasonable and achievable the possibility remains that the revenue growth of a reporting unit may not be as high as expected, and, as a result, the estimated fair value may decline. If our strategy and/or new products are not successful and we do not achieve anticipated core revenue growth in the future with respect to a reporting unit, the goodwill in the reporting unit may become impaired and, in such case, we may incur material impairment charges. Other Intangible Assets Intangible assets are assets acquired that lack physical substance and that meet the specified criteria for recognition apart from goodwill. Intangible assets we obtained through acquisitions are comprised mainly of technology, customer relationships, and trade names. The fair value of acquired technology and trade names is estimated by the use of a relief from royalty method, which values an intangible asset by estimating the royalties saved through the ownership of an asset. Under this method, an owner of an intangible asset determines the arm's length royalty that likely would have been charged if the owner had to license the asset from a third party. The royalty, which is based on the estimated rate applied against forecasted sales, is tax-effected and discounted to present value using a discount rate commensurate with the relative risk of achieving the cash flow attributable to the asset. The fair value of acquired customer relationships is estimated by the use of an income approach known as the excess earnings method. The excess earnings method measures economic benefit of an asset indirectly by calculating residual profit attributable to the asset after appropriate returns are paid with respect to complementary or contributory assets. The residual profit is tax-effected and discounted to present value at an appropriate discount rate that reflects the risk factors associated with the estimated income stream. Management tests indefinite-lived intangible assets for impairment annually, and more frequently if events or changes in circumstances indicate that an impairment may exist. Similar to the goodwill impairment test process, we may assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. If, after completing such qualitative assessment, we determine it is not more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, the asset is not impaired. If we conclude it is more likely than not that the fair value of the indefinite-lived intangible assets is less than the carrying value, we then proceed to a quantitative impairment test, which consists of a comparison of the fair value of the intangible assets to their carrying amounts. Alternatively, we may elect to forgo the qualitative analysis and proceed directly to testing the indefinite-lived intangible asset for impairment through the quantitative impairment test. In the fourth quarter 2013, we performed a quantitative impairment test on all of our indefinite-lived tradenames. In connection with the quantitative impairment test, management tests for impairment by comparing the carrying value of intangible assets to their estimated fair values. Since quoted market prices are seldom available for intangible assets, we utilize present value techniques to estimate fair value. Common among such approaches is the relief from royalty methodology described above, under which management estimates the direct cash flows associated with the intangible 54
-------------------------------------------------------------------------------- asset. Management must estimate the hypothetical royalty rate, discount rate, and terminal growth rate to estimate the forecasted cash flows associated with the asset. Discount rates and perpetual growth rates utilized in the impairment test of the trade names during the fourth quarter 2013 are comparable to the rates utilized in the impairment test of goodwill. The compound annual growth rate in revenues projected to be generated from the trade names ranged from 7% to 12% and a royalty rate of 4% was assumed. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows generated as a result of the respective intangible assets. Assumptions about royalty rates are based on the rates at which similar trademarks or technologies are being licensed in the marketplace. No impairment in the carrying value of our indefinite-lived intangible asset was evident as a result of the assessment of its respective fair value as determined under the methodology described above. We are not required to perform an annual impairment test for long-lived assets, including finite-lived intangible assets (e.g., customer relationships). In accordance with applicable accounting guidance, we assess the remaining useful life and recoverability of long-lived assets whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable (a triggering event). Triggering events include the likely (i.e., more likely than not) disposal of a portion of such assets or the occurrence of an adverse change in the market involving the business employing the related assets. Significant judgments in this area involve determining whether a triggering event has occurred and re-assessing the reasonableness of the remaining useful lives of finite-lived assets by, among other things, assessing customer attrition rates.
Accounting for Pensions and Other Postretirement Benefits
We provide a range of benefits to eligible employees and retired employees, including pensions and postretirement healthcare benefits. Several statistical and other factors which are designed to project future events are used in calculating the expense and liability related to these plans. These factors include actuarial assumptions about discount rates, expected rates of return on plan assets, compensation increases, turnover rates and healthcare cost trend rates. We review the actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when appropriate.
The weighted average assumptions for
Pension Other Benefits 2013 2012 2011 2013 2012 2011 Discount rate 4.27% 4.28% 5.50% 3.83% 3.95% 5.10% Rate of return 8.31% 8.27% 8.31% - - -
Initial healthcare trend rate - - - 8.15%
Ultimate healthcare trend rate - - - 5.0%
5.0% 5.0% Significant differences in our actual experience or significant changes in our assumptions may materially affect our pension and other postretirement obligations and our future expense. The following table shows the sensitivity of plan expenses and benefit obligations to changes in the weighted average assumptions: Expected Return on Plan Assumed Discount Rate Assets Assumed Healthcare Trend Rate 50 Basis 50 Basis 50 Basis Point Point Point 1.0% Increase Decrease Change Increase 1.0% Decrease (Dollars in millions) Net periodic pension and postretirement healthcare expense
$ (0.2 ) $ 0.1 $ 1.4$ 0.3 $ (0.2 ) Projected benefit obligation $ (25.7 ) $ 28.5N/A $ 4.3 $ (3.7 )
We estimate the fair value of share-based awards on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods. Share-based compensation expense related to stock options is measured using a Black-Scholes option pricing model that takes 55 -------------------------------------------------------------------------------- into account highly subjective and complex assumptions with respect to expected life of options, volatility, risk-free interest rate and expected dividend yield. The expected life of options granted represents the period of time that options granted are expected to be outstanding, which is derived from the vesting period of the award, as well as historical exercise behavior. Expected volatility is based on a blend of historical volatility and implied volatility derived from publicly traded options to purchase our common stock, which we believe is more reflective of the market conditions and a better indicator of expected volatility than solely using historical volatility. The risk-free interest rate is the implied yield currently available on United States Treasury zero-coupon issues with a remaining term equal to the expected life of the option. Accounting for Income Taxes Our annual provision for income taxes and determination of the deferred tax assets and liabilities require management to assess uncertainties, make judgments regarding outcomes and utilize estimates. We conduct a broad range of operations around the world, subjecting us to complex tax regulations in numerous international jurisdictions, resulting at times in tax audits, disputes with tax authorities and potential litigation, the outcome of which is uncertain. Management must make judgments about such uncertainties and determine estimates of our tax assets and liabilities. Deferred tax assets and liabilities are measured and recorded using currently enacted tax rates, which we expect will apply to taxable income in the years in which differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases are recovered or settled. The likelihood of a material change in our expected realization of these assets is dependent on future taxable income, our ability to use foreign tax credit carryforwards and carrybacks, final
United Statesand foreign tax settlements, and the effectiveness of our tax planning strategies in the various relevant jurisdictions. While management believes that its judgments and interpretations regarding income taxes are appropriate, significant differences in actual experience may require future adjustments to our tax assets and liabilities, which could be material. We are also required to assess the realizability of our deferred tax assets. We evaluate all positive and negative evidence and use judgments regarding past and future events, including operating results and available tax planning strategies that could be implemented to realize the deferred tax assets. Based on this assessment, we determine when it is more likely than not that all or some portion of our deferred tax assets may not be realized, in which case we apply a valuation allowance to offset the amount of such deferred tax assets. To the extent facts and circumstances change in the future, adjustments to the valuation allowances may be required.
The valuation allowance for deferred tax assets of
Significant judgment is required in determining income tax provisions and in evaluating tax positions. We establish additional provisions for income taxes when, despite the belief that tax positions are supportable, there remain certain positions that do not meet the minimum probability threshold, which is a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority. In the normal course of business, we are examined by various federal, state and foreign tax authorities. We regularly assess the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of our provision for income taxes. We adjust the income tax provision, the current tax liability and deferred taxes in any period in which facts that necessitate an adjustment become known. Specifically, we are currently in the midst of examinations by the Canadian, German,
Czech Republic, and Austrian taxing authorities with respect to our income tax returns for those countries for various tax years. The ultimate outcomes of the examinations of these returns could result in increases or decreases to our recorded tax liabilities, which would affect our financial results.
See Note 13 to the consolidated financial statements in this Annual Report on Form 10-K for additional information regarding our uncertain tax positions.
New Accounting Standards
See Note 2 to the consolidated financial statements included in this Annual Report on Form 10-K for a discussion on recently issued accounting standards, including estimated effects, if any, on our consolidated financial statements.