# TELEFLEX INC (TFX) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from TELEFLEX INC's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/96943/000009694322000016/tfx-20211231.htm
Accession: 0000096943-22-000016
Filing date: 2022-03-01
Report date: 2021-12-31
Extracted from Item 7 to the first post-MD&A boundary after HTML sanitization.
Confidence: high

Company profile: /company/TFX/
All MD&A years: /company/TFX/mda/
Next year: /company/TFX/mda/fy2022/ (FY 2022)

ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a global provider of medical technology products focused on enhancing clinical benefits, improving patient and provider safety and reducing total procedural costs. We primarily design, develop, manufacture and supply medical devices used by hospitals and healthcare providers for common diagnostic and therapeutic

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procedures in critical care and surgical applications. Approximately 95% of our net revenues come from single-use medical devices. We market and sell our products worldwide through a combination of our direct sales force and distributors. Because our products are used in numerous markets and for a variety of procedures, we are not dependent upon any one end-market or procedure. We are focused on achieving consistent, sustainable and profitable growth by increasing our market share and improving our operating efficiencies.

We evaluate our portfolio of products and businesses on an ongoing basis to ensure alignment with our overall objectives. Based on our evaluation, we may seek to optimize utilization of our facilities through restructuring initiatives designed to further reduce our cost base and enhance our competitive position. In addition, we may continue to explore opportunities to expand the size of our business and improve our margins through a combination of acquisitions and distributor to direct sales conversions, which generally involve our elimination of a distributor from the sales channel, either by acquiring the distributor or terminating the distributor relationship (in some instances, particularly in Asia, the conversions involve our acquisition or termination of a master distributor and the continued sale of our products through sub-distributors). Our distributor to direct sales conversions are designed to facilitate improved product pricing and more direct access to the end users of our products within the sales channel. Further, we may identify opportunities to expand our margins through strategic divestitures of existing businesses and product lines that do not meet our objectives.

Divestiture

On May 15, 2021, we entered into a definitive agreement to sell certain product lines within our global respiratory product portfolio (the "Divested respiratory business") to Medline Industries, Inc. (“Medline”) for consideration of $286.0 million, reduced by $12 million in working capital not transferring to Medline, which is subject to customary post close adjustments (the "Respiratory business divestiture"). In connection with the Respiratory business divestiture, we also entered into several ancillary agreements with Medline to help facilitate the transfer of the business, which provide for transition support, quality, supply and manufacturing services, including a manufacturing and supply transition agreement (the "MSTA").

On June 28, 2021, the first day of the third quarter of 2021, we completed the initial phase of the Respiratory business divestiture, pursuant to which we received cash proceeds of $259 million. We attributed $33.8 million of the proceeds to our performance obligations pursuant to the MSTA. The resulting liability was measured as the excess of the estimated fair value of the services to be performed over the estimated proceeds we expect to receive over the MSTA term. It was recorded within Other current liabilities and Other liabilities in the condensed consolidated balance sheet and the related proceeds will be recognized in net revenues as the services are performed.

The second phase of the Respiratory business divestiture will occur once we transfer certain additional manufacturing assets to Medline. Our receipt of $15.0 million in additional cash proceeds is contingent upon the transfer of these manufacturing assets and is expected to occur prior to the end of 2023. We plan to recognize the contingent consideration, and any gain on sale resulting from the second phase of the divestiture, when it becomes realizable.

Net revenues attributable to our Divested respiratory business recognized prior to the Respiratory business divestiture are included within each of our geographic segments and were $60.7 million for the year ended December 31, 2021, and $138.5 million for the year ended December 31, 2020. For the year ended December 31, 2021, we recognized $51.1 million in net revenues attributed to services provided to Medline in accordance with the MSTA, which are presented within our Americas reporting segment.

COVID-19 pandemic and related economic factors

Beginning in the first half of 2020, the challenges arising from the COVID-19 pandemic have adversely impacted our financial results, mainly as a result of a decline in demand for certain of our products, and have had an effect on various aspects of our global operations and employees resulting from precautionary and preventive measures to reduce the spread of COVID-19. Our business has been impacted by travel restrictions, border closures and quarantines as they affect our various sites, including our manufacturing sites. We have also experienced inefficiencies in our manufacturing operations due to temporary or partial work stoppages as well as government-mandated and self-imposed restrictions placed on, and safety measures implemented at, our facilities globally. The challenges arising from the pandemic have also impacted our contractors, suppliers, customers and other business partners and have generally had an adverse effect on macroeconomic conditions across the globe. Accordingly, this has impacted various aspects of our global supply chain, including causing logistical transport challenges for our freight transport providers, and has resulted in cost inflation. While we have not yet experienced

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significant disruptions in the global supply chain for our products that are in high demand, we have in some cases experienced lengthened delivery times, resulting in backorders for some of our products. We continue to monitor the impacts resulting from the pandemic on our operations.

To date, our financial results were most severely impacted by the pandemic during the second quarter of 2020 due to reduced elective procedure volumes, partially offset by increased demand for products used in the treatment of patients with COVID-19. Since the second quarter of 2020, we have experienced varying levels of continuing recovery across our product lines and geographic segments from the challenges stemming from the pandemic. We believe that the COVID-19 pandemic will continue to have an impact on our business, particularly in the near term, and that such impact would be most significant if the virus becomes more prevalent, if vaccine immunization rates do not increase and if new strains of the virus continue to emerge. As a result of the dynamic nature of the crisis, we cannot accurately predict the extent or duration of the impacts of the pandemic.

In addition to the impacts of the COVID-19 pandemic, we continue to monitor trade and tariff activity, inflation, and exchange rate volatility that could impact our financial position, results of operations or liquidity.

Results of Operations

As used in this discussion, "new products" are products for which commercial sales have commenced within the past 36 months, and “existing products” are products for which commercial sales commenced more than 36 months ago. Discussion of results of operations items that reference the effect of one or more acquired businesses (except as noted below with respect to acquired distributors) generally reflects the impact of the acquisitions within the first 12 months following the date of the acquisition. In addition to increases and decreases in the per unit selling prices of our products to our customers, our discussion of the impact of product price increases and decreases also reflects the impact on the pricing of our products resulting from any elimination of distributors, either through acquisition or termination of the distributor, from the sales channel. All dollar amounts in tables are presented in millions unless otherwise noted.

For a discussion of our results of operations comparison for 2020 and 2019, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed on February 25, 2021.

Comparison of 2021 and 2020

Revenues

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Net Revenues","$","2,809.6","","","$","2,537.2"]]
[[/GREPCENT_TABLE]]

Net revenues for the year ended December 31, 2021 increased by $272.4 million, or 10.7%,compared to the prior year, which was primarily attributable to a $94.4 million increase in sales volume of existing products, largely stemming from the impact that the COVID-19 pandemic had on the prior year, net revenues of $70.4 million generated by acquired businesses, primarily Z-Medica, a $50.0 million increase in new product sales and $44.9 million of favorable fluctuations in foreign currency exchange rates.

Gross profit

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Gross profit","$","1,549.6","","","$","1,324.9"],["Percentage of revenues","55.2","%","","52.2","%"]]
[[/GREPCENT_TABLE]]

For the year ended December 31, 2021, gross margin increased 300 basis points, or 5.7%, compared to the prior year period primarily due to higher sales volumes largely stemming from the impact that the COVID-19 pandemic had on the prior year, benefits from cost improvement initiatives, price increases and favorable product mix. The increases in gross margin were partially offset by an increase in logistics and distribution costs, largely stemming from the enduring impact of the COVID-19 pandemic.

Selling, general and administrative

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Selling, general and administrative","$","860.1","","","$","743.6"],["Percentage of revenues","30.6","%","","29.3","%"]]
[[/GREPCENT_TABLE]]

Selling, general and administrative expenses increased $116.5 million for the year ended December 31, 2021, compared to the prior year. The increase was primarily attributable to the benefit recognized in the prior year

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resulting from decreases in the estimated fair value of our contingent consideration liabilities stemming from the adverse impacts of the COVID-19 pandemic, higher selling and marketing expenses across certain of our product portfolios, operating expenses incurred by acquired businesses, primarily Z-Medica, and higher performance related employee-benefit expenses.

Research and development

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Research and development","$","130.8","","","$","119.7"],["Percentage of revenues","4.7","%","","4.7","%"]]
[[/GREPCENT_TABLE]]

Research and development expenses increased $11.1 million for the year ended December 31, 2021, compared to the prior year, which was primarily attributable to European Union Medical Device Regulation ("EU MDR") related costs partially offset by lower project spend within certain of our product portfolios.

Restructuring and impairment charges

Respiratory divestiture plan

In 2021, in connection with the Respiratory business divestiture, we committed to a restructuring plan designed to separate the manufacturing operations that will be transferred to Medline from those that will remain with Teleflex, which includes related workforce reductions (the “Respiratory divestiture plan”). The plan includes expanding certain of our existing locations to accommodate the transfer of capacity from the sites that will be transferred to Medline and replicating the manufacturing processes at alternate existing locations. We expect this plan will be substantially completed by the end of 2023.

We estimate that we will incur aggregate pre-tax restructuring and restructuring related charges in connection with the Respiratory divestiture plan of $24 million to $30 million and substantially all of these charges will result in cash outlays, the majority of which will be made in 2022 and 2023. Additionally, we expect to incur $22 million to $28 million in aggregate capital expenditures under the plan, which we expect will be incurred mostly in 2022 and 2023.

2021 Restructuring plan

During the first quarter of 2021, we committed to a restructuring plan designed to streamline various business functions across our segments (the "2021 Restructuring plan"). The plan was substantially completed by the end of 2021 and we expect future restructuring charges associated with the program, if any, to be nominal. We will achieve annual pre-tax savings of $15 million as a result of this plan.

Anticipated charges and pre-tax savings related to restructuring programs and other similar cost savings initiatives

We have ongoing restructuring programs consisting of the consolidation of our manufacturing operations (referred to as our 2019, 2018 and 2014 Footprint realignment plans) in addition to the Respiratory divestiture plan and the 2021 Restructuring plan, both as described above. We also have similar ongoing activities to relocate certain manufacturing operations within our OEM segment (the "OEM initiative") that do not meet the criteria for a restructuring program under applicable accounting guidance; nevertheless, the activities should result in cost savings (we expect only minimal costs to be incurred in connection with the OEM initiative). With respect to the restructuring programs and the OEM initiative, the table below summarizes charges incurred or estimated to be incurred and estimated annual pre-tax savings to be realized as follows: (1) with respect to charges (a) the estimated total charges that will have been incurred once the restructuring programs and the OEM initiative are completed; (b) the charges incurred through December 31, 2021; and (c) the estimated charges to be incurred from January 1, 2022 through the last anticipated completion date of the restructuring programs and the OEM initiative, and (2) with respect to estimated annual pre-tax savings (a) the estimated total annual pre-tax savings to be realized once the restructuring programs and OEM initiative are completed; (b) the estimated annual pre-tax savings realized based on the progress of the restructuring programs and the OEM initiative through December 31, 2021; and (c) the estimated additional annual pre-tax savings to be realized from January 1, 2022 through the last anticipated completion date of the restructuring programs and the OEM initiative.

Estimated charges and pre-tax savings are subject to change based on, among other things, the nature and timing of restructuring activities and similar activities, changes in the scope of restructuring programs and the OEM initiative, unanticipated expenditures and other developments, the effect of additional acquisitions or dispositions

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and other factors that were not reflected in the assumptions made by management in previously estimating restructuring and restructuring related charges and estimated pre-tax savings. Moreover, estimated pre-tax savings constituting efficiencies with respect to increased costs that otherwise would have resulted from business acquisitions involve, among other things, assumptions regarding the cost structure and integration of businesses that previously were not administered by our management, which are subject to a particularly high degree of risk and uncertainty. It is likely that estimates of charges and pre-tax savings will change from time to time, and the table below may reflect changes from amounts previously estimated. Additional details, including estimated charges expected to be incurred in connection with our restructuring programs and the anticipated completion dates, are described in Note 5 to the consolidated financial statements included in this Annual Report on Form 10-K.

Pre-tax savings may be realized during, and subsequent to, the completion of the restructuring programs. Pre-tax savings can also be affected by increases or decreases in sales volumes generated by the businesses impacted by the consolidation of manufacturing operations; such variations in revenues can increase or decrease pre-tax savings generated by the consolidation of manufacturing operations. For example, an increase in sales volumes generated by the impacted businesses, although likely to increase manufacturing costs, may generate additional savings with respect to costs that otherwise would have been incurred if the manufacturing operations were not consolidated.

[[GREPCENT_TABLE]]
[["","Restructuring programs and other similar cost saving initiatives"],["","Estimated Total","","Actual results through December 31, 2021","","Estimated Remaining"],["Restructuring charges - Restructuring plans (1)","$102 - $110","","$99","","$3 - $11"],["Restructuring charges - Respiratory divestiture plan","5 - 8","","3","","2 - 5"],["Total restructuring charges","107 - 118","","102","","5 - 16"],["Restructuring related charges - Restructuring plans (1)","128 - 146","","101","","27 - 45"],["Restructuring related charges - Respiratory divestiture plan","19 - 22","","3","","16 - 19"],["Total restructuring related charges (2)","147 - 168","","104","","43 - 64"],["Total charges","$254 - $286","","$206","","$48 - $80"],["OEM initiative annual pre-tax savings","$6 - $7","","$2","","$4 - $5"],["Pre-tax savings- Restructuring plans (1) (3)","88 - 97","","55","","33 - 42"],["Total annual pre-tax savings","$94 - $104","","$57","","$37 - $47"]]
[[/GREPCENT_TABLE]]

(1)Restructuring plans consist of the 2021 Restructuring program and the 2019, 2018 and 2014 Footprint realignment plans.

(2)Represents charges that are directly related to restructuring programs and principally constitute costs to transfer manufacturing operations to existing lower-cost locations, project management costs and accelerated depreciation, as well as a charge that is expected to be imposed by a taxing authority as a result of our exit from facilities in the authority's jurisdiction. Most of these charges (other than the tax charge) are expected to be recognized as cost of goods sold.

(3)The majority of the pre-tax savings are expected to result in reductions to cost of goods sold. Substantially all of the estimated remaining savings are expected to be realized between January 1, 2022 and December 31, 2023.

The following discussion provides additional details with respect to our ongoing significant restructuring programs:

2019 Footprint realignment plan

In February 2019, we initiated a restructuring plan primarily involving the relocation of certain manufacturing operations to existing lower-cost locations and related workforce reductions (the “2019 Footprint realignment plan"). These actions are expected to be substantially completed by the end of 2022.

We estimate that we will incur charges totaling $54 million to $60 million under the plan, of which we estimate that $48 million to $54 million of these charges will result in future cash outlays. We expect to incur $31 million to $33 million in total capital expenditures under the plan.

We expect to achieve annual pre-tax savings of $20 million to $22 million once the plan is fully implemented.

2018 Footprint realignment plan

In May 2018, we initiated a restructuring plan involving the relocation of certain European manufacturing

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operations to existing lower-cost locations, the outsourcing of certain European distribution operations and related workforce reductions (the "2018 Footprint realignment plan"). These actions are expected to be substantially completed by the end of 2022.

We estimate that we will incur total charges in connection with the 2018 Footprint realignment plan of $110 million to $128 million, of which, we estimate that $99 million to $122 million of these charges will result in future cash outlays. Additionally, we expect to incur $15 million to $16 million in total capital expenditures under the plan.

We expect to achieve annual pre-tax savings of $25 million to $30 million once the plan is fully implemented.

2014 Footprint realignment plan

In April 2014, we initiated a restructuring plan involving the consolidation of operations and a related reduction in workforce at certain facilities, and the relocation of manufacturing operations from certain higher-cost locations to existing lower-cost locations (the "2014 Footprint realignment plan"). We expect the plan will be substantially completed by the end of 2022.

We estimate that we will incur total charges of $53 million to $55 million, which we expect will result in cash outlays of $43 million to $46 million, and total capital expenditures of $26 million to $27 million under the plan.

We expect to achieve annual pre-tax savings of $28 million to $30 million once the plan is fully implemented.

The following table provides information regarding restructuring charges we have incurred with respect to each of our restructuring programs, as well as impairment charges, for the years ended December 31, 2021, 2020, and 2019. The restructuring charges listed in the table primarily consist of termination benefits.

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Respiratory divestiture plan","$","2.7","","","$","\u2014"],["2021 Restructuring plan","7.4","","","\u2014"],["2020 Workforce reduction plan (1)","0.9","","","8.8"],["2019 Footprint realignment plan","0.3","","","1.5"],["2018 Footprint realignment plan","2.5","","","6.0"],["2014 Footprint realignment plan","0.3","","","0.6"],["Other restructuring programs","0.9","","","0.2"],["Impairment charges (2)","6.7","","","21.4"],["Total","$","21.7","","","$","38.5"]]
[[/GREPCENT_TABLE]]

(1)During the second quarter of 2020, we committed to a workforce reduction designed to improve profitability and reduce cost primarily by streamlining certain sales and marketing functions in our EMEA segment and certain manufacturing operations in our OEM segment (the "2020 Workforce reduction plan"). The plan was substantially completed at the end of 2020.

(2)For the year ended December 31, 2021, we recorded impairment charges of $6.7 million related to our decision to abandon intellectual property and other assets primarily associated with our respiratory product portfolio that was not transferred to Medline as part of the Respiratory business divestiture. For the year ended December 31, 2020, we recorded impairment charges of $21.4 million, related to our decision to abandon certain intellectual property and other assets associated with our surgical product portfolio.

Interest expense 

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Interest expense","$","57.0","","","$","66.5"],["Average interest rate on debt during the year","2.2","%","","2.5","%"]]
[[/GREPCENT_TABLE]]

The decrease in interest expense for the year ended December 31, 2021 compared to the prior year was primarily due to the redemption of the 4.875% Senior Notes due 2026 (the “2026 Notes”) resulting in a lower average interest rate and lower average debt outstanding after subsequent debt pay downs using proceeds from the Respiratory business divestiture and operating cash flows.

Gain on sale of business and assets

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Gain on sale of business and assets","$","91.2","","","$","\u2014"]]
[[/GREPCENT_TABLE]]

During the year ended December 31, 2021, we recognized a gain related to the Respiratory business divestiture.

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Loss on extinguishment of debt 

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Loss on extinguishment of debt","$","13.0","","","$","\u2014"]]
[[/GREPCENT_TABLE]]

During the year ended December 31, 2021, we prepaid the $400 million aggregate outstanding principal amount under our 4.875% Senior Notes due 2026 (the "2026 Notes"). In addition to the prepayment of principal, we paid to the holders of the 2026 Notes a $9.8 million prepayment make-whole amount plus accrued and unpaid interest. We recorded the prepayment make-whole amount and a $3.2 million write-off of unamortized debt issuance costs as a loss on extinguishment of debt.

Taxes on income from continuing operations

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Effective income tax rate","13.3","%","","6.1","%"]]
[[/GREPCENT_TABLE]]

We generate substantial earnings from our non-U.S. operations. A number of the non-U.S. jurisdictions in which we file tax returns historically have had tax rates that are lower than the U.S. statutory tax rate; as a result, our consolidated effective income tax rate for 2021 and earlier years has been substantially below the U.S. statutory tax rate. The principal non-U.S. jurisdictions in which the tax rate in 2021 and earlier years was lower than the U.S. statutory tax rate and from which we derived substantial earnings included Ireland, Bermuda and Singapore.

The effective income tax rate for 2021 reflects tax expense associated with the Respiratory business divestiture. The effective tax rate for 2020 reflects non-taxable contingent consideration adjustments, recognized in connection with a decrease in the fair value of our contingent consideration liabilities. Additionally, the effective tax rates for both 2021 and 2020 reflect a net excess tax benefit related to share-based compensation and a tax benefit relating to the revaluation of state deferred tax assets and liabilities due to business integrations and other changes. See Note 15 to the consolidated financial statements included in this Annual Report on Form 10-K for additional information.

Segment Results

Segment Net Revenues

[[GREPCENT_TABLE]]
[["","Year Ended December 31","","","","% Increase/(Decrease)"],["","2021","","2020","","","","","","2021 vs 2020"],["Americas","$","1,659.3","","","$","1,465.0","","","","","","","13.3"],["EMEA","606.8","","","584.9","","","","","","","3.8"],["Asia","297.8","","","267.0","","","","","","","11.5"],["OEM","245.7","","","220.3","","","","","","","11.5"],["Segment Net Revenues","$","2,809.6","","","$","2,537.2","","","","","","","10.7"]]
[[/GREPCENT_TABLE]]

Segment Operating Profit

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","","","% Increase/(Decrease)"],["","2021","","2020","","","","","","2021 vs 2020"],["Americas","$","424.2","","","$","401.4","","","","","","","5.7"],["EMEA","94.9","","","81.3","","","","","","","16.6"],["Asia","84.6","","","51.2","","","","","","","65.2"],["OEM","56.2","","","44.9","","","","","","","25.3"],["Segment Operating Profit (1)","$","659.9","","","$","578.8","","","","","","","14.0"]]
[[/GREPCENT_TABLE]]

(1)See Note 18 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 from continuing operations before interest, loss on extinguishment of debt and taxes.

Americas

Americas net revenues for the year ended December 31, 2021 increased $194.3 million, or 13.3%, compared to the prior year, which was primarily attributable to a $68.9 million increase in sales volumes of existing products largely stemming from the impact that the COVID-19 pandemic had on the prior year, net revenues of $60.6 million generated by the Z-Medica acquisition, a $32.9 million increase in new product sales and, to a lesser extent, price increases.

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Americas operating profit for the year ended December 31, 2021 increased $22.8 million, or 5.7%, compared to the prior year, which was primarily attributable to an increase in gross profit resulting from higher sales partially offset by a benefit recognized in the prior year resulting from decreases in the estimated fair value of our contingent consideration liabilities stemming from the impacts of the COVID-19 pandemic and expenses incurred by Z-Medica.

In November 2021, the Center for Medicare and Medicaid Services (CMS) published its Physician Fee Schedule (PFS) and Outpatient Prospective Payment System (OPPS) rates for calendar year 2022. The rules, among other things, provide for updates with respect to the rates used to determine the reimbursement amounts received by healthcare providers across a broad range of healthcare procedures, including our UroLift System procedure. Specifically, for UroLift procedures performed in a physician office setting, the reimbursement rates outlined in the PFS will be reduced by 19-21%, as compared to 2021, and will be phased in over four years, while the reimbursement rates outlined in the OPPS for UroLift procedures performed in the hospital outpatient or ambulatory surgical center setting are 3% higher as compared to 2021. On December 10, 2021, President Biden signed into law the “Protecting Medicare and American Farmers from Sequester Cuts Act”. Among other things, the law increased the conversion factor in the PFS by 3% for 2022 versus the final rule issued in November. While it is uncertain how the changes in reimbursement rates will impact the financial performance of the Interventional Urology product portfolio over time, we do not anticipate the changes will have a significant impact on the financial performance of our Interventional Urology product portfolio in 2022. We anticipate that this decision may cause our provider community to migrate patients to the ambulatory surgical center or hospital outpatient setting. Going forward, we plan to implement strategies to limit any negative impacts on patient access to safe and effective clinical care in the office setting.

EMEA

EMEA net revenues for the year ended December 31, 2021 increased $21.9 million, or 3.8%, compared to the prior year, which was primarily attributable to $25.9 million of favorable fluctuations in foreign currency exchange rates partially offset by a $10.5 million decrease in sales volumes attributed to the Respiratory business divestiture.

EMEA operating profit for the year ended December 31, 2021 increased $13.6 million, or 16.6%, compared to the prior year, which was primarily attributable to favorable fluctuations in foreign currency exchange rates and an increase in gross profit resulting from favorable mix partially offset by an increase in EU MDR costs within research and development.

Asia

Asia net revenues for the year ended December 31, 2021 increased $30.8 million, or 11.5%, compared to the prior year, which was primarily attributable to a $13.1 million net increase in sales volumes of existing products largely stemming from the impact that the COVID-19 pandemic had on the prior year, $12.4 million of favorable fluctuations in foreign currency exchange rates and $9.3 million in new product sales. The increases in net revenues were partially offset by a $9.0 million decrease in sales volumes attributed to the Respiratory business divestiture.

Asia operating profit for the year ended December 31, 2021 increased $33.4 million, or 65.2%, compared to the prior year, which was primarily attributable to an increase in gross profit resulting from higher sales, favorable fluctuations in foreign currency exchange rates and a benefit from the reversal of a contingent liability related to tariffs imposed by Chinese authorities, which is described further in Note 17 to the consolidated financial statements. The increases in operating profit were partially offset by an increase in selling expenses to support higher sales.

OEM

OEM net revenues for the year ended December 31, 2021 increased $25.4 million, or 11.5% compared to the prior year which was primarily attributable to a $13.7 million increase in sales volumes of existing products largely stemming from the impact that the COVID-19 pandemic had on the prior year, a $5.8 million increase in new product sales and net revenues generated by the HPC acquisition.

OEM operating profit for the year ended December 31, 2021 increased $11.3 million, or 25.3%, compared to the prior year, which was primarily attributable to an increase in gross profit resulting from higher sales.

Liquidity and Capital Resources

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing

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activities. Our principal source of liquidity is our cash flows provided by operating activities. Our cash flows provided by operating activities are reduced by cash used to, among other things, fulfill contractual obligations for minimum lease payments under noncancellable operating leases, which often extend beyond one year; the weighted average remaining lease term of our operating lease portfolio is 7.9 years. Our cash flows provided by operating activities are also reduced by cash used for unconditional legally binding commitments to purchase goods or services (i.e. purchase obligations), which primarily related to inventory expected to be purchased within one year. Our net cash provided by operating activities was significantly in excess of amounts paid pursuant to these contractual obligations for the years ended December 31, 2021, 2020 and 2019.

Other significant factors that affect our overall management of liquidity include contractual obligations such as scheduled principal and interest payments with respect to outstanding indebtedness, tax on deemed repatriation of non-U.S. earnings, which will be paid annually over the next four years, and annual pension funding. We may also be obligated to make payments for contingent consideration due to past acquisitions, the timing and amount of which may be uncertain, and the magnitude of which can vary from year to year. Other significant factors that affect our liquidity include certain actions controlled by management such as capital expenditures, acquisitions, dividends and incremental pension and post-retirement benefit payments. See Note 10, Note 12, Note 15 and Note 16 to the consolidated financial statements included in this Annual Report on Form 10-K for additional information.

We believe our cash flow from operations, available cash and cash equivalents and borrowings under our revolving credit facility (which is provided for under the Credit Agreement) and accounts receivable securitization facility will enable us to fund our operating requirements, capital expenditures and debt obligations for the next 12 months and the foreseeable future.

Of our $445.1 million of cash and cash equivalents at December 31, 2021, $352.5 million was held at non-U.S. subsidiaries. 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.

In December 2021, we executed an intra-company transfer in which certain intellectual property rights held by several of our subsidiaries were contributed to a non-U.S. subsidiary. The transfer accelerated certain taxable income into the year ended December 31, 2021; however, the related current tax expense of $73.2 million, which is payable in 2022, was substantially offset by the reversal of existing deferred tax liabilities.

We have entered into cross-currency swap agreements with different financial institution counterparties to hedge against the effect of variability in the U.S. dollar to euro exchange rate. Under the terms of the cross-currency swap agreements, we notionally exchanged in the aggregate $750 million for €653.1 million. The swap agreements, which begin to expire in October 2023, are designated as net investment hedges and require an exchange of the notional amounts upon expiration or the earlier termination of the agreements. We and the counterparties have agreed to effect the exchange through a net settlement. As a result, we may be required to pay (or be entitled to receive) an amount equal to the difference, on the expiration or earlier termination dates, between the U.S. dollar equivalent of the €653.1 million notional amount and the $750 million notional amount. If, at the expiration or earlier termination of the swap agreements, the U.S. dollar to euro exchange rate has increased or declined by 10% from the rate in effect at the inception of these agreements, we would receive from or be required to pay to the counterparties an aggregate of approximately $75.0 million in respect of the notional settlement. As of December 31, 2021, we had $21.7 million in current assets and $9.6 million in non-current assets related to the fair value of our cross-currency swap agreements. The swap agreements entail risk that the counterparties will not fulfill their obligations under the agreements. However, we believe the risk is reduced because we have entered into separate agreements with different counterparties, all of which are large, well-established financial institutions.

We may at any time, from time to time, repurchase our outstanding debt securities in open market purchases, via tender offers or in privately negotiated transactions, exchange transactions or otherwise, at such price or prices as we deem appropriate. Such purchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors and may be commenced or suspended at any time.

Summarized Financial Information – Obligor Group

The 2027 Notes are issued by Teleflex Incorporated (the “Parent Company”), and payment of the Parent Company's obligations under the 2027 Notes is guaranteed, jointly and severally, by an enumerated group of the Parent Company’s subsidiaries (each, a “Guarantor Subsidiary” and collectively, the “Guarantor Subsidiaries”). The guarantees are full and unconditional, subject to certain customary release provisions. Each Guarantor Subsidiary is directly or indirectly 100% owned by the Parent Company. Summarized financial information for the Parent and

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Guarantor Subsidiaries (collectively, the “Obligor Group”) as of and for the year ended December 31, 2021 as follows:

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2021"],["","Obligor Group","Intercompany","Obligor Group (excluding intercompany)"],["Net revenue","$","1,975.5","","$","206.1","","$","1,769.4"],["Cost of goods sold","1,037.4","","145.4","","892.0"],["Gross profit","938.1","","60.7","","877.4"],["Income from continuing operations","208.9","","203.0","","5.9"],["Net income","209.1","","203.0","","6.1"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","December 31, 2021"],["","Obligor Group","Intercompany","Obligor Group (excluding intercompany)"],["Total current assets","$","812.5","","$","53.6","","$","758.9"],["Total assets","3,084.4","","1,419.4","","1,665.0"],["Total current liabilities","879.7","","523.6","","356.1"],["Total liabilities","3,541.2","","886.8","","2,654.4"]]
[[/GREPCENT_TABLE]]

The same accounting policies as described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 are used by the Parent Company and each of its subsidiaries in connection with the summarized financial information presented above. The Intercompany column in the table above represents transactions between and among the Obligor Group and non-guarantor subsidiaries (i.e. those subsidiaries of the Parent Company that have not guaranteed payment of the 2027 Notes). Obligor investments in non-guarantor subsidiaries and any related activity are excluded from the financial information presented above. The summarized financial information presented above for the Obligor Group as of and for the year ended December 31, 2021 gives effect to the 2028 Notes issued in a private offering in May 2020.

See "Financing Arrangements" below as well as Note 10 and Note 11 to the consolidated financial statements included in this Annual Report on Form 10-K for further information related to our borrowings and financial instruments.

Cash Flows

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020"],["Cash flows from continuing operations provided by (used in):"],["Operating activities","$","652.1","","","$","437.1"],["Investing activities","156.7","","","(837.8)"],["Financing activities","(715.8)","","","455.2"],["Cash flows used in discontinued operations","(0.7)","","","(0.7)"],["Effect of exchange rate changes on cash and cash equivalents","(23.1)","","","21.0"],["Increase (decrease) in cash and cash equivalents","$","69.2","","","$","74.8"]]
[[/GREPCENT_TABLE]]

Cash Flow from Operating Activities

Net cash provided by operating activities from continuing operations was $652.1 million during 2021, and $437.1 million during 2020. The $215.0 million increase was primarily attributable to favorable operating results and lower contingent consideration payments. Net cash provided by operating activities from continuing operations also reflects $33.8 million of proceeds received from the Respiratory business divestiture attributed to performance obligations under the MSTA, which were largely offset by tax payments related to the Respiratory business divestiture.

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Cash Flow from Investing Activities

Net cash provided by investing activities from continuing operations was $156.7 million during 2021, primarily consisted of $224.0 million in net proceeds from the Respiratory business divestiture and capital expenditures of $71.6 million.

Cash Flow from Financing Activities

Net cash used in financing activities from continuing operations was $715.8 million during 2021, which primarily consisted of a net reduction in borrowings of $634.5 million resulting from payments made against our Senior credit facility using proceeds from the Respiratory business divestiture and operating cash flows. Our borrowings were also impacted by the redemption of the $400 million 2026 Notes, which was funded using borrowings under the revolving credit facility. We also made dividend payments of $63.6 million and contingent consideration payments of $31.4 million.

For a discussion of our cash flow comparison for 2020 and 2019, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Free Cash Flow

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

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Net cash provided by operating activities from continuing operations","$","652.1","","","$","437.1"],["Less: Capital expenditures","71.6","","","90.7"],["Free cash flow","$","580.5","","","$","346.4"]]
[[/GREPCENT_TABLE]]

Financing Arrangements

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

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Net debt includes:"],["Current borrowings","$","110.0","","","$","100.5"],["Long-term borrowings","1,740.1","","","2,377.9"],["Unamortized debt issuance costs","13.4","","","19.6"],["Total debt","1,863.5","","","2,498.0"],["Less: Cash and cash equivalents","445.1","","","375.9"],["Net debt","1,418.4","","","2,122.1"],["Total capital includes:"],["Net debt","1,418.4","","","2,122.1"],["Shareholders\u2019 equity","3,754.7","","","3,336.5"],["Total capital","$","5,173.1","","","$","5,458.6"],["Percent of net debt to total capital","27.4","%","","38.9","%"]]
[[/GREPCENT_TABLE]]

Fixed rate debt comprised 53.7% and 56.0% of total debt at December 31, 2021 and 2020, respectively. The slight decline in fixed rate borrowings as a percentage of total borrowings as of December 31, 2021 compared to the prior year was due to the redemption of the 2026 Notes.

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Senior credit facility

On April 5, 2019, we entered into a second amended and restated credit agreement (the "Credit Agreement"), which provides for a $1.0 billion revolving credit facility and a $700 million term loan facility, each of which matures on April 5, 2024. The Credit Agreement replaces a previous credit agreement under which we were provided a $1.0 billion credit facility and a $750 million term loan facility, due 2022 (the “prior term loan”). The $700 million term loan facility under the Credit Agreement principally was applied against the remaining $675 million principal balance of the prior term loan.

At our option, loans under the Credit Agreement will bear interest at a rate equal to adjusted LIBOR plus an applicable margin ranging from 1.25% to 2.00% or at an alternate base rate, which is defined as the highest of (i) the “Prime Rate” in the U.S. last quoted by The Wall Street Journal, (ii) 0.50% above the greater of the federal funds rate and the rate comprised of both overnight federal funds and overnight eurodollar borrowings and (iii) 1.00% above adjusted LIBOR for a one month interest period, plus in each case an applicable margin ranging from 0.125% to 1.00%, in each case subject to adjustments based on our consolidated total net leverage ratio (generally, Consolidated Total Funded Indebtedness (which is net of “Qualified Cash”), as defined in the Credit Agreement, on the date of determination to Consolidated EBITDA, as defined in the Credit Agreement, for the four most recent fiscal quarters ending on or preceding the date of determination). Overdue loans will bear interest at the rate otherwise applicable to such loans plus 2.00%.

At December 31, 2021, we had $141.0 million in borrowings outstanding and $1.8 million in outstanding standby letters of credit under our $1.0 billion revolving credit facility.

The Credit Agreement contains covenants that, among other things and subject to certain exceptions, place limitations on our ability, and the ability of our subsidiaries, to incur additional indebtedness; create additional liens; enter into a merger, consolidation or amalgamation or other defined "fundamental changes," dispose of certain assets, make certain investments or acquisitions, pay dividends, or make other restricted payments, enter into swap agreements or enter into transactions with our affiliates. Additionally, the Credit Agreement contains financial covenants that, subject to specified exceptions, require us to maintain a consolidated total net leverage ratio of not more than 4.50 to 1.00 and a consolidated interest coverage ratio (generally, Consolidated EBITDA for the four most recent fiscal quarters ending on or preceding the date of determination to Consolidated Interest Expense, as defined in the Credit Agreement, paid in cash for such period) of not less than 3.50 to 1.00. As of December 31, 2021, we were in compliance with the covenants in the Credit Agreement.

Redemption of 2026 Senior Notes

On April 29, 2021, we issued a notice of redemption to holders of our outstanding $400 million aggregate principal amount of the 2026 Notes. Pursuant to the notice of redemption, the 2026 Notes were redeemed on June 1, 2021 (the “Redemption Date”) using borrowings under the revolving credit facility and cash on hand at a redemption price equal to 102.438% of the principal amount of the 2026 Notes plus accrued and unpaid interest up to, but not including, the Redemption Date (the “Redemption Price”). We recognized a loss on extinguishment of debt of $13.0 million as a result of the redemption of the 2026 Notes.

2027 and 2028 Senior Notes

As of December 31, 2021, the outstanding principal amount of our 2027 Notes and 2028 Notes (collectively the "Senior Notes") was $500 million, respectively. The indenture governing the Senior Notes contains covenants that, among other things among other things and subject to certain exceptions, limit or restrict our ability, and the ability of our subsidiaries, to create liens; consolidate, merge or dispose of certain assets; and enter into sale leaseback transactions. The obligations under the Senior Notes are fully and unconditionally guaranteed, jointly and severally, by each of our existing and future 100% owned domestic subsidiaries that are a guarantor or other obligor under the Credit Agreement and by certain of our other 100% owned domestic subsidiaries. As of December 31, 2021, we were in compliance with all of the terms of our Senior Notes.

Accounts receivable securitization

We have an accounts receivable securitization facility under which we sell an undivided interest in domestic accounts receivable for consideration of up to $75 million to a commercial paper conduit. As of December 31, 2021 and 2019, we borrowed the maximum amount available of $75 million under this facility. This facility is utilized 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

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this facility. As of December 31, 2021, we were in compliance with the covenants and none of the termination events had occurred.

For additional information regarding our indebtedness, see Note 10 to the consolidated financial statements included in this Annual Report on Form 10-K.

Critical Accounting Policies and 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 materially from the amounts derived 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. The following discussion should be considered in conjunction with the description of our accounting policies in Note 1 to the consolidated financial statements in this Annual Report on Form 10-K.

Allowance for Credit Losses

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.

An allowance for credit losses is maintained for trade accounts receivable based on the expected collectability of accounts receivable and the losses expected to be incurred over the life of our receivables. Considerations to determine credit losses include our historical collection experience, the length of time an account is outstanding, the financial position of the customer, information provided by credit rating services as well as the consideration of events or circumstances indicating historic collection rates may not be indicative of future collectability. Our allowance for credit losses was $10.8 million and $12.9 million at December 31, 2021 and 2020, respectively, which constituted 2.6% and 3.0% of gross trade accounts receivable at December 31, 2021 and 2020, respectively. The current portion of the allowance for credit losses, which was $6.0 million and $8.1 million as of December 31, 2021 and 2020, respectively, was recognized as a reduction of accounts receivable, net.

Although we maintain an allowance for credit losses to cover the estimated losses which may occur when customers cannot make their required payments, we cannot be assured that the allowances will be sufficient to cover future losses given the volatility in the worldwide economy and the possibility that other, unanticipated events may adversely affect collectability of the accounts. If our allowance for credit losses is insufficient to address receivables we ultimately determine are uncollectible, we would be required to incur additional charges, which could materially adversely affect our results of operations. 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 record a reserve with respect to the estimated amount of the rebates 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. When necessary, we adjust the reserves, with a corresponding adjustment to revenue, to reflect differences between estimated and actual experience. Historical adjustments to recorded reserves have not been significant and we do not expect significant revisions to the estimated rebates in the future. The reserve for estimated rebates was $26.4 million and $28.5 million at December 31, 2021 and 2020, respectively. We expect to pay amounts subject to the reserve as of December 31, 2021 within 90 days subsequent to year-end.

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Inventory Utilization

Inventories are valued at the lower of cost or net realizable value. Factors utilized in the determination of estimated net realizable value and whether a reserve is required 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.

We review the net realizable value of inventory 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 in estimating future usage. Our inventory reserve was $42.7 million and $42.9 million at December 31, 2021 and 2020, respectively.

Long-Lived Assets

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. For example, such an assessment may be initiated if, as a result of a change in expectations, we believe it is more likely than not that the asset will be sold or disposed of significantly before the end of its useful life or if an adverse change occurs in the business employing the asset. Significant judgments in this area involve determining whether such events or circumstances have occurred and determining the appropriate asset group requiring evaluation. The recoverability evaluation is based on various analyses, including undiscounted cash flow projections, which involve 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.

Goodwill and Other Intangible Assets

Intangible assets include indefinite-lived assets (such as goodwill, certain trade names and in-process research and development ("IPR&D")), as well as finite-lived intangibles (such as trade names that do not have indefinite lives, customer relationships, intellectual property, distribution rights and non-competition agreements) and are, generally, obtained through acquisition. Intangible assets acquired in a business combination are measured at fair value and we allocate any excess purchase price over the fair value of the net tangible and intangible assets acquired in a business combination to goodwill. Considerable management judgment is necessary in making the assumptions used in the estimated fair value of intangible assets acquired in a business combination.

The costs of finite-lived intangibles are amortized to expense over their estimated useful life. Determining the useful life of an intangible asset requires considerable judgment as different types of intangible assets typically will have different useful lives. Goodwill and other indefinite-lived intangible assets are not amortized; we test these assets 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 have occurred. Such conditions may include an economic downturn in a geographic market or a change in the assessment of future operations.

Goodwill

Goodwill impairment assessments are performed at a reporting unit level. For purposes of this assessment, our reporting units are our operating segments, or, in certain cases, a business one level below our operating segments. As the fair values of our reporting units are more likely than not greater than the carrying values, no impairment was recorded as a result of the annual goodwill impairment testing performed during the fourth quarter of 2021.

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, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying value, we proceed to a quantitative impairment test described below. Alternatively, we may test goodwill for impairment through the quantitative impairment test without conducting the qualitative analysis.

Under a quantitative impairment test we compare the fair value of a reporting unit to the carrying value. We calculate the fair value of the reporting unit using a combination of two methods; one which estimates the discounted cash flows of the reporting unit based on projected earnings in the future (the Income Approach) and

43

one which is based on revenue and EBITDA of similar businesses to those of the reporting unit in actual transactions (the Market Approach). If the fair value of the reporting unit 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 the carrying value of the reporting unit exceeds its fair value.

The more significant judgments and assumptions in determining fair value using 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) the discount rates that are used to estimate present value of the future cash flows, which are based on an assessment of the risk inherent in the future cash flows of the respective reporting units along with various market based inputs. The more significant judgments and assumptions used in the Market Approach include (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 2021 as compared to the valuations of our reporting units in the past several years.

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. Changes in assumptions underlying the Income Approach could cause a reporting unit's carrying value to exceed its fair value. While we believe our assumed growth rates of sales and cash flows are reasonable, 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 of that reporting unit may decline. In this regard, if our strategy and 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. Moreover, changes in revenue and EBITDA multiples in actual transactions from those historically present could result in an assessment that a reporting unit’s carrying value exceeds its fair value, in which case we also 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. Management tests indefinite-lived intangible assets for impairment annually, and more frequently if events or changes in circumstances indicate that an impairment may have occurred. 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 the qualitative assessment, we determine it is more likely than not that the fair value of the indefinite-lived intangible asset is greater 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 asset 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 asset to its carrying amount. Alternatively, we may elect to forgo the qualitative analysis and test the indefinite-lived intangible asset for impairment through the quantitative impairment test.

In connection with intangible assets acquired in a business combination and quantitative impairment tests, we determine the estimated fair value using various methods under the Income Approach. The more significant judgments and assumptions used in the valuation of intangible assets may include revenue growth rates, royalty rate, discount rate, attrition rate, and EBITDA margin. Each of these factors and assumptions can significantly impact the value of the intangible asset.

During the year ended December 31, 2021, we recorded impairment charges of $6.7 million related to our decision to abandon intellectual property and other assets primarily associated with our respiratory product portfolio that was not transferred to Medline as part of the Respiratory business divestiture. See "Restructuring and impairment charges" within "Result of Operations" above as well as Note 4 to the consolidated financial statements included in this Annual Report on Form 10-K for additional information on these charges.

Share-based Compensation

We estimate the fair value of share-based awards on the date of grant and recognize as expense the value of the portion of the award that is ultimately expected to vest over the requisite service periods. Share-based

44

compensation expense related to stock options is measured using a Black-Scholes option pricing model that takes into account subjective and complex assumptions with respect to the 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 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 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 U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of the option. Share-based compensation expense related to non-vested restricted stock units is measured based on the market price of the underlying stock on the grant date discounted for the risk free interest rate and the present value of expected dividends over the vesting period. Share based compensation expense for 2021 and 2020 was $22.9 million and $20.7 million, respectively.

Contingent Consideration Liabilities

In connection with an acquisition, we may be required to pay future consideration that is contingent upon the achievement of specified objectives, such as receipt of regulatory approval, commercialization of a product or achievement of sales targets. As of the acquisition date, we record a contingent liability representing the estimated fair value of the contingent consideration we expect to pay. We determined the fair value of the contingent consideration liabilities using a discounted cash flow analysis. Significant judgment is required in determining the assumptions used to calculate the fair value of the contingent consideration. Increases in projected revenues and probabilities of payment may result in significantly higher fair value measurements; decreases in these items may have the opposite effect. Increases in discount rates in the periods prior to payment may result in significantly lower fair value measurements; decreases may have the opposite effect. See Note 12 to the consolidated financial statements included in this Annual Report on Form 10-K for additional information.

We remeasure our contingent consideration liabilities each reporting period and recognize the change in the liabilities' fair value within selling, general and administrative expenses in our consolidated statement of income. As of December 31, 2021 and 2020, we accrued $9.8 million and $36.6 million of contingent consideration, respectively.

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. The difficulties inherent in such assessments, judgments and estimates are particularly challenging because we conduct a broad range of operations around the world, subjecting us to complex tax regulations in numerous international jurisdictions. As a result, we are at times subject to tax audits, disputes with tax authorities and potential litigation, the outcome of which is uncertain. In connection with its estimates of our tax assets and liabilities, management must, among other things, make judgments about the outcome of these uncertain matters.

Deferred tax assets and liabilities are measured and recorded using currently enacted tax rates that are expected to 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 U.S. and non-U.S. tax settlements, changes in tax law, 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.  

In assessing the realizability of our deferred tax assets, we evaluate positive and negative evidence and use judgments regarding past and future events, including results of operations 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 $143.2 million and $155.0 million at December 31, 2021 and 2020, respectively, relates principally to the uncertainty of the utilization of tax loss and credit carryforwards in various jurisdictions.

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

45

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 non-U.S. 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 we become aware of facts that necessitate an adjustment. We are currently under examination in Ireland and Germany. The ultimate outcome of these examinations could result in increases or decreases to our recorded tax liabilities, which would affect our financial results. See Note 15 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 of recently issued accounting standards, including estimated effects, if any, of the adoption of those standards on our consolidated financial statements.