10-Q 1 w62751e10vq.txt TELEFLEX FORM 10-Q DATED JUNE 30, 2002 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ------------ TO ------------ COMMISSION FILE NUMBER 1-5353 TELEFLEX INCORPORATED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 23-1147939 --------------------- --------------------------------- (STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NUMBER) 630 WEST GERMANTOWN PIKE, SUITE 450 PLYMOUTH MEETING, PA 19462 ------------------------------------------ ---------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(610) 834-6301 ---------------------------------------------- (TELEPHONE NUMBER INCLUDING AREA CODE) NONE ------------------------------------------------- (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate the number of shares outstanding of each of the issuer's classes of Common Stock as of the latest practicable date.
CLASS OUTSTANDING AT JUNE 30, 2002 ----------------------------- ---------------------------- Common Stock, $1.00 Par Value 39,268,409
-------------------------------------------------------------------------------- -------------------------------------------------------------------------------- TELEFLEX INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS)
JUNE 30, DEC. 30, 2002 2001 ---------- ---------- ASSETS Current assets Cash and cash equivalents................................. $ 45,762 $ 46,900 Accounts receivable less allowance for doubtful accounts............................................... 418,162 363,674 Inventories............................................... 353,956 308,775 Prepaid expenses.......................................... 28,576 28,128 ---------- ---------- 846,456 747,477 Property, plant and equipment, at cost, less accumulated depreciation.............................................. 585,290 565,695 Goodwill.................................................... 240,047 223,911 Intangibles and other assets................................ 60,214 56,444 Investments in affiliates................................... 43,860 41,493 ---------- ---------- $1,775,867 $1,635,020 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current portion of borrowings and demand loans............ $ 222,228 $ 212,122 Accounts payable and accrued expenses..................... 279,845 251,805 Income taxes payable...................................... 40,649 31,499 ---------- ---------- 542,722 495,426 Long-term borrowings........................................ 226,521 228,180 Deferred income taxes and other............................. 145,619 133,271 ---------- ---------- 914,862 856,877 Shareholders' equity........................................ 861,005 778,143 ---------- ---------- $1,775,867 $1,635,020 ========== ==========
The accompanying notes are an integral part of the condensed consolidated financial statements. 2 TELEFLEX INCORPORATED CONDENSED CONSOLIDATED STATEMENT OF INCOME (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE)
THREE MONTHS ENDED SIX MONTHS ENDED -------------------- ---------------------- JUNE 30, JULY 1, JUNE 30, JULY 1, 2002 2001 2002 2001 -------- -------- ---------- -------- Revenues...................................... $546,306 $503,004 $1,054,702 $973,738 -------- -------- ---------- -------- Cost of sales................................. 397,390 359,469 770,680 694,970 Operating expenses............................ 94,563 90,680 179,739 175,177 Interest expense.............................. 6,239 7,378 12,275 14,089 -------- -------- ---------- -------- 498,192 457,527 962,694 884,236 -------- -------- ---------- -------- Income before taxes........................... 48,114 45,477 92,008 89,502 Provision for taxes on income................. 14,578 14,416 28,054 28,460 -------- -------- ---------- -------- Net income.................................... $ 33,536 $ 31,061 $ 63,954 $ 61,042 ======== ======== ========== ======== Earnings per share Basic....................................... $ 0.85 $ 0.80 $ 1.63 $ 1.58 Diluted..................................... $ 0.84 $ 0.79 $ 1.61 $ 1.56 Dividends per share........................... $ 0.180 $ 0.170 $ 0.350 $ 0.320 Average number of common and common equivalent shares outstanding Basic....................................... 39,241 38,755 39,140 38,626 Diluted..................................... 39,968 39,359 39,803 39,198
The accompanying notes are an integral part of the condensed consolidated financial statements. 3 TELEFLEX INCORPORATED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED --------------------- JUNE 30, JULY 1, 2002 2001 -------- --------- Cash flows from operating activities: Net income................................................ $ 63,954 $ 61,042 Adjustments to reconcile net income to cash flows from operating activities: Depreciation expense................................... 42,286 35,251 Amortization expense................................... 2,596 8,938 (Increase) in accounts receivable...................... (26,626) (21,338) (Increase) in inventory................................ (21,234) (15,599) Decrease (increase) in prepaid expenses................ 428 (5,313) Increase (decrease) in accounts payable and accrued expenses.............................................. 14,159 (10,561) Increase in income taxes payable....................... 9,655 2,266 -------- --------- 85,218 54,686 -------- --------- Cash flows from financing activities: Proceeds from new borrowings.............................. -- 108,476 Reduction in long-term borrowings......................... (14,910) (19,026) Increase in current borrowings and demand loans........... 2,490 63,630 Proceeds from stock compensation plans.................... 8,120 6,950 Dividends................................................. (13,690) (12,368) -------- --------- (17,990) 147,662 -------- --------- Cash flows from investing activities: Expenditures for plant assets............................. (42,687) (49,573) Payments for businesses acquired.......................... (27,807) (149,059) Investments in affiliates................................. (337) 806 Other..................................................... 2,465 (2,392) -------- --------- (68,366) (200,218) -------- --------- Net (decrease) increase in cash and cash equivalents........ (1,138) 2,130 Cash and cash equivalents at the beginning of the period.... 46,900 45,139 -------- --------- Cash and cash equivalents at the end of the period.......... $ 45,762 $ 47,269 ======== =========
The accompanying notes are an integral part of the condensed consolidated financial statements. 4 TELEFLEX INCORPORATED STATEMENT OF COMPREHENSIVE INCOME
THREE MONTHS ENDED SIX MONTHS ENDED ------------------- -------------------- JUNE 30, JULY 1, JUNE 30, JULY 1, 2002 2001 2002 2001 -------- ------- -------- -------- Net income......................................... $33,536 $31,061 $63,954 $ 61,042 Financial instruments marked to market............. 1,443 1,593 1,956 (2,323) Cumulative translation adjustment.................. 21,849 (2,570) 19,123 (10,363) ------- ------- ------- -------- Comprehensive income............................... $56,828 $30,084 $85,033 $ 48,356 ======= ======= ======= ========
The accompanying notes are an integral part of the condensed consolidated financial statements. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 The accompanying unaudited condensed consolidated financial statements for the three months and six months ended June 30, 2002 and July 1, 2001 contain all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to present fairly the financial position, results of operations and cash flows for the periods then ended in accordance with the current requirements for Form 10-Q. At June 30, 2002, 5,435,093 shares of common stock were reserved for issuance under the company's stock compensation plans. NOTE 2 As of December 31, 2001, the company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), which requires goodwill no longer be amortized, but tested for impairment. The company did not record an impairment loss for its goodwill at adoption of SFAS 142. In accordance with SFAS 142, the company discontinued the amortization of goodwill effective December 31, 2001. A reconciliation of previously reported net income and earnings per share to the amounts adjusted for the exclusion of goodwill amortization net of the related income tax effect follows:
THREE MONTHS ENDED SIX MONTHS ENDED ------------------- ------------------- JUNE 30, JULY 1, JUNE 30, JULY 1, 2002 2001 2002 2001 -------- ------- -------- ------- Reported net income......................... $33,536 $31,061 $63,954 $61,042 Add: Goodwill amortization, net of tax...... -- 2,389 -- 4,757 ------- ------- ------- ------- Adjusted net income......................... $33,536 $33,450 $63,954 $65,799 ======= ======= ======= ======= Basic earnings per share.................... $ .85 $ .80 $ 1.63 $ 1.58 Add: Goodwill amortization, net of tax per basic share............................... -- .06 -- .12 ------- ------- ------- ------- Adjusted basic earnings per share........... $ .85 $ .86 $ 1.63 $ 1.70 ======= ======= ======= ======= Diluted earnings per share.................. $ .84 $ .79 $ 1.61 $ 1.56 Add: Goodwill amortization, net of tax per diluted share............................. -- .06 -- .12 ------- ------- ------- ------- Adjusted diluted earnings per share......... $ .84 $ .85 $ 1.61 $ 1.68 ======= ======= ======= =======
5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2 -- (CONTINUED) Changes in the carrying amount of goodwill for the six months ended June 30, 2002, by operating segment, are as follows:
COMMERCIAL MEDICAL AEROSPACE TOTAL -------------- ----------- --------- -------- Goodwill, net at December 30, 2001.............................. $ 79,048 $120,551 $24,312 $223,911 Goodwill acquired................... 4,993 5,620 -- 10,613 Translation adjustment.............. 3,262 2,088 173 5,523 -------- -------- ------- -------- Goodwill, net at June 30, 2002...... $ 87,303 $128,259 $24,485 $240,047 ======== ======== ======= ========
The following table reflects the components of intangible assets as of June 30, 2002: GROSS CARRYING ACCUMULATED AMOUNT AMORTIZATION -------- -------- Intellectual property............... $ 22,234 $ 5,059 Customer lists...................... 21,000 1,230 Distribution rights................. 16,206 5,108
Amortization expense related to those intangible assets was $1.3 million for the three months ended June 30, 2002. Estimated annual amortization expense for each of the five succeeding years is as follows: 2002................................ $ 5,299 2003................................ 5,347 2004................................ 5,009 2005................................ 4,201 2006................................ 3,777
NOTE 3 Inventories consisted of the following:
JUNE 30, DEC. 30, 2002 2001 -------------- ----------- Raw materials....................... $161,957 $133,364 Work-in-process..................... 64,534 44,530 Finished goods...................... 127,465 130,881 -------- -------- $353,956 $308,775 ======== ========
6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4 BUSINESS SEGMENT INFORMATION:
THREE MONTHS ENDED SIX MONTHS ENDED -------------------- ---------------------- JUNE 30, JULY 1, PERCENT JUNE 30, JULY 1, PERCENT 2002 2001 CHANGE 2002 2001 CHANGE -------- -------- ------- ---------- -------- ------- Sales Commercial................ $291,648 $246,598 18% $ 557,400 $469,416 19% Medical................... 113,473 107,366 6% 220,776 213,770 3% Aerospace................. 141,185 149,040 (5%) 276,526 290,552 (5%) -------- -------- ---------- -------- Total..................... $546,306 $503,004 9% $1,054,702 $973,738 8% ======== ======== ========== ======== Operating profit Commercial................ $ 29,684 $ 26,638 11% $ 55,388 $ 51,708 7% Medical................... 18,394 17,658 4% 35,761 34,733 3% Aerospace................. 10,888 16,436 (34%) 22,317 32,871 (32%) -------- -------- ---------- -------- 58,966 60,732* (3%) 113,466 119,312* (5%) -------- -------- ---------- -------- Less: Interest expense.......... 6,239 7,378 (15%) 12,275 14,089 (13%) Corporate expenses........ 4,613 4,649 (1%) 9,183 9,293 (1%) Goodwill amortization expense................ -- 3,228* -- -- 6,428* -- -------- -------- ---------- -------- Income before taxes......... 48,114 45,477 6% 92,008 89,502 3% Taxes on income........... 14,578 14,416 1% 28,054 28,460 (1%) -------- -------- ---------- -------- Net income................ $ 33,536 $ 31,061 8% $ 63,954 $ 61,042 5% ======== ======== ========== ========
--------------- * Goodwill amortization in 2001 has been reclassified from operating profit to a corporate expense item to facilitate comparison with the current period's results. In addition, references to prior year operating profit and margin in Management's Analysis of Quarterly Financial Data, contained on pages 7 and 8 herein, are based on the reclassified amounts. MANAGEMENT'S ANALYSIS OF QUARTERLY FINANCIAL DATA RESULTS OF OPERATIONS: Revenues increased 9% in the second quarter of 2002 to $546.3 million from $503.0 million in 2001. Core product improvement accounted for approximately one-third of the sales growth and acquisitions contributed approximately two-thirds. The Commercial, Medical and Aerospace segments comprised 53%, 21% and 26% of the company's net sales, respectively. The gross profit margin decreased to 27.3% in 2002 compared with 28.5% in 2001, as all three segments contributed to the decline. Operating expenses as a percentage of sales declined to 17.3% in 2002 compared with 18.0% in 2001 as declines in Medical and Commercial offset an increase in the Aerospace Segment. In addition, operating expenses in 2002 exclude the amortization of goodwill in accordance with SFAS 142. Operating profit decreased 3% in the second quarter from $60.7 million in 2001 to $59.0 million in 2002, as gains in the Commercial and Medical segments were more than offset by a decline in the Aerospace Segment. Operating margin declined to 10.8% in 2002 versus 12.1% in 2001. The Commercial, Medical and Aerospace segments comprised 50%, 31% and 19% of the company's operating profit, respectively. 7 Net income and diluted earnings per share for the quarter were $33.5 million and $0.84. Excluding goodwill amortization expense in the second quarter of 2001, net income remained even with last year and diluted earnings per share declined 1%. Interest expense declined in 2002 due to lower interest rates and a reduction in the average debt outstanding. The effective income tax rate was 30.3% in 2002 compared with 31.7% in 2001. The decline resulted from the impact of SFAS 142 adoption in 2002 and a higher proportion of income in 2002 earned in countries with relatively lower tax rates. INDUSTRY SEGMENT REVIEW: For comparative purposes second quarter 2001 goodwill amortization expense of $3.2 million (Commercial -- $.7 million, Medical -- $2.1 million, Aerospace -- $.4 million) has been reclassified from operating profit to a corporate expense item. Discussion of operating profit and margin below reflects the reclassified amounts. Sales in the Commercial Segment increased 18% from $246.6 million in 2001 to $291.6 million in 2002 resulting from acquisitions, and to a lesser extent core growth. Marine sales increased as a result of stronger market conditions supplemented by new products. Industrial sales increased largely from the prior year acquisition of a fuel handling system manufacturer, the current year acquisition of a cable fabricator and distributor and growth in light-duty cable applications. These factors more than compensated for a decline in alternative fuel component sales. Automotive sales increased due to additional platforms for the adjustable pedal, new programs in Europe and the acquisition of a Japanese mechanical control manufacturer. Operating profit improved from $26.6 million in 2001 to $29.7 million in 2002 on core improvements in the Automotive and Marine product lines. Operating margin was lower primarily from pricing pressures, $1.2 million of costs related to the curtailment of a North American automotive facility and a lower contribution from acquisitions. Medical Segment sales increased 6% from $107.4 million in 2001 to $113.5 million in 2002 due primarily to core growth in both product lines. Core business gained in connection with the overall market supplemented by the introduction of new products in the Hospital Supply product line. Volume improvements increased operating profit 4% to $18.4 million in 2002 from $17.7 million in 2001. Operating margin declined slightly to 16.2% from 16.4% as a result of a disposition in Europe and initial costs incurred for new instrument management contracts. Aerospace Segment sales declined 5% from $149.0 million in 2001 to $141.2 million in 2002. Cargo handling systems, industrial gas turbine services, repair services and manufactured components sales and operating profit declined due to market conditions in the commercial aerospace and industrial gas turbine industries. Operating profit fell 34% to $10.9 million in 2002 from $16.4 million in 2001 and operating margin decreased from 11.0% in 2001 to 7.7% in 2002 resulting from lower volume, start up costs for a component manufacturing facility in Mexico and spending for new products in cargo handling systems. CASH FLOWS FROM OPERATIONS AND LIQUIDITY: Cash flow from operations was $85.2 million for the first six months of 2002, compared to $54.7 million in 2001. The year-over-year increase was primarily the result of improvements in working capital levels relative to last year, particularly due to the timing of accounts payable. Total borrowings increased by $8.4 million to $448.7 million at June 30, 2002 as compared to $440.3 million at December 30, 2001. The increase was a result of currency exchange rate changes and borrowings incurred to finance acquisitions offset by repayments. The ratio of total debt to total capitalization decreased to 34% at June 30, 2002 from 36% at December 30, 2001 as equity increased in 2002 at a higher rate relative to debt. FORWARD-LOOKING STATEMENTS: This quarterly report includes the company's current plans and expectations and is based on information available to it. It relies on a number of assumptions and estimates which could be inaccurate and which are subject to risks and uncertainties. 8 PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the company's 2002 Annual Meeting of Shareholders held on April 26, 2002, the following were elected to the Board of Directors of the company for a term expiring in 2005:
NAME VOTES FOR WITHHELD ---- ---------- -------- Lennox K. Black............................................. 35,193,531 491,907 William R. Cook............................................. 35,199,679 485,759 James W. Stratton........................................... 35,098,696 586,742
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Reports on form 8-K. No reports on form 8-K were filed during the quarter. 9 TELEFLEX INCORPORATED SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TELEFLEX INCORPORATED /s/ HAROLD L. ZUBER, JR. -------------------------------------- Harold L. Zuber, Jr. Executive Vice President and Chief Financial Officer /s/ STEPHEN J. GAMBONE -------------------------------------- Stephen J. Gambone Controller and Chief Accounting Officer August 12, 2002 10