10-Q 1 w65051e10vq.txt TELEFLEX, INC. FORM 10-Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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 SEPTEMBER 29, 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 SEPTEMBER 29, 2002 ----------------------------- --------------------------------- Common Stock, $1.00 Par Value 39,360,053
-------------------------------------------------------------------------------- -------------------------------------------------------------------------------- TELEFLEX INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS)
SEPT. 29, DEC. 30, 2002 2001 ---------- ---------- ASSETS Current assets Cash and cash equivalents................................. $ 54,429 $ 46,900 Accounts receivable less allowance for doubtful accounts............................................... 398,411 363,674 Inventories............................................... 363,006 308,775 Prepaid expenses.......................................... 25,121 28,128 ---------- ---------- 840,967 747,477 Property, plant and equipment, at cost, less accumulated depreciation.............................................. 591,465 565,695 Goodwill.................................................... 249,130 223,911 Intangibles and other assets................................ 69,378 56,444 Investments in affiliates................................... 44,758 41,493 ---------- ---------- $1,795,698 $1,635,020 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current portion of borrowings and demand loans............ $ 232,855 $ 212,122 Accounts payable and accrued expenses..................... 274,830 251,805 Income taxes payable...................................... 45,917 31,499 ---------- ---------- 553,602 495,426 Long-term borrowings........................................ 220,414 228,180 Deferred income taxes and other............................. 145,735 133,271 ---------- ---------- 919,751 856,877 Shareholders' equity........................................ 875,947 778,143 ---------- ---------- $1,795,698 $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 NINE MONTHS ENDED ---------------------- ------------------------ SEPT. 29, SEPT. 30, SEPT. 29, SEPT. 30, 2002 2001 2002 2001 --------- --------- ---------- ---------- Revenues..................................... $508,238 $466,014 $1,562,940 $1,439,752 -------- -------- ---------- ---------- Cost of sales................................ 375,749 337,422 1,146,429 1,032,392 Operating expenses........................... 93,069 89,064 272,808 264,241 Interest expense............................. 6,280 7,263 18,555 21,352 -------- -------- ---------- ---------- 475,098 433,749 1,437,792 1,317,985 -------- -------- ---------- ---------- Income before taxes.......................... 33,140 32,265 125,148 121,767 Provision for taxes on income................ 6,860 10,163 34,914 38,623 -------- -------- ---------- ---------- Net income................................... $ 26,280 $ 22,102 $ 90,234 $ 83,144 ======== ======== ========== ========== Earnings per share Basic...................................... $ 0.67 $ 0.57 $ 2.30 $ 2.15 Diluted.................................... $ 0.66 $ 0.56 $ 2.27 $ 2.12 Dividends per share.......................... $ 0.180 $ 0.170 $ 0.530 $ 0.490 Average number of common and common equivalent shares outstanding Basic...................................... 39,341 38,847 39,207 38,700 Diluted.................................... 39,820 39,379 39,809 39,258
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)
NINE MONTHS ENDED --------------------- SEPT. 29, SEPT. 30, 2002 2001 --------- --------- Cash flows from operating activities: Net income................................................ $ 90,234 $ 83,144 Adjustments to reconcile net income to cash flows from operating activities: Depreciation expense................................... 65,509 54,628 Amortization expense................................... 4,197 13,467 (Increase) in accounts receivable...................... (8,795) (15,872) (Increase) in inventory................................ (29,276) (17,025) Decrease (increase) in prepaid expenses................ 3,603 (7,921) Increase (decrease) in accounts payable and accrued expenses.............................................. 13,121 (7,121) Increase in income taxes payable....................... 11,995 6,214 --------- --------- 150,588 109,514 --------- --------- Cash flows from financing activities: Proceeds from new borrowings.............................. 1,457 81,847 Reduction in long-term borrowings......................... (23,796) (20,253) Increase in current borrowings and demand loans........... 4,857 80,675 Proceeds from stock compensation plans.................... 9,696 7,655 Dividends................................................. (20,771) (18,972) --------- --------- (28,557) 130,952 --------- --------- Cash flows from investing activities: Expenditures for plant assets............................. (66,563) (73,300) Payments for businesses acquired.......................... (49,863) (167,772) Investments in affiliates................................. (93) 543 Other..................................................... 2,017 (495) --------- --------- (114,502) (241,024) --------- --------- Net increase (decrease) in cash and cash equivalents........ 7,529 (558) Cash and cash equivalents at the beginning of the period.... 46,900 45,139 --------- --------- Cash and cash equivalents at the end of the period.......... $ 54,429 $ 44,581 ========= =========
The accompanying notes are an integral part of the condensed consolidated financial statements. 4 TELEFLEX INCORPORATED STATEMENT OF COMPREHENSIVE INCOME
THREE MONTHS ENDED NINE MONTHS ENDED --------------------- --------------------- SEPT. 29, SEPT. 30, SEPT. 29, SEPT. 30, 2002 2001 2002 2001 --------- --------- --------- --------- Net income............................................ $26,280 $22,102 $ 90,234 $83,144 Financial instruments marked to market................ (3,401) 297 (1,445) (2,026) Cumulative translation adjustment..................... (4,299) 1,456 14,824 (8,907) ------- ------- -------- ------- Comprehensive income.................................. $18,580 $23,855 $103,613 $72,211 ======= ======= ======== =======
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 nine months ended September 29, 2002 and September 30, 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 September 29, 2002, 5,386,132 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 NINE MONTHS ENDED --------------------- --------------------- SEPT. 29, SEPT. 30, SEPT. 29, SEPT. 30, 2002 2001 2002 2001 --------- --------- --------- --------- Reported net income............................ $26,280 $22,102 $90,234 $83,144 Add: Goodwill amortization, net of tax......... -- 2,389 -- 7,146 ------- ------- ------- ------- Adjusted net income............................ $26,280 $24,491 $90,234 $90,290 ======= ======= ======= ======= Basic earnings per share....................... $ .67 $ .57 $ 2.30 $ 2.15 Add: Goodwill amortization, net of tax per basic share.................................. -- .06 -- .18 ------- ------- ------- ------- Adjusted basic earnings per share.............. $ .67 $ .63 $ 2.30 $ 2.33 ======= ======= ======= ======= Diluted earnings per share..................... $ .66 $ .56 $ 2.27 $ 2.12 Add: Goodwill amortization, net of tax per diluted share................................ -- .06 -- .18 ------- ------- ------- ------- Adjusted diluted earnings per share............ $ .66 $ .62 $ 2.27 $ 2.30 ======= ======= ======= =======
5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2 -- (CONTINUED) Changes in the carrying amount of goodwill for the nine months ended September 29, 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...................... 5,602 15,320 1,243 22,165 Translation adjustment................. 1,958 990 106 3,054 -------- -------- ------- -------- Goodwill, net at September 29, 2002.... $ 86,608 $136,861 $25,661 $249,130 ======== ======== ======= ========
The following table reflects the components of intangible assets as of September 29, 2002:
GROSS CARRYING ACCUMULATED AMOUNT AMORTIZATION -------------- ------------ Intellectual property.................. $ 32,506 $ 6,503 Customer lists......................... 21,000 1,405 Distribution rights.................... 15,895 5,614
Amortization expense related to those intangible assets was $1.6 million for the three months ended September 29, 2002. Estimated annual amortization expense for each of the five succeeding years is as follows: 2002................................... $ 5,976 2003................................... 6,439 2004................................... 6,203 2005................................... 5,477 2006................................... 4,958
NOTE 3 Inventories consisted of the following:
SEPT. 29, DEC. 30, 2002 2001 -------------- ------------ Raw materials.......................... $164,458 $133,364 Work-in-process........................ 63,642 44,530 Finished goods......................... 134,906 130,881 -------- -------- $363,006 $308,775 ======== ========
6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4 BUSINESS SEGMENT INFORMATION:
THREE MONTHS ENDED NINE MONTHS ENDED --------------------- ----------------------- SEPT. 29, SEPT. 30, PERCENT SEPT. 29, SEPT. 30, PERCENT 2002 2001 CHANGE 2002 2001 CHANGE --------- --------- ------- ---------- ---------- ------- Sales Commercial................... $262,116 $218,253 20% $ 819,516 $ 687,669 19% Medical...................... 112,223 104,537 7% 332,999 318,307 5% Aerospace.................... 133,899 143,224 (7%) 410,425 433,776 (5%) -------- -------- ---------- ---------- Total........................ $508,238 $466,014 9% $1,562,940 $1,439,752 9% ======== ======== ========== ========== Operating profit Commercial................... $ 18,742 $ 14,788 27% $ 74,130 $ 66,496 11% Medical...................... 17,617 17,380 1% 53,378 52,113 2% Aerospace.................... 7,954 15,396 (48%) 30,271 48,267 (37%) -------- -------- ---------- ---------- 44,313 47,564* (7%) 157,779 166,876* (5%) -------- -------- ---------- ---------- Less: Interest expense............. 6,280 7,263 (14%) 18,555 21,352 (13%) Corporate expenses........... 4,893 4,807 2% 14,076 14,100 -- Goodwill amortization expense................... -- 3,229* -- -- 9,657* -- -------- -------- ---------- ---------- Income before taxes............ 33,140 32,265 3% 125,148 121,767 3% Taxes on income.............. 6,860 10,163 (33%) 34,914 38,623 (10%) -------- -------- ---------- ---------- Net income................... $ 26,280 $ 22,102 19% $ 90,234 $ 83,144 9% ======== ======== ========== ==========
--------------- * 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 through 9 herein, are based on the reclassified amounts. MANAGEMENT'S ANALYSIS OF QUARTERLY FINANCIAL DATA RESULTS OF OPERATIONS: Revenues increased 9% in the third quarter of 2002 to $508.2 million from $466.0 million in 2001. The sales gain can be attributed primarily to acquisitions in the Commercial Segment and to a lesser extent changes in currency exchange rates. All three segments benefited from currency gains. The Commercial, Medical and Aerospace segments comprised 52%, 22% and 26% of the company's net sales, respectively. The gross profit margin decreased to 26.1% in 2002 compared with 27.6% in 2001, as an improvement in the Commercial Segment was more than offset by declines in the Medical and Aerospace segments. Operating expenses as a percentage of sales declined to 18.3% in 2002 compared with 19.1% in 2001 as the Medical and Aerospace segments reported declines. The Commercial Segment was flat relative to the comparable period last year. In addition, operating expenses in 2002 exclude the amortization of goodwill in accordance with SFAS 142. Operating profit decreased 7% in the third quarter from $47.6 million in 2001 to $44.3 million in 2002, as gains in the Commercial and Medical segments were more than offset by a decline in the Aerospace 7 Segment. Operating margin declined to 8.7% in 2002 versus 10.2% in 2001. The Commercial, Medical and Aerospace segments comprised 42%, 40% and 18% of the company's operating profit, respectively. Net income and diluted earnings per share for the quarter were $26.3 million and $0.66. Excluding goodwill amortization expense in the third quarter of 2001, net income improved 7% and diluted earnings per share increased 6%. Interest expense declined in 2002 due to lower interest rates and a reduction in the average debt outstanding. The effective income tax rate was 20.7% in 2002 compared with 31.5% in 2001. The reduction in the effective tax rate for the quarter includes a benefit of $3.1 million, or $0.08 per share from favorable tax settlements. Excluding the effect of these settlements, the effective tax rate would have been 30.0%, which compares favorably with the same period last year due to a higher proportion of income in 2002 earned in countries with relatively lower tax rates. INDUSTRY SEGMENT REVIEW: For comparative purposes third 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 20% from $218.3 million in 2001 to $262.1 million in 2002 as all three product lines gained. The increase resulted from acquisitions, which accounted for half the growth, improvement in core sales and to a lesser extent, from changes in currency exchange rates. Stronger marine market conditions in both the OEM and aftermarket sectors coupled with increased sales of non-marine products such as the modern burner unit helped advance Marine product line revenues. The majority of Industrial product line sales growth can be attributed to the acquisition of a fabricator of stainless and carbon steel stranded products as core improvement in light duty cables was offset by declines in alternative fuel component sales. Automotive sales increased from the acquisition of a Japanese cable manufacturer, and from additional adjustable pedal systems volume, which was offset by price pressure in North America. Operating profit improved from $14.8 million in 2001 to $18.7 million in 2002 as all three product lines improved from the additional sales. Operating margin improved to 7.2% in 2002 from 6.8% in 2001 as a result of higher volume, additional production in low cost countries and the successful Morse Controls integration, which began in 2001. Medical Segment sales increased 7% from $104.5 million in 2001 to $112.2 million in 2002 due primarily to core growth in the Hospital Supply product line boosted by gains in hospital supply and home care markets, new products and currency exchange rate changes. Surgical Devices sales improved slightly as a gain from the acquisition of an orthopedic instrument manufacturer offset a market-driven decline in sales of certain closure products. Operating profit improved 1% to $17.6 million in 2002 from $17.4 million in 2001 as a volume- related improvement in the Hospital Supply product line more than compensated for a decline in Surgical Devices. Operating margin declined to 15.7% from 16.6% as a result of lower production rates in Hospital Supply to reduce inventory levels, pricing pressures, and a product mix change in the Surgical Devices product line. Aerospace Segment sales declined 7% from $143.2 million in 2001 to $133.9 million in 2002 from weaker commercial aerospace and industrial gas turbine market conditions affecting both volume and price. Cargo handling systems, industrial gas turbine services, repair services and manufactured components all reported double digit operating profit declines. Operating profit fell 48% to $8.0 million in 2002 from $15.4 million in 2001 and operating margin decreased from 10.7% in 2001 to 5.9% in 2002. The reductions resulted from the sales declines and expenses related to development of new container and cargo handling systems products. CASH FLOWS FROM OPERATIONS AND LIQUIDITY: Cash flow from operations was $150.6 million for the first nine months of 2002, compared to $109.5 million in 2001. Year-over-year increases in net income, depreciation and lower working capital levels relative to last year, particularly due to the timing of accounts payable and prepaid expenses, led to the gain. Total borrowings increased by $13.0 million to $453.3 million at September 29, 2002 as compared to 8 $440.3 million at December 30, 2001. The increase was a result of borrowings incurred to finance acquisitions and currency exchange rate changes offset by repayments. The ratio of total debt to total capitalization improved to 34% at September 29, 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. PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Reports on Form 8-K. On August 12, 2002 Teleflex Incorporated filed a report on Form 8-K dated August 12, 2002, to file as an exhibit the sworn statement of its principal executive officer and principal financial officer signed pursuant to the Securities and Exchange Commission order requiring sworn statements. 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. Chief Financial Officer and Executive Vice President /s/ STEPHEN J. GAMBONE -------------------------------------- Stephen J. Gambone Chief Accounting Officer and Controller November 12, 2002 10 TELEFLEX INCORPORATED CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Jeffrey P. Black, Chief Executive Officer and President of Teleflex Incorporated, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Teleflex Incorporated; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ JEFFREY P. BLACK -------------------------------------- Jeffrey P. Black Chief Executive Officer and President Date: November 12, 2002 11 TELEFLEX INCORPORATED CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Harold L. Zuber, Jr., Chief Financial Officer and Executive Vice President of Teleflex Incorporated, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Teleflex Incorporated; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ HAROLD L. ZUBER, JR. -------------------------------------- Harold L. Zuber, Jr. Chief Financial Officer and Executive Vice President Date: November 12, 2002 12