SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
For the quarterly period ended June 29, 2003
OR
For the transition period from ____________ to
Commission File Number 1-5353
TELEFLEX INCORPORATED
(610) 834-6301
None
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.
þ Yes o No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock as of the latest practicable date.
CONDENSED CONSOLIDATED BALANCE SHEET
The accompanying notes are an integral part of the condensed consolidated financial statements.
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STATEMENT OF COMPREHENSIVE INCOME
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1
The accompanying unaudited condensed consolidated financial statements for the three and six months ended June 29, 2003 and June 30, 2002 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 29, 2003, 5,316,832 shares of common stock were reserved for issuance under the Company’s stock compensation plans.
Note 2
In November 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that certain guarantees be recognized as liabilities at fair value at their inception date and requires certain disclosures by the guarantor in its financial statements about its obligations. In the ordinary course of business, the Company provides routine letters of credit, indemnifications and other guarantees whose terms range in duration and often are not explicitly defined. Adoption of FIN 45 did not have a material impact on the results of operations or financial condition of the Company.
Note 3
In May 2003, the FASB issued Statement No. 150 (FAS 150), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. FAS 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not believe adoption of FAS 150 will have a material impact on the results of operations or financial condition of the Company.
Note 4
The Company has stock-based compensation plans that provide for the granting of incentive and non-qualified options to officers and key employees to purchase shares of common stock at the market price of the stock on the dates options are granted. No stock-based employee compensation cost is reflected in net income.
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The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation”:
Note 5
Changes in the carrying amount of goodwill for the six months ended June 29, 2003, by operating segment, are as follows:
The following table reflects the components of intangible assets:
Amortization expense related to those intangible assets was $3,477 for the six months ended June 29, 2003. Amortization expense is estimated to be $7,265 in 2003, $7,138 in 2004, $6,398 in 2005, $5,579 in 2006 and $4,701 in 2007.
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Note 6
Inventories consisted of the following:
Note 7
Business segment information:
MANAGEMENT’S ANALYSIS OF QUARTERLY FINANCIAL DATA
Results of Operations:
Revenues increased 6% in the second quarter of 2003 to $577.9 million from $546.3 million in 2002. The 6% increase in revenues resulted from currency gains, as a 3% gain from acquisitions was negated by a 3% decline in core business. The Commercial and Medical segments each reported gains, which were offset in part by a decline in the Aerospace Segment. The Commercial, Medical and Aerospace segments comprised 55%, 22% and 23% of the Company’s net sales, respectively.
The gross profit margin declined to 26.8% in 2003 from 27.3% in 2002, largely as a result of a quarter-over-quarter decline in the Aerospace Segment, particularly Industrial Gas Turbine (IGT) Services. Medical Segment gross margin improved slightly, while Commercial Segment gross margin declined slightly and
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Operating profit declined 4% in the second quarter to $56.4 million in 2003 from $59.0 million in 2002 resulting from a decline in the Aerospace Segment, which more than compensated for gains in the Commercial and Medical segments. Operating margin declined to 9.8% in 2003 from 10.8% in 2002 due to a decline in the Aerospace Segment. Commercial and Medical segment operating margins improved. The Commercial, Medical and Aerospace segments comprised 58%, 38% and 4% of the Company’s operating profit, respectively.
Interest expense increased in 2003 as a result of changes in exchange rates. The effective income tax rate was 29.0% in the second quarter of 2003 compared with 30.3% in 2002. The decline resulted from a higher proportion of income in 2003 earned in countries with relatively lower tax rates. Net income and diluted earnings per share for the quarter were $31.8 million and $0.80, a 5% decline.
Industry Segment Review:
Sales in the Commercial Segment gained 9% from $291.6 million in 2002 to $318.2 million in the second quarter of 2003 as all three product lines, Automotive, Marine and Industrial reported gains. Currency and acquisitions contributed to the top line gain. Core product sales declined slightly in the quarter, primarily a result of lower automotive cable and marine aftermarket sales. Automotive sales improved due to new platforms in North America for the adjustable pedal system, a new transmission guide control program in Europe and a positive contribution from currencies. Sales of non-marine products, including goods for military application, and new products such as the SmartCastTM bank fishfinder helped offset a weather related weaker marine aftermarket. Acquisitions, including the 2003 purchase of a designer and manufacturer of electronic and electromechanical products for the automotive, marine and industrial markets, helped drive Industrial product line sales higher. Commercial Segment operating profit improved from $29.7 million in 2002 to $32.9 million in 2003. Operating margin for the Commercial Segment increased to 10.3% from 10.2%. Automotive operating profit gained on increased volume in Europe, currency and the second quarter 2002 costs incurred to curtail a North American facility. Marine operating profit fell due to adverse product mix and the unfavorable impact of a stronger Canadian dollar. Acquisitions and core improvement in fluid handling systems helped boost Industrial product line operating profit.
Medical Segment sales increased 14% from $113.5 million in 2002 to $129.7 million in 2003. Both product lines, Health Care Supply and Surgical Devices, improved. Stronger foreign currencies accounted for nearly two-thirds of the growth. Also contributing to growth was the acquisition of an orthopedic instrument manufacturer in September 2002 and increased volume of urology products. Operating profit increased to $21.6 million in 2003 from $18.4 million in 2002, and operating margin improved from 16.2% in 2002 to 16.6% in 2003. In Health Care Supply, volume improvement and increased reliance on production in low cost countries led to higher operating profit. In Surgical Devices, operating profit improved due largely to the acquisition and a reduction in operating expenses, which was partially offset by costs related to the closure of an off-site service facility.
Aerospace Segment sales decreased 8% to $130.1 million in 2003 from $141.2 million in 2002. Results in this quarter continue to reflect price erosion and weaker power generation and commercial aerospace markets. The sales decrease was primarily due to a nearly 20% drop in IGT Services, with lesser declines in Manufactured Components and Cargo Systems, while Repair Services sales increased slightly. Operating profit declined 82% due largely to the weaker performance in IGT Services, particularly the engineering services and replacement parts businesses. These items, coupled with currency pressure and SARS, served to lower operating profit. Cargo Systems, Manufactured Components, and Repair Services all generated mid-single digit returns. Operating margin declined to 1.5% in 2003 from 7.7% in 2002.
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Cash Flows from Operations and Liquidity:
Cash flows from operating activities in the first six months of 2003 increased to $102.2 million from the prior year period of $85.2 million. The primary reason was reduced working capital requirements in the Aerospace Segment. Total borrowings increased by $10.2 million to $433.1 million at June 29, 2003 as compared to $422.9 million at December 29, 2002. The increase was due to borrowings incurred to finance the acquisition and from currency exchange rate changes offset by repayments. The ratio of total debt to total capitalization decreased to 30% at June 29, 2003 from 32% at December 29, 2002 as equity increased in 2003 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.
The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports will be made available free of charge through the Investor Relations section of the Company’s Internet website (http://www.teleflex.com) as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.
As of a date within 90 days prior to the date of the filing of this report, our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures, which included inquiries made to certain other of our employees. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have each concluded that our disclosure controls and procedures provide reasonable assurance that we record, process, summarize, and report information required to be disclosed by us in our periodic reports filed under the Securities Exchange Act within the time periods specified by the Securities and Exchange Commission’s rules and forms. Subsequent to the date of their evaluation, there have not been any significant changes in our internal controls or in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART II OTHER INFORMATION
At the Company’s 2003 Annual Meeting of Shareholders held on April 25, 2003, the following were elected to the Board of Directors of the Company for a term expiring in 2006:
The Shareholders approved the appointment of PricewaterhouseCoopers LLP as independent accountants of the Company for the fiscal year ending December 28, 2003, as follows:
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1. During the quarter ended June 29, 2003, the Company filed the following reports on Form 8-K:
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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.
August 12, 2003
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CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Jeffrey P. Black, Chief Executive Officer and President of Teleflex Incorporated, certify that:
Date: August 12, 2003
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CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Harold L. Zuber, Jr., Chief Financial Officer and Executive Vice President of Teleflex Incorporated, certify that:
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