SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
For the quarterly period ended September 26, 2004
OR
For the transition period from to
Commission File Number 1-5353
TELEFLEX INCORPORATED
(610) 948-5100
(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.
TABLE OF CONTENTS
The accompanying notes are an integral part of the condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements for the three and nine months ended September 26, 2004 and September 28, 2003 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. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 28, 2003.
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 option-based employee compensation cost is reflected in net income. 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 123, “Accounting for Stock-Based Compensation”:
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The fair value for options granted in 2004 and 2003 was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
Note 2. New accounting standards
Variable interest entities.In December 2003, the FASB issued Interpretation (FIN) 46R, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,” which replaced FASB Interpretation 46, “Consolidation of Variable Interest Entities,” and clarifies the application of Accounting Research Bulletin 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. The Company has adopted the provisions of the interpretation using fair value appraisals. The adoption of this interpretation had no material impact on the Company’s financial position, results of operations or cash flows. In applying the interpretation, four previously non-consolidated entities with a net investment of $10,000 were consolidated in the September 26, 2004 financial statements.
Pension and other postretirement benefits.In December 2003, the FASB issued SFAS 132R, “Employers’ Disclosures about Pensions and Other Postretirement Benefits — an amendment of FASB Statements 87, 88, and 106,” which replaced SFAS 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” SFAS 132R retains the disclosure requirements of SFAS 132 and requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The disclosure requirements of SFAS 132R are generally effective for fiscal years ending after December 15, 2003. Disclosure of the estimated future benefit payments and certain information about foreign plans shall be effective for fiscal years ending after June 15, 2004. The interim-period disclosures required by this Statement were effective for interim periods beginning after December 15, 2003. Disclosures related to the estimated future benefit payments and foreign plans shall be incorporated into the footnotes to the Company’s 2004 financial statements. The adoption of SFAS 132R did not have a material impact on the Company’s financial position, results of operations or cash flows.
The Company has a number of defined benefit pension and postretirement plans covering eligible U.S. and non-U.S. employees. The defined benefit pension plans are noncontributory. The benefits under these plans are based primarily on years of service and employees’ pay near retirement. The Company’s funding policy for U.S. plans is to contribute annually, at a minimum, amounts required by applicable laws and regulations. Obligations under non-U.S. plans are systematically provided for by depositing funds with trustees or by book reserves.
The parent company and certain subsidiaries provide medical, dental and life insurance benefits to pensioners and survivors. The associated plans are unfunded and approved claims are paid from company funds.
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Note 2. New accounting standards — (continued)
Net benefit cost of defined benefit plans consists of the following:
The Company previously disclosed in its consolidated financial statements for the year ended December 28, 2003 that it expected to contribute $5,000 to its U.S. pension plans. Due to changes in current expected actuarial returns and current funding estimates, through September 26, 2004 the Company has contributed $8,700 to fund its U.S. pension plans. The Company has completed the funding of its U.S. pension plans for 2004. The Company anticipates contributing approximately $2,000 for its non-domestic pension plans.
Medicare prescription drug costs.In April 2004, the FASB issued Staff Position FAS 106-2 to address the accounting and disclosure requirements related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The adoption of this provision had no material impact on the Company’s financial position, results of operations, or cash flows.
American Jobs Creation Act.On October 22, 2004 President Bush signed the American Jobs Creation Act of 2004 (the Act) into law. The Act includes provisions that may materially affect the Company’s accounting for income taxes including a possible increase in its effective tax rate and changes in its deferred assets and liabilities. The Company is assessing the impact of the Act.
Inventories consisted of the following:
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Note 4. Goodwill and intangible assets
Changes in the carrying amount of goodwill for the nine months ended September 26, 2004, by operating segment, are as follows:
Goodwill adjustments primarily represent final adjustments to the purchase price allocation for acquisitions completed within the last twelve months.
The following table reflects the components of intangible assets:
Amortization expense related to intangible assets was $4,160 and $9,531 for the three and nine months ended September 26, 2004. Amortization expense related to the above carrying amounts is estimated to be $13,855 in 2004, $15,590 in 2005, $14,651 in 2006, $13,852 in 2007 and $13,792 in 2008.
Note 5. Borrowings
During the quarter, the Company issued $350,000 in Senior Notes at rates ranging from 5.23% to 5.85% fixed over the term of the notes. The borrowing consists of $150,000 of seven-year notes, $100,000 of ten-year notes, and $100,000 of twelve-year notes. Interest is to be paid semiannually. The notes were financed through a group of 23 financial institutions. Proceeds were used primarily to fund the Hudson acquisition.
In addition, the Company completed a $400,000 five-year syndicated revolving credit facility. The credit facility is available at several interest rates options. The Company expects to draw upon the revolving credit facility to refinance existing loans and to retire callable debt of Hudson.
Note 6. Earnings per share
Basic earnings per share are computed by dividing net income by the average number of common shares outstanding during the period. Diluted earnings per share are computed in the same manner except that the weighted average number of shares is increased for dilutive securities. The difference between basic and
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diluted weighted average common shares results from the assumption that dilutive stock options were exercised. A reconciliation of basic to diluted weighted average shares outstanding is as follows:
Weighted average stock options of 1,199 and 447 were antidilutive and were therefore not included in the calculation of earnings per share for the three months ended September 26, 2004 and September 28, 2003, respectively. Weighted average antidilutive stock options were 773 and 886 for the nine months ended September 26, 2004 and September 28, 2003, respectively.
At September 26, 2004, 4,720 shares were reserved for issuance under the Company’s stock compensation plans.
On July 6, 2004, the Company completed the acquisition of all of the issued and outstanding capital stock of Hudson Respiratory Care Inc. (Hudson), a provider of disposable medical products for respiratory care and anesthesia, for approximately $458,000 subject to adjustment. The results for Hudson are included in the Company’s Medical Segment.
The acquisition has been accounted for using the purchase method of accounting in accordance with SFAS 141, “Business Combinations.” The following table presents the preliminary allocation of purchase price for the Hudson acquisition based on estimated fair values:
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The amount allocated to goodwill is reflective of the benefit the Company expects to realize from expanding its presence in the health care supply market through Hudson and from expected synergies. Of the $129,400 in intangible assets, $54,000 was assigned to intangibles with estimated remaining amortizable lives of 10 years and $900 was assigned to intangibles with estimated remaining amortizable lives of 11.5 years. The remaining $74,500 was assigned to indefinite-lived intangibles other than goodwill. The deferred tax asset is a result of Hudson’s net operating loss carryforward and a difference in tax basis prior to acquisition. The Company is in the process of completing third party valuations of certain tangible and intangible assets acquired with the new business. Therefore, the allocation of purchase price to this acquisition is subject to revision.
The following table provides pro forma results of operations for the periods noted below, as if the acquisition had been made as of the beginning of the period. The pro forma amounts are not necessarily indicative of the results that would have occurred if the acquisition had been completed at that time.
The pro forma results of operations for the nine months ended September 26, 2004 include $25,686 of expenses, or $0.63 per share, incurred by Hudson in contemplation of the transaction. These expenses include bonus and stock option settlement expenses, professional fees, broker fees and insurance costs.
In connection with this acquisition, the Company has formulated a plan related to the future integration of the acquired entity. The integration activities began during the due diligence process and continue for twelve months after the acquisition. The Company has accrued estimates for certain costs, related primarily to personnel reductions and facility closings and the termination of certain distribution agreements at the date of acquisition, in accordance with Emerging Issues Task Force Issue 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” The amount accrued for these future integration costs is $23,422. Set forth below is detail of integration costs:
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Adjustments to these estimates can be made up to 12 months from the acquisition date as plans are executed. To the extent these expected amounts are not utilized for the intended purpose, the difference would be recorded as a reduction of the purchase price by reducing recorded goodwill. Costs in excess of the accrual would be expensed as incurred.
Note 9. Commitments and contingent liabilities
Product warranty liability.The Company warrants to the original purchaser of certain of its products that it will, at its option, repair or replace, without charge, such products if they fail due to a manufacturing defect. Warranty periods vary by product. The Company has recourse provisions for certain products that would enable recovery from third parties for amounts paid under the warranty. The Company accrues for product warranties when, based on available information, it is probable that customers will make claims under warranties relating to products that have been sold, and a reasonable estimate of the costs (based on historical claims experience relative to sales) can be made. Set forth below is a reconciliation of the Company’s estimated product warranty liability for the nine months ended September 26, 2004:
Operating leases.The Company uses various leased facilities and equipment in its operations. The terms for these leased assets vary depending on the lease agreement. The Company also has synthetic lease programs that are used primarily for plant and equipment. In connection with the synthetic and other leases, the Company has residual value guarantees in the amount of $19,959 at September 26, 2004. The Company’s future payments cannot exceed the minimum rent obligation plus the residual value guarantee amount. The guarantee amounts are tied to the unamortized lease values of the assets under synthetic lease and are due should the Company decide neither to renew these leases, nor to exercise its purchase options. At September 26, 2004, the Company had no liabilities recorded for these obligations. Any residual value guarantee amounts paid to the lessor may be recovered by the Company from the sale of the assets to a third party.
Accounts receivable securitization program.The Company uses an accounts receivable securitization program to gain access to enhanced credit markets and reduce financing costs. As currently structured, the Company sells certain trade receivables on a non-recourse basis to a consolidated company, which in turn sells an interest in those receivables to a commercial paper conduit. The conduit issues notes secured by that interest to third party investors. These notes are secured by a 364-day liquidity facility provided by a bank. At September 26, 2004, $69,983 was recorded in demand loans under this program.
Environmental. The Company is also subject to contingencies pursuant to environmental laws and regulations that in the future may require the Company to take further action to correct the effects on the environment of prior disposal practices or releases of chemical or petroleum substances by the Company or other parties. Much of this liability results from the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA, often referred to as Superfund), the Resource Conservation and Recovery Act (RCRA), and similar state laws. These laws require the Company to undertake certain investigative and
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Note 9. Commitments and contingent liabilities — (continued)
remedial activities at sites where the Company conducts or once conducted operations or at sites where company-generated waste was disposed.
Remediation activities vary substantially in duration and cost from site to site. These activities, and their associated costs, depend on the mix of unique site characteristics, evolving remediation technologies, diverse regulatory agencies and enforcement policies, as well as the presence or absence of potentially responsible parties. At September 26, 2004, the Company’s consolidated balance sheet included an accrued liability of $4,455 relating to these matters. Considerable uncertainty exists with respect to these costs and, under adverse changes in circumstances, potential liability may exceed the amount accrued as of September 26, 2004. The time frame over which the accrued or presently unrecognized amounts may be paid out, based on past history, is estimated to be 15-20 years.
Litigation. The Company is a party to various lawsuits and claims arising in the normal course of business. These lawsuits and claims include actions involving product liability contracts, intellectual property, employment practices and environmental matters. The ultimate effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists as to the final outcome of these lawsuits and claims in the opinion of company counsel. However, while the ultimate liabilities resulting from such lawsuits and claims may be significant to results of operations in the period recognized, management does not anticipate they will have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.
On February 13, 2004, the Company was notified that a jury sitting in the Federal District Court for the Northern District of Georgia had rendered a verdict against one of its subsidiaries, Rüsch, Inc., in a trademark infringement case in the amount of $2,600 as “reasonable royalty” and an additional $32,200 as “unjust enrichment.” Judgment was not entered on the verdict, and the trial judge held a hearing on February 25, 2004 on the issue of what judgment would be entered by the court. The judge reserved judgment at that hearing pending further briefing by the parties. Under applicable Federal trademark law, the trial judge has the discretion to determine whether and in what amount an award for unjust enrichment should be made. As of the filing date of the Company’s September 26, 2004 Form 10-Q, no judgment had been entered on this matter.
Rüsch, Inc., a manufacturer of health care supply products, is a co-defendant in this case with Medical Marketing Group, Inc. (MMG). This case involves a common law trademark claim arising under 1988 and 1997 contracts between MMG and the plaintiff, which were terminated in 1999. Rüsch, Inc. acquired the business of MMG in February 2000. In connection with the acquisition, the Company escrowed a portion of the purchase price, the balance of which approximates the reasonable royalty found by the jury.
The Company cannot predict when judgment will be entered in this case, nor predict what amount, if any, may be awarded for unjust enrichment. Accordingly, other than the amount provided in the escrow noted above, no accrual has been recorded in the accompanying consolidated financial statements.
Other. The Company has various purchase commitments for materials, supplies, and items of permanent investment incident to the ordinary conduct of business. In the aggregate, such commitments are not at prices in excess of current market. In addition, in the normal course of business the Company periodically enters into agreements that incorporate indemnification provisions. While the amount to which the Company may be liable under such agreements cannot be estimated, it is the opinion of management that any potential indemnification is not expected to have a material adverse effect on the consolidated financial position, results of operations or liquidity.
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During the third quarter of 2004, the Company sold two non-strategic businesses, which represented nearly $5,000 in annual revenues. The divestitures included a non-core component of an automotive business in the Commercial Segment and assets of a business which manufactured and repaired components for industrial gas turbines. These divestitures resulted in a pre-tax loss of $563, or $0.01 per share after tax.
During the second quarter of 2004, the Company sold three non-strategic businesses, which represented nearly $100,000 in annual revenues. The divestitures included a consumer marine electronics manufacturer, a mechanical cable manufacturer for the automotive industry, and a producer of stranded cable for industrial applications. All three businesses were part of the Company’s Commercial Segment. The divestitures resulted in a pre-tax gain of $5,083, or $0.07 per share after tax.
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Identifiable assets are as follows:
Medical Segment assets increased primarily due to the Hudson acquisition.
MANAGEMENT’S ANALYSIS OF QUARTERLY AND NINE MONTHS FINANCIAL DATA
Overview:
The Company is focused on achieving consistent and sustainable growth through a combination of core growth and carefully selected acquisitions. Acquisition growth was provided during the year primarily from the July 6, 2004 acquisition of Hudson. Hudson is a leading provider of disposable medical products for respiratory care and anesthesia, and activities to integrate this business into our existing Medical business commenced during the quarter. During the quarter and the year our results also were affected by the 2003 acquisitions of seven smaller businesses:
Our internal growth initiatives include the development of new products, moving existing products into market adjacencies in which we already participate with other products and the expansion of market share. Our core sales growth as compared to the prior year period, excluding the impacts of currency and acquisitions, was 3% for the third quarter and 5% for the first nine months of the year.
In connection with the acquisition of Hudson, we retired certain existing credit lines, issued $350,000 of Senior Notes at fixed interest rates ranging from 5.23% to 5.85%, entered into a $400,000 five-year revolving credit facility and amended the terms of certain existing Senior Notes to create a more effective and lower rate debt structure.
During the quarter we commenced a portfolio evaluation to identify businesses for divestiture, phase out or consolidation. To assist us in this review, we engaged an investment banking firm to evaluate strategic alternatives for a major portion of these businesses. A result of the initial evaluations was the disposal, towards
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The weakening of the U.S. dollar through 2003 and 2004, particularly against the euro, the Swedish krona and the British pound, had mixed impact on our reported results. Currency changes increased reported net sales and net orders by $16.9 million and $21.5 million, respectively, in the quarter and by $61.2 million and $66.4 million, respectively, in the first nine months of the year, as compared to prior year periods. However, since a large proportion of this impact was reported by certain loss-making operations, there was no significant effect on profits from these currency translation effects.
Results of Operations:
Discussion of growth from acquisitions reflects the impact of a purchased company twelve months beyond the date of acquisition. Activity beyond the initial twelve months is considered core growth. Core growth excludes the impact of translating the results of international subsidiaries at different currency exchange rates from year to year and the comparable activity of divested companies within the most recent twelve-month period.
Third Quarter
Revenues increased 14% in the third quarter of 2004 to $625.8 million from $550.9 million in 2003. The 14% increase in revenues was comprised of 6% from acquisitions net of dispositions, 3% from core growth, 3% from currency translation and 2% from the impact of consolidating entities under FIN 46R. The Commercial and Medical segments reported overall and core revenue improvement while Aerospace Segment core and overall revenue declined. The Commercial, Medical and Aerospace segments comprised 47%, 33% and 20% of the Company’s net revenues, respectively.
Cost of sales as a percentage of revenues decreased to 72.8% in 2004 compared to 74.5% in 2003. A decrease in the Aerospace Segment more than compensated for increases in the Commercial and to a lesser extent Medical Segment. Operating expenses as a percentage of revenues were 21.7% in 2004 compared with 19.7% in 2003 due to an increase relative to sales in the Commercial and Aerospace segments and higher corporate expenses. Corporate expenses rose primarily due to new regulatory provisions and certain strategic activities.
Interest expense increased in 2004 principally from higher debt levels associated with the Hudson acquisition. The effective income tax rate was 17.3% in the third quarter of 2004 as a result of recognizing a benefit of $2.0 million, or $.05 per share, from releasing a tax reserve whose statutory limitation period expired during the quarter. Excluding this impact, the effective income tax rate was 26.7% compared to 28.0% in 2003. The decline was the result of a higher proportion of income in 2004 earned in countries with relatively lower tax rates. Net income for the quarter was $17.5 million, a decrease of 4% from the third quarter of 2003. Diluted earnings per share declined 4% to $0.43.
Nine Months
Revenues increased 14% in the first nine months of 2004 to $1.92 billion from $1.68 billion in 2003. The 14% increase in revenues was comprised of 5% from core growth, 5% from acquisitions, net of dispositions, 3% from currency and 1% from the impact of consolidating entities under FIN 46R. The Commercial, Medical and Aerospace segments comprised 52%, 27% and 21% of the Company’s net revenues, respectively.
Cost of sales as a percentage of revenues decreased to 73.4% in 2004 compared to 73.9% in 2003. A decrease in the Medical Segment more than compensated for an increase in the Commercial Segment, while the Aerospace Segment’s cost of sales as a percent of revenues remained constant. Operating expenses as a percentage of revenues increased to 19.8% in 2004 compared with 18.4% in 2003 due to increases relative to sales in all three segments and higher corporate expenses. In the first quarter of 2003, the Company sold an
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Interest expense increased in 2004 principally from higher debt outstanding in connection with the Hudson acquisition. The effective income tax rate was 25.9% in the first nine months of 2004 compared with 29.0% in 2003. The lower rate in 2004 was the result of releasing a $2.0 million tax reserve in the third quarter of 2004 and a higher proportion of income in 2004 earned in countries with relatively lower tax rates. Net income for the first nine months was $81.1 million, an increase of 2% from the first nine months of 2003. Diluted earnings per share improved 1% to $2.00.
Industry Segment Review:
Commercial Segment revenues increased 6% in the quarter from $279.2 million in 2003 to $295.2 million in 2004 as improvement in products serving marine and industrial markets more than compensated for a decline in the sales to Tier I automotive customers. Overall, core growth contributed 7%, currency added 3%, acquisitions throughout 2003 contributed 2%, consolidation of entities covered under FIN 46R added 1% while dispositions deducted 7%. Sales to Tier I automotive customers declined in part due to the second quarter 2004 disposition of a mechanical cable manufacturer. Strong growth in Marine revenues occurred despite being tempered by the second quarter 2004 disposition of a consumer marine electronics manufacturer and aftermarket weakness in the latter portion of the quarter due to hurricanes in the southeastern United States. Commercial Segment operating profit declined from $15.8 million in 2003 to $7.9 million in 2004. Operating profit declined largely due to adverse mix and higher raw material pricing for automotive pedals, the impact of program cancellations in alternative fuel systems and costs associated with the launch of a new product for the Tier II automotive market. Operating profit as a percent of revenues declined to 2.7% in the quarter compared to 5.7% in 2003.
Revenues in the Medical Segment gained 47% in the quarter to $204.8 million in 2004 from $139.6 million in 2003. Over two-thirds of the increase was the result of acquisitions; the balance was provided by FIN46R consolidated entities, core growth and currency gains. In Health Care Supply, over two-thirds of the revenue gain came from the Hudson acquisition. Surgical Devices revenues improved on core growth in sales of new products, instruments, and OEM specialty devices. Medical Segment operating profit increased 45% from $21.0 million in 2003 to $30.5 million in 2004. Operating profit improved due to acquired and core growth in both product lines. Operating profit as a percent of revenues declined to 14.9% in 2004 from 15.0% in 2003.
Aerospace Segment sales declined 5% to $125.8 million in 2004 from $132.0 million in 2003. Revenues decreased 6% due to lower core sales offset by a 1% increase due to currency. Core declines in Industrial Gas Turbine (IGT), and to a lesser extent Cargo Systems, were offset partially by gains in Manufactured Components and Repair Product and Services. The core decline was largely the result of the phase out of construction and engineering services in IGT. Aerospace Segment operating profit improved from $0.5 million in 2003 to $3.5 million in 2004. Operating profit improved as a result of reduced losses in IGT, in part due to the phase out of engineering and construction services. Operations in the Aerospace Segment continue to experience pricing constraints and currency pressure. Operating profit as a percent of revenues increased to 2.8% from 0.4%.
Commercial Segment revenues in the first nine months increased 12% from $897.3 million in 2003 to $1.0 billion in 2004. Overall, core growth across all three product lines accounted for 8%, currency and acquisitions each added 4%, while dispositions deducted 4%. Strongest growth was to marine markets as a result of increased demand for both OEM and aftermarket products. Commercial Segment operating profit declined from $77.8 million in 2003 to $70.8 million in 2004. Industrial operating profit declined as a result of
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Nine month revenues in the Medical Segment gained 33% to $513.7 million in 2004 from $387.5 million in 2003. Revenues gained 21% from acquisitions, 5% each from core growth and foreign currency changes, and 2% from the consolidation of FIN 46R entities. In Health Care Supply, slightly more than one-half of the growth came from the Hudson acquisition with currency and core improvement providing a majority of the residual. In Surgical Devices, the cardiothoracic acquisition in the third quarter of 2003 accounted for over 80% of the year-over-year revenue improvement. Operating profit increased 30% to $79.9 million in 2004 from $61.6 million in 2003 as a result of acquisitions and core volume gains in the Health Care Supply and Surgical Devices product lines. Operating profit as a percent of revenues declined from 15.9% in 2003 to 15.5% in 2004.
Aerospace Segment sales gained 2% in the first nine months to $398.5 million in 2004 from $390.3 million in 2003. Stronger foreign currencies and core growth each accounted for 1%. Core growth was the result of double-digit growth in Repair Product and Services and Manufactured Components, which more than compensated for declines in IGT and Cargo Systems. Core revenue growth was in part due to increased sales of lower margin offerings. The Aerospace Segment generated an operating profit of $0.6 million versus operating profit of $4.3 million in the first nine months of 2003. Operating profit declined due to pricing pressures from the aerospace OEMs and aftermarket, lower volume in Cargo Systems and higher costs in manufactured components. Operating profit as a percent of revenues was 1.1% in 2003 versus 0.1% in 2004.
Cash Flows from Operations and Liquidity:
Cash flows from operating activities in the first nine months of 2004 were $185.3 million, compared to $155.4 million in the prior year comparable period. Improved collections, coupled with higher depreciation, amortization and net income led to improved operating cash flow. Proceeds from new borrowings, primarily for the acquisition of Hudson, totaled $495.3 million offset by payments of $167.3 million. Proceeds from stock compensation plans increased to $12.7 million as 400,000 stock options were exercised in the first nine months versus 151,000 in the prior year comparable period. Borrowings increased by $345.1 million to $801.1 million at September 26, 2004 as compared to $456.0 million at December 28, 2003. The increase was due to additional borrowings used to acquire Hudson offset by repayments of both short and long-term debt facilitated by improved operating cash flow, proceeds from the disposition of businesses and lower year-over-year capital spending. The ratio of net debt to total capital was 38% at September 26, 2004 versus 27% at December 28, 2003.
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The Company believes that its cash flow from operations and the ability to access additional funds through credit facilities will enable it to fund its operating requirements, capital expenditures and additional acquisition opportunities.
Contractual obligations as of September 26, 2004 are as follows ($ in millions):
Forward-Looking Statements:
In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the Company notes that certain statements contained in this quarterly report, other written reports and oral statements are forward-looking in nature. These forward-looking statements include matters such as business strategies, market potential, future financial performance, product deployments and other future-oriented matters. Such matters involve risks and uncertainties which can cause actual results to differ materially from those projected in the forward-looking statements and include, but are not limited to:
The Company undertakes no obligation to update or publicly revise these forward-looking statements to reflect events or circumstances that arise after the date of this report.
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 Investors 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.
Item 4. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of the
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Disclosure controls and procedures are designed to ensure information required to be disclosed in reports filed with the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Disclosure controls include internal controls that are designed to provide reasonable assurance that transactions are safeguarded against unauthorized or improper use and that transactions are properly recorded and reported.
Any control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of the control system inherently has limitations, and the benefits of controls must be weighed against their costs. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Therefore, no evaluation of a cost-effective system of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.
PART II OTHER INFORMATION
The Company is subject to contingencies pursuant to environmental laws and regulations that in the future may require the Company to take further action to correct the effects on the environment of prior disposal practices or releases of chemical or petroleum substances by the Company or other parties. Much of this liability results from the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA, often referred to as Superfund), the Resource Conservation and Recovery Act (RCRA), and similar state laws. These laws require the Company to undertake certain investigative and remedial activities at sites where the Company conducts or once conducted operations or at sites where company-generated waste was disposed.
Remediation activities vary substantially in duration and cost from site to site. These activities, and their associated costs, depend on the mix of unique site characteristics, evolving remediation technologies, diverse regulatory agencies and enforcement policies, as well as the presence or absence of potentially responsible parties. The time frame over which the accrued or presently unrecognized amounts may be paid out, based on past history, is estimated to be 15-20 years.
The Company is a party to various lawsuits and claims arising in the normal course of business. These lawsuits and claims include actions involving product liability contracts, intellectual property, employment practices and environmental matters. The ultimate effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists as to the final outcome of these lawsuits and claims in the opinion of company counsel. However, while the ultimate liabilities resulting from such lawsuits and claims may be significant to results of operations in the period recognized, management does not anticipate they will have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.
The Company was notified in February 2004 that a jury had rendered a verdict against one of its subsidiaries. As of the date of this filing, a judgment on the verdict has not yet been entered pending further
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Item 6. Exhibits and Reports on Form 8-K
1. Exhibits:
2. During the quarter ended September 26, 2004, 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.
November 2, 2004
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EXHIBIT INDEX