SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
For the quarterly period ended March 30, 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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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1
The accompanying unaudited condensed consolidated financial statements for the three months ended March 30, 2003 and March 31, 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 March 30, 2003, 5,333,715 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. The Company does not believe these will have a material impact on the results of operations or financial condition of the Company.
Note 3
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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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 3 — (continued)
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 4
Changes in the carrying amount of goodwill for the three months ended March 30, 2003, by operating segment, are as follows:
The following table reflects the components of intangible assets:
Amortization expense related to those intangible assets was $1,698 for the three months ended March 30, 2003. Amortization expense is estimated to be $7,041 in 2003, $6,901 in 2004, $6,190 in 2005, $5,406 in 2006 and $4,567 in 2007.
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Note 5
Inventories consisted of the following:
Note 6
Business segment information:
MANAGEMENT’S ANALYSIS OF QUARTERLY FINANCIAL DATA
Results of Operations:
Revenues increased 7% in the first quarter of 2003 to $546.2 million from $508.4 million in 2002. The increase resulted from gains in the Commercial and Medical segments which more than offset a decline in the Aerospace Segment. The 7% increase in revenues was comprised of 4% from acquisitions, 5% from currency translation and a core business decline of 2%. The Commercial, Medical and Aerospace segments comprised 55%, 22% and 23% of the Company’s net sales, respectively.
The gross profit margin declined to 26.0% in 2003 from 26.6% in 2002 as a result of a decrease in the Aerospace Segment, due to a combination of lower volume in Industrial Gas Turbine (IGT) Services and new lower margin programs in Repair Services. Commercial and Medical gross margin improved slightly.
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Operating profit declined 8% in the first quarter to $50.1 million in 2003 from $54.5 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 9.2% in 2003 from 10.7% in 2002 due primarily to a decline in the Aerospace Segment. Medical Segment margin declined slightly, while Commercial margin remained flat. The Commercial, Medical and Aerospace segments comprised 58%, 38% and 4% of the Company’s operating profit, respectively.
Interest expense increased in 2003 primarily as a result of changes in exchange rates. During the quarter, the Company completed the sale of a non-core equity investment resulting in a pre-tax gain of $3.1 million, or $0.05 cents per share after tax. The effective income tax rate was 29.6% in 2003 compared with 30.7% 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 $29.2 million and $0.74, a 4% decline.
Industry Segment Review:
Sales in the Commercial Segment gained 13% from $265.8 million in 2002 to $299.8 million in 2003 as all three product lines, Automotive, Marine and Industrial, reported gains. Automotive and Industrial product lines reported double-digit gains while Marine sales improved modestly. Automotive sales improved due to stronger foreign currencies and increased volume of the adjustable pedal and transmission guide control programs. Industrial sales grew largely as a result of acquisitions, including the 2003 purchase of a designer and manufacturer of electronic and electromechanical products for the automotive, marine and industrial markets. Marine revenues increased slightly as a result of improved sales to original equipment manufacturers and of non-marine products, which more than compensated for weaker aftermarket sales. Operating profit increased to $29.1 million from $25.7 million in 2002. Operating profit improved due to volume increases across all three product lines and prior year plant closings in the Automotive product line. Operating margin remained constant at 9.7%.
Medical Segment sales increased 10% from $107.3 million in 2002 to $118.1 million in 2003. Stronger European currencies, increased volume of core anesthesia products in the Health Care Supply product line and the acquisition of a medical instrument company in the third quarter of 2002 led to the double-digit increase. Operating profit increased from $17.4 million in 2002 to $19.0 million in 2003 while operating margin declined slightly from 16.2% to 16.1%. In Health Care Supply, higher volume and greater reliance on production in low cost countries improved both operating profit and margin. In Surgical Devices, operating profit remained relatively constant and margin declined as a result of adverse mix.
Aerospace Segment sales decreased 5% to $128.3 million in 2003 from $135.3 million in 2002 as this segment continued to experience weaker power generation and commercial aerospace markets. A significant sales decline in IGT Services more than offset growth in Repair Services and Cargo Systems. Manufactured Component revenue was relatively flat. Operating profit decreased 83% to $1.9 million and operating margin dropped from 8.4% in 2002 to 1.5% in 2003. Operating profit declined as a result of approximately $3 million in plant wind-down and closing costs, lower volume in IGT Services and, to a lesser extent currency pressures in Cargo Systems. These factors along with new Repair Services programs resulted in lower margins.
Cash Flows from Operations and Liquidity:
Cash flows from operating activities in the first quarter of 2003 declined slightly to $27.2 million from the prior year period of $28.3 million. Accounts receivable levels increased due in part to increased sales in Europe, particularly Medical, where payment terms are longer. Total borrowings increased by $25 million to $447.6 million at March 30, 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. The ratio of total debt to total capitalization at both December 29, 2002 and March 30, 2003 was 32%.
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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
1. During the quarter ended March 30, 2003, the Company filed the following report 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.
May 13, 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: May 13, 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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