Teleflex 10-K 2006
Documents found in this filing:
Commission file number 1-5353
(Exact name of registrant as specified in its charter)
Registrants telephone number, including area code: (610) 948-5100
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
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. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of the Common Stock of the registrant held by non-affiliates of the registrant (37,080,375 shares) on June 26, 2005 (the last business day of the registrants most recently completed fiscal second quarter) was $2,124,705,488(1). The aggregate market value was computed by reference to the closing price of the Common Stock on such date.
The registrant had 41,150,750 Common Shares outstanding as of February 21, 2006.
Document Incorporated By Reference: certain provisions of the registrants definitive proxy statement in connection with its 2006 Annual Meeting of Shareholders, to be filed within 120 days of the close of the registrants fiscal year are incorporated by reference in Part III hereof.
No other product line for the Commercial Segment amounted to more than 10% of consolidated revenues for any period presented.
The following table sets forth the percentage of revenues by end market for 2005 for the Commercial Segment.
Backlog: As of December 25, 2005, our backlog of firm orders for our Commercial Segment was $257 million. This compares with $226 million as of December 26, 2004. Standard Commercial products are typically shipped between two weeks and three months after receipt of order. Therefore, the backlog of such orders is not indicative of probable revenues in any future 12-month period.
No other product line for the Medical Segment amounted to more than 10% of consolidated revenues for any period presented.
Backlog: As of December 25, 2005, our backlog of firm orders for our Medical Segment was $65 million. This compares with $65 million as of December 26, 2004. Substantially all of the December 25, 2005 backlog will be filled in 2006. Most of our medical products are sold on orders calling for delivery within a few months. Therefore, the backlog of such orders is not indicative of probable revenues in any future 12-month period.
Marketing: Medical products are sold directly to hospitals, healthcare providers, distributors and to original equipment manufacturers of medical devices through our own sales forces and through independent representatives and independent distributor networks.
Our Aerospace Segment businesses provide repair products and services for flight and ground-based turbine engines; manufacture and distribute precision-machined components; and design, manufacture and market cargo-handling systems. These products require a high degree of engineering sophistication and are often custom-designed. They are provided through business operating units organized by market and technical expertise. Major operations are located in North America, Europe and Asia.
Commercial aviation markets represent the majority percentage of revenues in this segment. Markets for these products are generally influenced by spending patterns in the commercial aviation and military markets.
Repair Products and Services: The largest single product category in the Aerospace Segment, repair products and services represented 49 percent of segment revenues in 2005. This category includes repair technologies and services primarily for critical components of flight turbines, including fan blades and airfoils. We utilize advanced reprofiling and adaptive-machining techniques to improve efficiency of aircraft engine performance and reduce turnaround time for maintenance and repairs. Repair products and services are provided through service locations in North America, Europe and Asia. Our repair products and services business is conducted through a consolidated, but not wholly-owned, subsidiary called Airfoil Technologies International (ATI), whose product line serves many of the industrys leading aircraft engine providers and a range of commercial airlines.
Precision-Machined Components: Products in this category represented 26 percent of Aerospace Segment revenues in 2005. Our precision-machined components include: fan blades, compressor blades, cases, blisks and other components for military and commercial flight turbine engines and a range of custom-designed and manufactured products for industrial markets. The vast majority of our precision-machined components are sold to original equipment manufacturers of aircraft engines and for military applications, with a very small percentage of products sold to industrial markets.
Cargo-handling Systems: Products in this category represented 25 percent of Aerospace Segment revenues in 2005. Our cargo-handling systems include on-board cargo-handling systems for wide-body and narrow-body aircraft, actuators, cargo containers, aftermarket spare parts and repair services. Marketed under the Telair International brand name, our wide-body cargo-handling systems are sold to aircraft original equipment manufacturers or to airlines and air freight carriers as buyer furnished equipment for original installations or as retrofits for existing equipment. Our other Telair products in this category include: narrow-body aircraft cargo-loading systems and cargo containers. We also manufacture and repair components for
No other product line for the Aerospace Segment amounted to more than 10% of consolidated revenues for any period presented.
The following table sets forth the percentage of revenues by end market for 2005 for the Aerospace Segment.
Backlog: As of December 25, 2005, our backlog of firm orders for our Aerospace Segment was $316 million, of which we expect nearly three-fourths to be filled in 2006. Our backlog for our Aerospace Segment on December 26, 2004 was $289 million.
Marketing: Generally, products sold to the aerospace market are sold through our own force of field representatives.
During the third quarter of 2005, we completed the sale of our automotive pedal systems business and sold a European medical product sterilization business. During the second quarter of 2005, we adopted a plan to sell a small medical business and we are actively marketing this business. During the first quarter of 2005, we completed the sale of Sermatech International, a surface-engineering/specialty coatings business. For 2005 and comparable periods, the automotive pedal systems business, the European medical product sterilization business, the small medical business and Sermatech business have been presented in our consolidated financial statements as discontinued operations. The Sermatech business was previously reported as part of our Aerospace Segment. For a more complete discussion, see Note 15 to our consolidated financial statements included in this Annual Report on Form 10-K.
Government agencies in a number of countries regulate our products and the products sold by our customers utilizing our products. The U.S. Food and Drug Administration and government agencies in other countries regulate the approval, manufacturing and sale and marketing of many of our healthcare products. The U.S. Federal Aviation Administration and the European Aviation Safety Agency regulate the manufacturing and sale of some of our aerospace products and license the operation of our repair stations. The National Highway Traffic Safety Administration regulates the manufacturing and sale of numerous of our automotive products.
Given the range and diversity of our products and markets, no one competitor offers competitive products for all the markets and customers that we serve. In general, all of our segments and product lines face significant competition from competitors of varying sizes, although the number of competitors in each market tends to be limited. We believe that our competitive position depends on the technical competence
Mr. Lennox K. Black has been Chairman of the Board since April 1983. From January 2000 until May 2002, he was also Chief Executive Officer. Lennox K. Black is the father of Mr. Jeffrey P. Black.
Mr. Sickler has been Vice Chairman since December 2000. From December 2003 until August 2004, he was Interim Chief Financial Officer. Prior to December 2000 he was a Senior Vice President.
Mr. Jeffrey P. Black has been Chief Executive Officer since May 2002 and President since December 2000. He has been a Director since November 2002. Mr. Jeffrey P. Black was President of the Teleflex Industrial Group from July 2000 to December 2000 and President of Teleflex Fluid Systems from January 1999 to July 2000.
Mr. Handy has been Executive Vice PresidentHuman Resources since April 2003. He was Vice President of Human Resources for the Research and Development division of Wyeth, an international provider of pharmaceuticals, consumer healthcare products, and animal healthcare products, from August 2000 to April 2003, and from November 1998 until August 2000 he was Vice President of Human Resources for the Supply Chain division of Wyeth.
Mr. Headley has been Executive Vice President and Chief Financial Officer since August 2004. From July 1996 until August 2004, he was Vice President and Chief Financial Officer of Roper Industries, Inc., a diversified industrial company that designs, manufactures and distributes engineered products and solutions for global niche markets. From July 1993 to June 1996, Mr. Headley served as Chief Financial Officer of the U.S. operations of McKechnie Group, plc, a manufacturer of components and assemblies for a variety of industries.
Mr. Miller has been Senior Vice President, General Counsel and Secretary since November 2004, following a 20-year career with Aramark Corporation. From November 2001 until November 2004, he was Senior Vice President and Associate General Counsel for Food & Support Services division of Aramark, a diversified management services company providing food, refreshment, facility and other support services for a variety
In addition to the above, we own or lease approximately 1,385,000 square feet of warehousing, manufacturing and office space located in the United States, Canada, Mexico, South America, Europe, Australia and Asia. We also own or lease certain properties that are no longer being used in our operations. We are actively marketing these owned properties and seeking to sublease these leased properties. At December 25, 2005, the owned properties were classified as held for sale.
We are a party to various lawsuits and claims arising in the normal course of business. These lawsuits and claims include actions involving product liability, intellectual property, employment and environmental
Various senior and term note agreements provide for the maintenance of certain financial ratios and limit the repurchase of our stock and payment of cash dividends. Under the most restrictive of these provisions, $213 million of retained earnings was available for dividends and stock repurchases at December 25, 2005. On February 22, 2006, the Board of Directors declared a quarterly dividend of $0.25 per share on our common stock, which was paid on March 15, 2006 to holders of record on March 6, 2006. As of March 6, 2006, we had approximately 1,005 holders of record of our common stock.
On July 25, 2005, our Board of Directors authorized the repurchase of up to $140 million of outstanding Teleflex common stock over twelve months ending July 2006. Under the approved plan, we repurchased 690,100 shares on the open market during 2005 for an aggregate purchase price of $46.5 million. The
We are focused on achieving consistent and sustainable growth through the continued development of our core businesses and carefully selected acquisitions. 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 revenue growth in 2005 as compared to 2004, excluding the impacts of currency, acquisitions and divestitures, was 5%. During the first six months of 2005, our results were benefited by the contribution from the third quarter 2004 acquisition of Hudson Respiratory Care Inc., or HudsonRCI, a leading provider of disposable medical products for respiratory care and anesthesia. Further in 2005, we acquired a small repair products and services business in the Aerospace Segment for $8.0 million.
During 2004, we commenced a portfolio review program that resulted in the sale of a number of non-core businesses and product lines in 2005:
Termination benefits are comprised of severance-related payments for all employees terminated in connection with the restructuring and divestiture program. Contract termination costs relate primarily to the termination of leases in conjunction with the consolidation of facilities and in 2005 also include a $0.5 million reduction in the estimated cost associated with a lease termination in conjunction with a consolidation of manufacturing facilities in our Commercial Segment. Asset impairments relate primarily to machinery and equipment associated with the consolidation of manufacturing facilities and in 2004 also relate to goodwill associated with our Industrial Gas Turbine aftermarket services business. Other restructuring costs include expenses primarily related to the consolidation of manufacturing operations and the reorganization of administrative functions.
As of December 25, 2005, we expect to incur the following future restructuring costs in our Medical Segment over the next 2 quarters (dollars in thousands):
Cost savings from our restructuring and divestiture program were approximately $53 million in 2005 and we expect cost savings for 2006 to be between $60 million and $80 million.
Revenues increased 16% in 2004 to $2.39 billion from $2.06 billion in 2003. This increase was due to increases of 7% from acquisitions, 6% from core growth, 4% from currency, 1% from the consolidation of variable interest entities and 1% from the impact of eliminating the one-month reporting lag for certain of our foreign operations, offset, in part, by a decrease of 3% from dispositions. The Commercial, Medical and Aerospace segments comprised 50%, 31% and 19% of our revenues, respectively.
Materials, labor and other product costs as a percentage of revenues decreased to 71.3% in 2004 compared to 71.7% in 2003. The decline was due to the disposition of underperforming businesses and a
The decline in our percent of net debt to total capital for 2005 as compared to 2004 is primarily due to the receipt of proceeds from the sale of businesses and assets and improved management of working capital.
We also have obligations with respect to our pension and other postretirement benefit plans. See Note 12 to our consolidated financial statements included in this Annual Report on Form 10-K.
Off Balance Sheet Arrangements
We have residual value guarantees under operating leases for plant and equipment. The maximum potential amount of future payments we could be required to make under these guarantees is approximately $6.9 million.
We use an accounts receivable securitization program to gain access to enhanced credit markets and reduce financing costs. As currently structured, we sell certain trade receivables on a non-recourse basis to a consolidated special purpose entity, 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. The assets of the special purpose entity are not available to satisfy our obligations.
During the first quarter of 2005, we amended the securitization program agreement. In accordance with the provisions of SFAS No. 140, transfers of assets under the program now qualify as sales of receivables and accordingly, $40.1 million and $0 of accounts receivable and the related amounts previously recorded in notes payable were removed from the consolidated balance sheet as of December 25, 2005 and December 26, 2004, respectively.
See also Note 13 to our consolidated financial statements included in this Annual Report on Form 10-K.
We are exposed to certain financial risks, specifically fluctuations in market interest rates, foreign currency exchange rates and, to a lesser extent, commodity prices. We use derivative financial instruments to manage or reduce the impact of some of these risks. All instruments are entered into for other than trading purposes. We are also exposed to changes in the market traded price of our common stock as it influences the valuation of stock options and their effect on pro forma earnings as disclosed.
A 1.0% increase or decrease in variable interest rates would adversely or positively impact our expected net earnings by approximately $1.1 million or ($1.1 million), respectively.
We are exposed to fluctuations in market values of transactions in currencies other than the functional currencies of certain subsidiaries. We have entered into forward contracts with several major financial institutions to hedge a portion of projected cash flows from these exposures. The following table presents our open forward currency contracts as of December 25, 2005, which all mature in 2006. Forward contract notional amounts presented below are expressed in the stated currencies (in thousands). The fair value of the open forward contracts as of December 25, 2005 was $0.5 million.
A movement of 10% in the value of the U.S. dollar against foreign currencies would impact our expected net earnings by approximately $0.9 million.
The financial statements and supplementary data required by this Item are included herein, commencing on page F-1.
See Additional Information About The Board Of Directors and Corporate Governance, Compensation Committee Report on Executive Compensation and Executive Compensation and Other Information in the Proxy Statement for our 2006 Annual Meeting, which information is incorporated herein by reference.
See Audit and Non-Audit Fees and Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Auditors in the Proxy Statement for our 2006 Annual Meeting, which information is incorporated herein by reference.
(a) Consolidated Financial Statements:
The Index to Consolidated Financial Statements and Schedule is set forth on page F-1 hereof.
The Exhibits are listed in the Index to Exhibits.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and as of the date indicated below.
Dated: March 20, 2006
FINANCIAL STATEMENT SCHEDULE
March 20, 2006
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The fair value for options granted in 2005, 2004 and 2003 was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
Income taxes: The provision for income taxes is determined using the asset and liability approach of accounting for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported
The amount allocated to goodwill is reflective of the benefit the Company expects to realize from expanding its presence in the healthcare supply market through HudsonRCI and from expected synergies. Goodwill is not deductible for tax purposes. Of the $103,300 in intangible assets, $40,900 was assigned to customer relationships with estimated remaining amortizable lives of 10 years and $900 was assigned to patents with estimated remaining amortizable lives of 11.5 years. The remaining $61,500 was assigned to trade names with indefinite useful lives. The deferred tax asset is a result of HudsonRCIs net operating loss carryforward and a difference in tax basis prior to acquisition.
The following table provides unaudited pro forma results of operations for the periods noted below, as if the acquisition had been made at the beginning of each 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 unaudited pro forma results of operations for the twelve months ended December 26, 2004 and December 28, 2003 each include $25,686 of expenses, or $0.63 and $0.64 per share, respectively, incurred by HudsonRCI in contemplation of the transaction. These expenses include bonus and stock option settlement expenses, professional fees, broker fees and insurance costs.
In 2003, the Company acquired seven smaller businesses for a total cost of $95,481, of which $94,995 was paid in cash in 2003 and $486 was paid in cash in 2005. The acquisitions included a cardiothoracic devices business and an anesthesia and respiratory care business in the Medical Segment; a designer and manufacturer of electronic and electromechanical products for the automotive, marine and industrial markets, a European manufacturer of alternative fuel systems, a passenger and light truck electronic throttle control business, a European light-duty cable operation, and an automotive seat comfort systems business in the Commercial Segment. Goodwill recognized in those transactions amounted to $26,649, of which $1,780 was deductible for tax purposes. Goodwill was assigned to the Commercial and Medical segments in the amount of $25,586 and $1,063, respectively.
During the fourth quarter of 2004, the Company announced and commenced implementation of a restructuring and divestiture program designed to improve future operating performance and position the Company for future earnings growth. The actions have included exiting or divesting of non-core or low performing businesses, consolidating manufacturing operations and reorganizing administrative functions to enable businesses to share services.
Certain costs associated with the restructuring and divestiture program are not included in restructuring costs. All inventory adjustments that resulted from the restructuring and divestiture program and certain other costs associated with closing out businesses during 2005 and 2004 are included in materials, labor and other product costs and totaled $2,000 and $17,040, respectively. The $2,000 in costs for 2005 related to the Companys Aerospace Segment. Of the $17,040 in costs for 2004, $4,537 and $12,503 were attributed to the Companys Commercial and Aerospace segments, respectively.
Termination benefits are comprised of severance-related payments for all employees terminated in connection with the restructuring and divestiture program. Contract termination costs relate primarily to the termination of leases in conjunction with the consolidation of facilities and in 2005 also include a $531 reduction in the estimated cost associated with a lease termination in conjunction with the consolidation of manufacturing facilities in the Companys Commercial Segment. Asset impairments relate primarily to machinery and equipment associated with the consolidation of manufacturing facilities and in 2004 also relate to goodwill associated with the Companys Industrial Gas Turbine aftermarket services business. Other restructuring costs include expenses primarily related to the consolidation of manufacturing operations and the reorganization of administrative functions.
As of December 25, 2005, the Company expects to incur the following future restructuring costs in its Medical Segment over the next 2 quarters:
Inventories at year end consisted of the following:
Note 6Property, plant and equipment
The major classes of property, plant and equipment, at cost, at year end are as follows:
Intangible assets at year end consisted of the following:
Amortization expense related to intangible assets was $13,851, $13,579 and $8,492 for 2005, 2004 and 2003, respectively. Estimated annual amortization expense for each of the five succeeding years is as follows:
The various senior and term note agreements provide for the maintenance of certain financial ratios and limit the repurchase of the Companys stock and payment of cash dividends. As of December 25, 2005, the Company was in compliance with these provisions. Under the most restrictive of these provisions, $213,000 of retained earnings was available for dividends and stock repurchases at December 25, 2005.
Notes payable at December 25, 2005 consists of demand loans due to banks of $88,902 at an average interest rate of 4.1%. In addition, the Company has approximately $503,000 available under several interest rate alternatives in unused lines of credit.
Interest expense in 2005, 2004 and 2003 did not differ materially from interest paid, nor did the carrying value of year-end long-term borrowings differ materially from fair value.
The aggregate amount of long-term debt, including capital leases, maturing in the next five years are as follows:
Note 9Financial instruments
The Company uses forward rate contracts to manage currency transaction exposure and interest rate swaps for exposure to interest rate changes. These cash flow hedges are recorded on the balance sheet at fair market value and subsequent changes in value are recognized in the statement of income or as part of comprehensive income. Approximately $1,164 of the amount in accumulated other comprehensive income at December 25, 2005 would be reclassified as expense to the statement of income during 2006 should foreign currency exchange rates and interest rates remain at December 25, 2005 levels.
Note 10Shareholders equity and stock compensation plans
The authorized capital of the Company is comprised of 100,000,000 common shares, $1 par value, and 500,000 preference shares. No preference shares have been outstanding during the last three years.
On July 25, 2005, the Companys Board of Directors authorized the repurchase of up to $140 million of outstanding Teleflex common stock over twelve months ending July 2006. Under the approved plan, the Company repurchased (in thousands) 690 shares on the open market for an aggregate purchase price of $46,518 during 2005.
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed in the same manner except that the weighted average number of shares is increased for dilutive securities. The difference between basic and 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 (in thousands) of 199, 790 and 787 were antidilutive and therefore not included in the calculation of earnings per share for 2005, 2004 and 2003, respectively.
Accumulated other comprehensive income at year end consisted of the following:
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. Outstanding options generally are exercisable three to five years after the date of the grant and expire no more than ten years after the grant.
A summary of the status and changes of shares subject to options outstanding and the related average prices per share follows:
No options expired during the three years ended December 25, 2005.
The following table summarizes information about stock options outstanding at December 25, 2005:
The following table summarizes the U.S. and non-U.S. components of income from continuing operations before taxes and minority interest:
Income taxes paid were $29,560, $23,042 and $22,040 in 2005, 2004 and 2003, respectively.
Reconciliations between the statutory federal income tax rate and the effective income tax rate for 2005, 2004 and 2003 were as follows:
At December 25, 2005, the cumulative unremitted earnings of subsidiaries outside the United States, for which no income or withholding taxes have been provided, approximated $229,304. Such earnings are expected to be reinvested indefinitely and as a result, no deferred tax liability has been recognized with regard to the remittance of such earnings. It is not practicable to estimate the income tax liability that might be incurred if such earnings were remitted to the United States.
Under the tax laws of various jurisdictions in which the Company operates, deductions or credits that cannot be fully utilized for tax purposes during the current year may be carried forward, subject to statutory limitations, to reduce taxable income or taxes payable in a future tax year. At December 25, 2005, the tax effect of such carry forwards approximated $94,592. Of this amount, $11,640 has no expiration date, $6,682 expires after 2005 but before the end of 2010 and $76,270 expires after 2010. A substantial amount of these loss carryforwards were acquired in an acquisition by the Company in 2004. Therefore, the utilization of these tax attributes is subject to an annual limitation imposed by Section 382 of the Internal Revenue Code. It is not expected that this annual limitation will prevent the Company from utilizing its carryforwards. The determination of state net operating loss carryforwards are dependent upon the U.S. subsidiaries taxable income or loss, apportionment percentages and other respective state laws, which can change year to year and impact the amount of such carryforward.
The valuation allowance for deferred tax assets of $32,598 and $31,689 at December 25, 2005 and December 26, 2004, respectively, relates principally to the uncertainty of the utilization of certain deferred tax assets, primarily tax loss and credit carryforwards in various jurisdictions. The valuation allowance was calculated in accordance with the provisions of SFAS No. 109, which requires that a valuation allowance be established and maintained when it is more likely than not that all or a portion of deferred tax assets will not be realized.
Summarized information on the Companys pension and postretirement benefit plans, measured as of year end, and the net amount recognized on the consolidated balance sheet were as follows: