Teleflex 10-K 2010
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Commission file number 1-5353
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filler and smaller reporting company in Rule 12b-2 of the Exchange Act. (check one):.
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 (39,577,181 shares) on June 26, 2009 (the last business day of the registrants most recently completed fiscal second quarter) was $1,775,036,568 (1). The aggregate market value was computed by reference to the closing price of the Common Stock on such date.
The registrant had 39,761,409 Common Shares outstanding as of February 12, 2010.
Document Incorporated By Reference: certain provisions of the registrants definitive proxy statement in connection with its 2010 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.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
All statements made in this Annual Report on Form 10-K, other than statements of historical fact, are forward-looking statements. The words anticipate, believe, estimate, expect, intend, may, plan, will, would, should, guidance, potential, continue, project, forecast, confident, prospects, and similar expressions typically are used to identify forward-looking statements. Forward-looking statements are based on the then-current expectations, beliefs, assumptions, estimates and forecasts about our business and the industry and markets in which we operate. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements due to a number of factors, including our ability to resolve, to the satisfaction of the U.S. Food and Drug Administration (FDA), the issues identified in the corporate warning letter issued to Arrow International; changes in business relationships with and purchases by or from major customers or suppliers, including delays or cancellations in shipments; demand for and market acceptance of new and existing products; our ability to integrate acquired businesses into our operations, realize planned synergies and operate such businesses profitably in accordance with expectations; our ability to effectively execute our restructuring programs; competitive market conditions and resulting effects on revenues and pricing; increases in raw material costs that cannot be recovered in product pricing; and global economic factors, including currency exchange rates and interest rates; difficulties entering new markets; and general economic conditions. For a further discussion of the risks that our business is subject to, see Item 1A. Risk Factors of this Annual Report on Form 10-K. We expressly disclaim any intent or obligation to update these forward-looking statements, except as otherwise specifically stated by us.
Teleflex Incorporated is referred to herein as we, us, our, Teleflex and the Company.
Teleflex is principally a global provider of medical technology products that enable healthcare providers to improve patient outcomes, reduce infections and enhance patient and provider safety. We primarily develop, manufacture and supply single-use medical devices used by hospitals and healthcare providers for common diagnostic and therapeutic procedures in critical care and surgical applications. We serve hospitals and healthcare providers in more than 140 countries.
We provide a broad-based platform of medical products, which we categorize into four groups: Critical Care, Surgical Care, Cardiac Care and OEM and Development Services. Critical care, representing our largest product group, includes medical devices used in vascular access, anesthesia, urology and respiratory care applications; surgical care includes surgical instruments and devices; and cardiac care includes cardiac assist devices and equipment. We also design and manufacture instruments and devices for other medical device manufacturers. Our primary products and product brands include the following:
Teleflex is focused on achieving consistent, sustainable and profitable growth through development of new products, expansion of market share, introduction of existing products into new geographies and through selected acquisitions which enhance or expedite our development initiatives and our ability to grow market share. Furthermore, we believe our research and development capabilities and our commitment to engineering excellence and lean, low-cost manufacturing allow us to consistently bring cost effective, innovative products to market that improve the safety, efficacy, and quality of healthcare.
In addition to our medical business, we also have businesses that serve niche segments of the aerospace and commercial markets with specialty engineered products. Our aerospace products include cargo-handling systems, containers, and pallets for commercial air cargo, and military aircraft actuators. Our commercial
products include driver controls, engine assemblies and drive parts for the marine industry and rigging products and services for commercial industries.
HISTORY AND RECENT DEVELOPMENTS
Teleflex was founded in 1943 as a manufacturer of precision mechanical push/pull controls for military aircraft. From this original single market, single product orientation, we have grown through an active program of development of new products, introduction of products into new geographic or end-markets and through acquisitions of companies with related market, technology or industry expertise. Throughout our history, we have continually focused on providing innovative technology-driven, specialty-engineered products that help our customers meet their business requirements.
Over the past several years, we have engaged in an extensive acquisition and divestiture program to improve margins, reduce cyclicality and focus our resources on the development of our healthcare business. We have significantly changed the composition of our portfolio of businesses, expanding our presence in the medical device industry, while divesting many of our businesses serving the aerospace and industrial markets. The most significant of these transactions occurred in 2007 with our acquisition of Arrow International, a leading global supplier of catheter-based medical technology products used for vascular access and cardiac care, and the divestiture of our automotive and industrial businesses. Our acquisition of Arrow significantly expanded our disposable medical product offerings for critical care, enhanced our global footprint and added to our research and development capabilities.
We continually evaluate the composition of the portfolio of our products and businesses to ensure alignment with our overall objectives. We strive to maintain a portfolio of products and businesses that provide consistency of performance, improved profitability and sustainable growth.
We operate our businesses through three segments, the largest of which is our Medical Segment, which represented 77 percent of our consolidated revenues and 91 percent of our segment operating profit in 2009. In 2009, our Aerospace and Commercial segments represented 10 percent and 13 percent of consolidated revenues, respectively, and 5 percent and 4 percent of segment operating profit, respectively.
Further detail and additional information regarding our segments and geographic areas is presented in Note 17 to our consolidated financial statements included in this Annual Report on Form 10-K.
Our Medical Segment designs, develops, manufactures and supplies medical devices for critical care and surgical applications. We categorize our medical products into four product groups: Critical Care, Surgical, Cardiac Care, and OEM and Development Services.
Approximately 49 percent of our segment revenues are derived from customers outside the United States. Our Medical Segment operates 30 manufacturing sites, with major manufacturing operations located in Czech Republic, Germany, Malaysia, Mexico and the United States.
The following is an overview of the key product lines within our Medical Segment.
Critical care, which is predominantly comprised of single use products, constitutes the largest product category within our Medical Segment, representing 65 percent of segment revenues in 2009. Our medical products are used in a wide range of critical care procedures for vascular access, respiratory care, anesthesia and airway management, treatment of urologic conditions and other specialty procedures.
We are a leading provider of specialty products for critical care. Our products are generally marketed under the brand names of Arrow, Rüsch, HudsonRCI, Gibeck and Sheridan. The large majority of sales for disposable medical products are made to the hospital/healthcare provider market, with a smaller percentage sold to alternate sites.
Our vascular access products are generally catheter-based products used in a variety of clinical procedures to facilitate multiple critical care therapies including the administration of intravenous medications, other therapies, and the measurement of blood pressure and taking of blood samples through a single puncture site.
Our vascular access catheters and related devices consist principally of central venous access catheters such as the following: the Arrow-Howes Multi-Lumen Catheter, a catheter equipped with three or four channels, or lumens; double-and single-lumen catheters, which are designed for use in a variety of clinical procedures; the Arrow Pressure Injectable CVC, which gives clinicians who perform contrast-enhanced CT scans the option of using an indwelling pressure injectable Arrow CVC without having to insert another catheter for their scan; and percutaneous sheath introducers, which are used as a means for inserting cardiovascular and other catheterization devices into the vascular system during critical care procedures.
We also provide a range of peripherally inserted central catheters, which are soft, flexible catheters inserted in the upper arm and advanced into the superior vena cava and are accessed for various types of intravenous medications and therapies, and radial artery catheters, which are used for measuring arterial blood pressure and taking blood samples. Our offerings include a pressure injectable peripherally inserted catheter which addresses the therapeutic need for a catheter that can withstand the higher pressures required by the injection of contrast media for CT scans.
Our vascular access products also include specialty catheters and related products used in a range of other procedures and include percutaneous thrombolytic devices, which are designed for clearance of thrombosed hemodialysis grafts in chronic hemodialysis patients; and hemodialysis access catheters, including the Cannon® Catheter, which is used to facilitate dialysis treatment.
Many of our vascular access catheters are treated with the ARROWg+ard, or ARROWg+ard Blue Plus, antiseptic surface treatments to reduce the risk of catheter related infection. ARROWg+ard Blue Plus is a newer, longer lasting formulation of ARROWg+ard and provides antimicrobial treatment of the interior lumens and hubs of each catheter.
As part of our ongoing efforts to meet physicians needs for safety and management of risk of infection in the hospital setting, we sell a Maximal Barrier Precautions central venous access kit, which includes a full body drape, a catheter treated with the ARROWg+ard antimicrobial technology and other accessories. The features of this kit were created to assist healthcare providers in complying with guidelines for reducing catheter-related bloodstream infections that have been established by a variety of health regulatory agencies, such as the Centers for Disease Control and Prevention and the Joint Commission on the Accreditation of Healthcare Organizations.
Related products include custom tubing sets used to connect central venous catheters to blood pressure monitoring devices and drug infusion systems.
During 2009, we introduced the Arrow Pressure Injectable Triple Lumen PICC with a non-tapered catheter body and the Arrow BlueFlexTip, designed to reduce the risk of thrombosis and infection associated with venous access catheters. We introduced a new tray design and additional features for our kits containing our Arrow Pressure Injectable CVC, and a CVC kit designed specifically for the needs of the Japanese market.
Our respiratory care products principally consist of devices used in aerosol and medication delivery, oxygen therapy and ventilation management. We offer an extensive range of aerosol therapy products, including the Micromist Nebulizer, the Neb-U-Mask System and the Opti-Neb Pro Compressor. We are also a global provider of oxygen supplies, offering a broad range of products to deliver oxygen therapy safely and comfortably. These include masks, cannulas, tubing and humidifiers. These products are used in a variety of clinical settings including hospitals, long-term care facilities, rehabilitation centers and patients homes to treat respiratory ailments such as chronic lung disease, pneumonia, cystic fibrosis and asthma.
Our ventilation management products promote patient safety and maximize clinician efficiency. These products include ventilator circuits with an extended life to support clinical practice guidelines, high efficiency particulate air (HEPA) filters that provide protection against the transmission of bacteria and viruses, heat and moisture exchangers that reduce circuit manipulation and cross-contamination risk and heated humidifiers that promote patient compliance to non-invasive respiratory strategies, like Non-Invasive Ventilation and High Flow Oxygen Therapy.
Our ConchaTherm Neptune is a heated humidification solution. It is designed to enable the caregiver to customize patient treatment to meet specific clinical goals and to facilitate advanced patient outcomes without sacrificing clinician efficiency.
During 2009, we introduced the Gibeck HumidFlo heat and moisture exchanger, which allows medication to be delivered without breaking the breathing circuit or interrupting ventilation, and OSMO, a product that allows for maintenance free water removal from the expiratory limb of the breathing circuit during mechanical ventilation (breathing systems used to deliver medical gases from a ventilator to a patients lungs). In 2009, we also signed an agreement to act as an exclusive distributor of the ResMed Non-Invasive Ventilation mask portfolio for specified acute care hospitals in the United States.
Our anesthesia and airway management products include endotracheal tubes, laryngeal masks, airways and face masks to deliver anesthetic agents and oxygen. To assist in the placement of endotracheal tubes, we provide a comprehensive and unique line of laryngoscope blades and handles, including standard halogen and fiber optic light sources.
Our regional anesthesia or acute pain management products include epidural, spinal and peripheral nerve block catheters. Nerve blocks provide pain relief during and after surgical procedures and help clinicians better manage each patients pain. We offer the first stimulating continuous nerve block catheter, the Arrow StimuCath, which confirms the positive placement of the catheter next to the nerve. The Flex Tip Plus continuous epidural catheter features a soft, flexible tip that helps reduce the incidence of complications, such as transient paresthesia and inadvertent cannulation of blood vessels or the dura, while improving the clinicians ability to thread the catheter into the epidural space. Our Arrow TheraCath epidural catheter, with high compression strength for direction-ability and enhanced radiopacity, was designed for pain management procedures where increased steer-ability is important. Additional integral components create a range of standard and custom procedural kits.
During 2009, we introduced a new line of laryngeal masks, added a line of disposable metal laryngoscope blades to our line of laryngoscope products and extended our endotracheal tube product line. We also expanded our range of products for acute pain management with the introduction of new spinal kits marketed under the Arrow SureBlock Spinal brand.
Our line of urology products provides bladder management for patients in the hospital and home care markets. Our product portfolio consists principally of catheters (including Foley, intermittent, external and suprapubic), urine collectors, catheterization accessories and products for operative endurology. We believe we have significant market share in Foley catheters in the EMEA markets (Europe, the Middle East and Africa).
We also design our urine collectors, catheterization accessories and kits with our overall infection prevention strategy in mind. For example, the Rüsch MMG Closed System intermittent catheter is used by spinal cord injury patients to help reduce the likelihood of urinary tract infections.
In the United States, reimbursement regulations were implemented in 2009 that allow many Medicare patients to shift from a re-useable practice, with its inherent risk of infections, to a single use disposable practice. Sales of our intermittent catheters in the U.S. have benefited from this reimbursement shift.
During 2009, we introduced new intermittent catheters with hydrophilic coatings, a new Profile urinary Foley catheter, and a silicone post-operative Foley catheter all marketed under the Rüsch brand.
Surgical care, which is predominantly comprised of single use products, represented 19 percent of Medical Segment revenues in 2009. Our surgical products include: ligation and closure products, including appliers, clips, and sutures used in a variety of surgical procedures; access ports used in minimally invasive surgical procedures including robotic surgery; and fluid management products used for chest drainage. Our surgical products also include hand-held instruments for general and specialty surgical procedures, In addition, we provide instrument management services. We market surgical products under the Deknatel, Pleur-evac, Pilling, Taut and Weck brand names.
Hem-o-lok is a unique locking polymer ligation clip, and is a significant part of the Weck portfolio. Hem-o-lok clips have special applications in robotic, laparoscopic and cardiovascular surgery and provide surgeons with a unique level of security and performance.
In 2009, we introduced the Taut Universal Seal designed for use with the ADAPt line of bladeless laparoscopic access devices. The new Taut seal provides surgeons the ability to perform laparoscopic procedures with variable diameter instruments, without flimsy diaphragm seals, lubricants that can smudge cameras or the need for reducer caps. Also during 2009, we added a new rotating head stapler and a new long endoscopic clip applier to our extensive line of ligation products.
Cardiac care products accounted for approximately 5 percent of Medical Segment revenues in fiscal 2009. Products in this category include diagnostic catheters and capital equipment, such as thermodilution and wedge pressure catheters; specialized angiographic catheters, such as Berman and Reverse Berman catheters; therapeutic delivery catheters, such as temporary pacing catheters; and intra-aortic balloon, or IAB, catheters to capital equipment, such as intra-aortic balloon pump, or IABP, consoles. IABP products are used to augment oxygen delivery to the cardiac muscle and reduce the oxygen demand after cardiac surgery, serious heart attack or interventional procedures.
The IAB and IABP product lines feature the AutoCAT 2 WAVE console and the FiberOptix catheter, which together utilize fiber optic technology for arterial pressure signal acquisition and enable the patented WAVE timing algorithm to support the broadest range of patient heart rhythms, including severely arrhythmic patients.
Customized medical instruments, implants and components sold to original equipment manufacturers, or OEMs, represented 10 percent of Medical Segment revenues in 2009. Under the Beere Medical, KMedic, Specialized Medical Devices, Deknatel and TFXOEM brand names, we provide specialized product development services, which include design engineering, prototyping and testing, manufacturing, assembly and packaging. Our OEM product development and manufacturing facilities are located globally in close proximity to major medical device manufacturers in Germany, Ireland, Mexico and the United States.
The OEM category includes custom extrusion, catheter fabrication, introducer systems, sheath/dilator sets, specialty sutures, resins and performance fibers. We also provide machined and forged instrumentation for general and specialty procedures, Ortho-Grip® instrument handles and fixation devices used primarily for orthopedic procedures.
The following table sets forth revenues for 2009, 2008 and 2007 by product category for the Medical Segment.
The following table sets forth the percentage of revenues for 2009, 2008 and 2007 by end market for the Medical Segment.
Markets for these products are influenced by a number of factors including demographics, utilization and reimbursement patterns in the worldwide healthcare markets. Our products are sold through direct sales or distribution in over 140 countries. The following table sets forth the percentage of revenues for 2009, 2008 and 2007 derived from the major geographic areas we serve.
Our Aerospace Segment businesses provide cargo handling systems and equipment for wide body and narrow body aircraft, cargo containment devices for air cargo and passenger baggage, and actuators for applications in commercial and military aircraft. We are a leading global provider of cargo handling systems and equipment and cargo containers for commercial aircraft. Our brand names, Telair International and Nordisk, are well known and respected on a global basis.
Sales to customers in commercial aviation markets represent 95 percent of revenues in this segment in 2009. Markets for our commercial aviation products are influenced by the level of general economic activity, investment patterns in new aircraft, both passenger and cargo, cargo market trends and flight hours. Major locations for manufacturing and service are located in Germany, Norway, the United States, Sweden, Singapore and China.
Our cargo-handling systems include on-board automated cargo-loading systems for wide-body aircraft, baggage-handling systems for narrow body aircraft, 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 seller and/or buyer furnished equipment for original installations or as retrofits for existing equipment. Cargo-handling systems require a high degree of engineering sophistication.
Telair International is the exclusive supplier of main deck and lower deck cargo systems for the new Boeing 747-8. Telair is also the exclusive provider of lower deck systems for the Airbus A330/A340-200 and 300 aircraft. Airbus is currently producing over 80 of these aircraft per year. Telair has been selected to supply cargo systems for the Airbus A350 XWB airframe when it enters production. Telair is also the exclusive supplier of sliding carpet systems for bulk-loading of narrow body aircraft such as 737 passenger planes. The Telair narrowbody system speeds loading and unloading of baggage and cargo to speed turnaround and increase aircraft utilization. This system is being installed in new 737s for American Airlines and Continental Airlines, as well as in 737s and the A320 family aircraft for airlines all over the world. Telair also provides bin loading systems for Canadair (Bombardier) aircraft. In addition to the design and manufacture of cargo systems, we provide customers with aftermarket spare parts and repair services for their Telair systems.
We design, manufacture and repair unit loading devices, or ULDs, which include both cargo containers and pallets. In November 2007, we acquired Nordisk Aviation Products, expanding our customer base and global manufacturing and service capacity for cargo equipment. Nordisk globally has the widest ULD product line and specializes in ULDs that either reduce weight or maximize cargo volume by closely matching the interior contour of the aircraft. In 2009 Nordisk introduced the 55 kg Ultralite container, the lightest in its class. Weight reduction is a key factor in extending the range of aircraft, increasing payload and reducing fuel costs. Nordisk provides global support of its products with worldwide spare parts stocking and a network of affiliated repair stations.
We manufacture and repair actuation devices and components for our systems and other related aircraft controls, including canopy and door actuators, cargo winches and flight controls. Teleflex actuators are used on the Boeing 747, 767 and 737 aircraft, as well as a number of military and legacy aircraft. In 2009, our actuation business won a significant order to provide actuation devices for the U.S. Air Force A-10 wing replacement program, as well as new content on the 747-8 and 747-Intercontinental.
The following table sets forth the percentage of revenues for 2009, 2008 and 2007 by end market for the Aerospace Segment.
Our Commercial Segment businesses principally design, manufacture and distribute steering and throttle controls and engine and drive assemblies primarily for the recreational marine market, and rigging products and services for oil exploration, dredging, mooring, construction and associated applications. Major manufacturing operations are located in Canada, the United States and Singapore.
This is the largest single product category in the Commercial Segment, representing 68 percent of the Commercial Segment revenues in 2009. Products in this category include: shift and throttle cables; mechanical, hydraulic and electronic steering systems and throttle controls; engine drive parts; associated parts and products; and outdoor power components.
We are a leading global provider of both mechanical and hydraulic steering systems for recreational powerboats and mechanical, hydraulic, and electronic throttle controls. We also are a leading distributor of engine assemblies and drive parts, which are marketed under the well-known Sierra brand name. Our marine products are sold to OEMs, such as SeaRay, Bayliner, Volvo Penta, Mercury and Yamaha; and to the aftermarket through distributors, dealers and retail outlets and are widely available at marinas and retail outlets such as West Marine and Bass Pro Shops. Our major product brands include Teleflex Marine, TFXtreme, SeaStar, BayStar and Sierra.
We also manufacture and sell heaters that provide cold weather auxiliary heating solutions for commercial vehicles under the Proheat name and burner units that provide a heat source for military field feeding appliances.
Products in this category represented 32 percent of Commercial Segment revenues in 2009. Products include customized heavy-duty wire rope, wire rope assemblies, high tensile synthetic rope, synthetic assemblies and related rigging hardware. Our markets include oil drilling, marine transportation, marine construction and material handling. With strain testing capabilities, we also help our customers meet new safety legislation and regulations for moorings. In 2007, we enhanced our product offerings in this business through our acquisition of Southern Wire Corporation, a prominent wholesale provider of rigging services. With facilities in Texas, Louisiana, Nevada, Missouri, and Mississippi, our rigging products and services business serves over 1,500 active accounts.
The following table sets forth revenues for 2009, 2008 and 2007 by product category for the Commercial Segment.
The following table sets forth the percentage of revenues for 2009, 2008 and 2007 by end market for the Commercial Segment.
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 manufacture and sale of some of our aerospace products and license the operation of our repair stations. For more information, see Item 1A. Risk Factors.
The medical devices industry is highly competitive. We compete with many companies, ranging from small start-up enterprises to companies that are larger and more established than us with access to significant financial resources. Furthermore, new product development and technological change characterize the market in which we compete. We must continue to develop and acquire new products and technologies for our Medical Segment businesses to remain competitive. We believe that we compete primarily on the basis of clinical superiority and innovative features that enhance patient benefit, product reliability, performance, customer and sales support, and cost-effectiveness.
Aerospace and Commercial Segments
The businesses within our Aerospace and Commercial segments generally face significant competition from competitors of varying sizes. We believe that our competitive position depends on the technical competence and creative ability of our engineering personnel, the know-how and skill of our manufacturing personnel, and the strength and scope of our sales, service and distribution networks. Competitors of the businesses with our Aerospace Segment include Goodrich Corporation, AAR Corp and Driessen Aerospace Group. Competition for our Commercial business tends to be fragmented.
SALES AND MARKETING
Our 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.
Aerospace and Commercial Segments
Products sold to the aerospace market are sold through our own field representatives and distributors. The majority of our Commercial Segment products are sold through a direct sales force of field representatives and technical specialists. Marine driver controls and engine and drive parts are sold directly to boat builders and engine manufacturers as well as through distributors, dealers and retail outlets to reach recreational boaters. Rigging products and services includes both a retail business and a wholesale business, both of which sell through a direct sales force.
Most of our medical products are sold to hospitals or healthcare providers on orders calling for delivery within a few days or weeks, with longer order times for products sold to medical device manufacturers. Therefore, the backlog of our Medical Segment orders is not indicative of probable revenues in any future 12-month period.
As of December 31, 2009, our backlog of firm orders for our Aerospace Segment was $45 million, of which we expect approximately 95 percent to be filled in 2010. Our backlog for our Aerospace Segment on December 31, 2008 was $68 million.
Standard Commercial Segment products are typically shipped between a few days 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.
We own a portfolio of patents, patents pending and trademarks. We also license various patents and trademarks. Patents for individual products extend for varying periods according to the date of patent filing or grant and the legal term of patents in the various countries where patent protection is obtained. Trademark rights may potentially extend for longer periods of time and are dependent upon national laws and use of the marks. All capitalized product names throughout this document are trademarks owned by, or licensed to, us or our subsidiaries. Although these have been of value and are expected to continue to be of value in the future, we do not consider any single patent or trademark, except for the Teleflex and Arrow brands, to be essential to the operation of our business.
Materials used in the manufacture of our products are purchased from a large number of suppliers in diverse geographic locations. We are not dependent on any single supplier for a substantial amount of the materials used or components supplied for our overall operations. Most of the materials and components we use are available from multiple sources, and where practical, we attempt to identify alternative suppliers. Volatility in commodity markets, particularly steel and plastic resins, can have a significant impact on the cost of producing certain of our products. We cannot be assured of successfully passing these cost increases through to all of our customers, particularly original equipment manufacturers.
RESEARCH AND DEVELOPMENT
We are engaged in both internal and external research and development in our Medical, Aerospace and Commercial segments. Nearly 80% of our research and development costs occur in our Medical business in connection with our efforts to bring innovative new products to the markets we serve, and to enhance the clinical value, ease of use, safety and reliability of our existing product lines. Our research and development efforts support our strategic objectives to provide safe and effective products that reduce infections, improve patient and clinician safety, enhance patient outcomes and enable less invasive procedures.
Research and development in our Aerospace and Commercial businesses is focused on the development of lighter, more durable and more automated systems and products that facilitate cargo loading and containment on commercial aircraft and improve the performance of recreational boats.
We also acquire or license products and technologies that are consistent with our strategic objectives and enhance our ability to provide a full range of product and service options to our customers.
Portions of our revenues, particularly in the Commercial and Medical segments, are subject to seasonal fluctuations. Revenues in the marine aftermarket generally increase in the second quarter as boat owners prepare their watercraft for the upcoming season. Incidence of flu and other disease patterns as well as the frequency of elective medical procedures affect revenues related to disposable medical products.
We employed approximately 12,700 full-time and temporary employees at December 31, 2009. Of these employees, approximately 3,900 were employed in the United States and 8,800 in countries outside of the United States. Less than 8% percent of our employees in the United States were covered by union contracts. We have government-mandated collective-bargaining arrangements or union contracts that cover employees in other countries. We believe we have good relationships with our employees.
We are subject to the reporting requirements of the Securities Exchange Act of 1934. Therefore, we file reports, proxy statements and other information with the Securities and Exchange Commission (SEC). Such reports, proxy statements, and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
You can access financial and other information in the Investors section of our website which can be accessed at www.teleflex.com. We make available through our website, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished under Section 13(a) or 15(d) of the Securities Exchange Act as soon as reasonably practicable after electronically filing or furnishing such material to the SEC. The information on our website is not part of this annual report on Form 10-K. The reference to our website address is intended to be an inactive textual reference only.
We are a Delaware corporation incorporated in 1943. Our executive offices are located at 155 South Limerick Road, Limerick, PA 19468. Our telephone number is (610) 948-5100.
The names and ages of all of our executive officers as of February 24, 2010 and the positions and offices held by each such officer are as follows:
Mr. Black has been Chairman since May 2006, Chief Executive Officer since May 2002 and President since December 2000. He has been a Director since November 2002. Mr. 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. Meier joined Teleflex as Executive Vice President and Chief Financial Officer in January 2010. Prior to joining Teleflex, Mr. Meier held various executive-level positions with Advanced Medical Optics, Inc., a global ophthalmic medical device company, from April 2002 to May 2009. He most recently served as President and Chief Operating Officer of Advanced Medical Optics from November 2007 to May 2009.
Mr. Miller has been Executive Vice President, General Counsel and Secretary since February 2008. From November 2004 to February 2008, Mr. Miller was Senior Vice President, General Counsel and Secretary. From November 2001 until November 2004, he was Senior Vice President and Associate General Counsel for the Food & Support Services division of Aramark Corporation, a diversified management services company providing food, refreshment, facility and other support services for a variety of organizations.
Mr. Waaser has been the President of Teleflex Medical since October 2006. Prior to joining Teleflex, Mr. Waaser served as President and Chief Executive Officer of Hill-Rom, Inc., a manufacturer and provider of products and services for the healthcare industry, including patient room equipment, therapeutic wound and pulmonary care products, biomedical equipment services and communications systems, from 2001 to 2005.
Mr. Suddarth has been the President of our Aerospace and Commercial segments since March 2009. From July 2004 to March 2009, Mr. Suddarth was the President of Teleflex Aerospace. From 2003 to 2004, Mr. Suddarth was the President of Techsonic Industries Inc., a former subsidiary of Teleflex that manufactured underwater sonar and video viewing equipment, which was divested in 2004.
Mr. Northfield has been the Executive Vice President for Global Operations, Teleflex Medical since September 2008. From 2005 to 2008, Mr. Northfield was the President of Teleflex Commercial. From 2004 to 2005, Mr. Northfield was the President of Teleflex Automotive and the Vice President of Strategic Development. Mr. Northfield held the position of Vice President of Strategic Development from 2001 to 2004.
Our officers are elected annually by the Board of Directors. Each officer serves at the pleasure of the Board until their respective successors have been elected.
We are subject to risks that could adversely affect our business, financial condition and results of operations. These risks include, but are not limited to the following:
We face significant uncertainty in the industry due to government health care reform.
Political, economic and regulatory influences are subjecting the health care industry to fundamental changes. We anticipate that the current presidential administration, Congress and certain state legislatures will continue to review and assess alternative health care delivery systems and payment methods with an objective of reducing health care costs and expanding access. The uncertainties regarding the final legislation and its implementation could continue to have an adverse effect on our customers purchasing decisions regarding our products and services. Any legislation enacted could represent opportunities and challenges. The potential exists that Medicare and Medicaid reimbursement in a variety of health care settings could be negatively impacted. Additionally, proposals to tax the sale of medical device technologies are being considered in Congress. At this juncture in the legislative process, it is not possible to determine the final magnitude of the tax or its precise structure and implementation. However, should a medical device manufacturers tax be enacted into law, its impact, along with the impact of health care reform to Medicare and Medicaid reimbursement as well as other aspects of the various reform plans to our industry, could have a material adverse effect on our financial condition, results of operations and cash flow. At this time, we cannot predict with certainty which, if any, health care reform proposals will be adopted, when they may be adopted or what impact they may have on us.
Customers in our Medical Segment depend on third party reimbursement and the failure of healthcare programs to provide reimbursement or the reduction in levels of reimbursement for our medical products could adversely affect our Medical Segment.
Demand for some of our medical products is affected by the extent to which government healthcare programs and private health insurers reimburse our customers for patients medical expenses in the countries where we do business. Internationally, medical reimbursement systems vary significantly, with medical centers in some countries having fixed budgets, regardless of the level of patient treatment. Other countries require application for, and approval of, government or third party reimbursement. Without both favorable coverage determinations by, and the financial support of, government and third party insurers, the market for some of our medical products could be adversely affected.
We cannot be sure that third party payors will maintain the current level of reimbursement to our customers for use of our existing products. Adverse coverage determinations or any reduction in the amount of reimbursement could harm our business. In addition, as a result of their purchasing power, third party payors often seek discounts, price reductions or other incentives from medical products suppliers. Our provision of such pricing concessions could negatively impact our revenues and product margins.
Much of our business is subject to extensive government regulation, which may require us to incur significant expenses to ensure compliance; our failure to comply with those regulations could have a material adverse effect on our results of operations and financial condition
Numerous national and local government agencies in a number of countries regulate our products. The U.S. Food and Drug Administration (FDA) and government agencies in other countries regulate the approval, manufacturing and sale and marketing of many of our medical products. The U.S. Federal Aviation Administration and the European Aviation Safety Agency regulate the manufacture and sale of some of our aerospace products and licenses for the operation of our repair stations. Failure to comply with applicable regulations and quality assurance guidelines could lead to manufacturing shutdowns, product shortages, delays in product manufacturing, product seizures, recalls, operating restrictions, withdrawal of required licenses, prohibitions against exporting of products to, or importing products from countries outside the United States. In addition, civil and criminal penalties, including exclusion under Medicaid or Medicare, could result from regulatory
violations. Any one or more of these events could have a material adverse effect on our business, financial condition and results of operations.
The process of obtaining regulatory approvals to market a medical device, particularly from the FDA and certain foreign governmental authorities, can be costly and time consuming, and approvals might not be granted for future products on a timely basis, if at all. The regulatory approval process may result in delayed realization of product revenues or in substantial additional costs, which could have a material adverse effect on our financial condition and results of operations. Our Medical Segment facilities are subject to periodic inspection by the FDA and other federal, state and foreign governmental authorities, which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation procedures.
On October 11, 2007, Arrow International received a corporate warning letter from the FDA, which expresses concerns with Arrows quality systems, including complaint handling, corrective and preventive action, process and design validation and inspection and training procedures. While we are working with the FDA to resolve these issues, our efforts to address the issues raised in the warning letter have required and may continue to require the dedication of significant internal and external resources. There can be no assurance regarding the length of time or cost it will take us to resolve these issues to the satisfaction of the FDA. In addition, if our remedial actions are not satisfactory to the FDA, we may need to devote additional financial and human resources to our efforts, and the FDA may take further regulatory actions against us. These actions may include seizing our product inventory, obtaining a court injunction against further marketing of our products, assessing civil monetary penalties or imposing a consent decree on us, which could in turn have a material adverse effect on our business, financial condition and results of operations.
We are also subject to various federal and state laws pertaining to healthcare pricing and fraud and abuse, including anti-kickback and false claims laws. Violations of these laws may be punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in federal and state healthcare programs.
In addition, we are subject to numerous foreign, federal, state and local environmental protection and health and safety laws governing, among other things:
These laws and government regulations are complex, change frequently and have tended to become more stringent over time. We cannot provide assurance that our costs of complying with current or future environmental protection and health and safety laws, or our liabilities arising from past or future releases of, or exposures to, hazardous substances will not exceed our estimates or will not adversely affect our financial condition and results of operations. Moreover, we may become subject to additional environmental claims, which may include claims for personal injury or cleanup, based on our past, present or future business activities, which could also adversely affect our financial condition and results of operations.
Our strategic initiatives may not produce the intended growth in revenue and operating income.
We have disclosed operational strategies and initiatives. These strategies include making significant investments to achieve revenue growth and margin improvement targets. If we do not achieve the expected benefits from these investments or otherwise fail to execute on our strategic initiatives, we may not achieve the growth improvement we are targeting and our results of operations may be adversely affected. In addition, as part of our strategy for growth, we have made and may continue to make acquisitions and divestitures and enter into strategic alliances such as joint ventures and joint development agreements. However, we may not be able to identify suitable acquisition candidates, complete acquisitions or integrate acquisitions successfully, and our
strategic alliances may not prove to be successful. In this regard, acquisitions involve numerous risks, including difficulties in the integration of the operations, technologies, services and products of the acquired companies and the diversion of managements attention from other business concerns. Although our management will endeavor to evaluate the risks inherent in any particular transaction, there can be no assurance that we will properly ascertain all such risks. In addition, prior acquisitions have resulted, and future acquisitions could result, in the incurrence of substantial additional indebtedness and other expenses. Future acquisitions may also result in potentially dilutive issuances of equity securities. There can be no assurance that difficulties encountered with acquisitions will not have a material adverse effect on our business, financial condition and results of operations.
We may not be successful in achieving expected operating efficiencies and sustaining or improving operating expense reductions, and may experience business disruptions, associated with announced restructuring, realignment and cost reduction activities.
Over the past few years we have announced several restructuring, realignment and cost reduction initiatives, including significant realignments of our businesses, employee terminations and product rationalizations. While we have started to realize the efficiencies of these actions, these activities may not produce the full efficiency and cost reduction benefits we expect. Further, such benefits may be realized later than expected, and the ongoing costs of implementing these measures may be greater than anticipated. If these measures are not successful or sustainable, we may undertake additional realignment and cost reduction efforts, which could result in future charges. Moreover, our ability to achieve our other strategic goals and business plans may be adversely affected and we could experience business disruptions with customers and elsewhere if our restructuring and realignment efforts prove ineffective.
Our failure to successfully develop new products could adversely affect our results.
The medical device industry is characterized by rapid product development and technological advances. In addition, while our products for the aerospace and commercial industries generally have longer life cycles, many of those products require changes in design or other enhancements to meet the evolving needs of our customers. The future success of our business will depend, in part, on our ability to design and manufacture new competitive products and to enhance existing products. Our product development efforts may require substantial investment by us. There can be no assurance that unforeseen problems will not occur with respect to the development, performance or market acceptance of new technologies or products, such as the inability to:
Moreover, we may not otherwise be able to successfully develop and market new products or enhance existing products. Our failure to successfully develop and market new products or enhance existing products could reduce our revenues and margins, which would have an adverse effect on our business, financial condition and results of operations.
We may incur material losses and costs as a result of product liability, warranty, recall and other claims that may be brought against us.
Our businesses expose us to potential product liability risks that are inherent in the design, manufacture and marketing of our products. In particular, our medical device products are often used in surgical and intensive care settings with seriously ill patients. Many of these products are designed to be implanted in the human body for varying periods of time, and component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks with respect to these or other products we manufacture or sell could result in an unsafe condition or injury to, or death of, the patient. In addition, our products for the
aerospace and commercial industries are used in potentially hazardous environments. Although we carry product liability insurance we may be exposed to product liability and warranty claims in the event that our products actually or allegedly fail to perform as expected or the use of our products results, or is alleged to result, in bodily injury and/or property damage. Accordingly, we could experience material warranty or product liability losses in the future and incur significant costs to defend these claims. In addition, if any of our products are, or are alleged to be, defective, we may be required to participate in a recall of that product if the defect or the alleged defect relates to safety, and we may experience lost sales and be exposed to legal and reputational risk. Product liability, warranty and recall costs may have a material adverse effect on our financial condition and results of operations.
We also are party to various lawsuits and claims arising in the normal course of business involving contracts, intellectual property, import and export regulations, employment and environmental matters. The defense of these lawsuits may divert our managements attention, and we may incur significant expenses in defending these lawsuits. In addition, we may be required to pay damage awards or settlements, or become subject to injunctions or other equitable remedies, that could have a material adverse effect on our financial condition and results of operations. While we do not believe that any litigation in which we are currently engaged would have such an adverse effect, the outcome of litigation, including regulatory matters, is often difficult to predict, and we cannot assure that the outcome of pending or future litigation will not have a material adverse effect on our business, financial condition or results of operations.
We have substantial debt obligations that could adversely impact our business, results of operations and financial condition.
As of December 31, 2009, our outstanding indebtedness was approximately $1.2 billion. We will be required to use a significant portion of our operating cash flow to reduce our indebtedness over the next few years. As a result, cash flow available to fund working capital, capital expenditures, acquisitions, investments and dividends may be limited. Our indebtedness may also subject us to greater vulnerability to general adverse economic and industry conditions and increase our vulnerability to increases in interest rates because a portion of our indebtedness bears interest at floating rates.
Our senior credit facility and agreements with the holders of our senior notes, which we refer to below as our senior debt facilities, impose certain operating and financial covenants that could limit our ability to, among other things:
In addition, the terms of our senior debt facilities require us to comply with a number of covenants, including covenants that require us to maintain specified financial ratios, which are described in more detail in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations. Our ability to meet those financial ratios can be affected by events beyond our control, and we cannot assure that, in the event of a significant deterioration of our operating results, we will be able to satisfy those ratios. A breach of any of these covenants could result in a default under our senior debt facilities. If we fail to maintain compliance with these covenants and cannot obtain a waiver from the lenders under the senior debt facilities, the lenders could elect to declare all amounts outstanding under the senior debt facilities to be immediately due and payable and
terminate all commitments to extend further credit under the facilities. If the lenders under the senior debt facilities accelerate the repayment of borrowings and we are not able to obtain financing to enable repayment, we likely would have to liquidate significant assets, which nevertheless may not be sufficient to repay our borrowings.
We are subject to risks associated with our non-U.S. operations.
Although no material concentration of our manufacturing operations exists in any single country, we have significant manufacturing operations outside the United States, including operations conducted through entities that are not wholly-owned. As of, and for the year ended, December 31, 2009, approximately 41% of our total fixed assets and 46% of our total net revenues were attributable to products directly distributed from our operations outside the U.S. Our international operations are subject to varying degrees of risk inherent in doing business outside the U.S., including:
These and other factors may have a material adverse effect on our international operations or on our business, results of operations and financial condition generally.
Foreign currency exchange rate, commodity price and interest rate fluctuations may adversely affect our results.
We are exposed to a variety of market risks, including the effects of changes in foreign currency exchange rates, commodity prices and interest rates. We expect revenue from products manufactured in, and sold into, non-U.S. markets to continue to represent a significant portion of our net revenue. Our consolidated financial statements reflect translation of financial statements denominated in non-U.S. currencies to U.S. dollars, our reporting currency. When the U.S. dollar strengthens or weakens in relation to the foreign currencies of the countries where we sell or manufacture our products, such as the euro, our U.S. dollar-reported revenue and income will fluctuate. Although we have entered into forward contracts with several major financial institutions to hedge a portion of projected cash flows denominated in non-functional currency in order to reduce the effects of currency rate fluctuations, changes in the relative values of currencies may, in some instances, have a significant effect on our results of operations.
Many of our products have significant steel and plastic resin content. We also use quantities of other commodities, including copper and zinc. Although we monitor our exposure to these commodity price increases as an integral part of our overall risk management program, volatility in the prices of these commodities could increase the costs of our products and services. We may not be able to pass on these costs to our customers and this could have a material adverse effect on our results of operations and cash flows.
Fluctuations in our effective tax rate and changes to tax laws may adversely affect our results.
As a company with significant operations outside of the U.S., we are subject to taxation in numerous countries, states and other jurisdictions. As a result, our effective tax rate is derived from a combination of applicable tax rates in the various countries, states and other jurisdictions in which we operate. In preparing our financial statements, we estimate the amount of tax that will become payable in each of the countries, states and other jurisdictions in which we operate. Our effective tax rate, however, may be lower or higher than experienced in the past due to numerous factors, including a change in the mix of our profitability from country to country, changes in accounting for income taxes and changes in tax laws. Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations, which could have an adverse effect on our business and results of operations. In addition, unfavorable results of tax audits and changes in tax laws in jurisdictions in which we operate, among other things, could adversely affect our results of operations and cash flows.
An interruption in our manufacturing operations may adversely affect our business.
Many of our key products across all three of our business segments are manufactured at single locations, with limited alternate facilities. If an event occurs that results in damage to one or more of our facilities, it may not be possible to timely manufacture the relevant products at previous levels or at all. In addition, with respect to our Medical Segment, due to the stringent regulations and requirements of the FDA and other regulatory authorities regarding the manufacture of our products, we may not be able to quickly establish additional or replacement sources for certain components or materials. A reduction or interruption in manufacturing, or an inability to secure alternative sources of raw materials or components that are acceptable to us, could have an adverse effect on our results of operations and financial condition.
Further adverse developments in general domestic and global economic conditions combined with a continuation of volatile global credit markets could adversely impact our operating results, financial condition and liquidity.
We are subject to risks arising from adverse changes in general domestic and global economic conditions, including recession or economic slowdown and disruption of credit markets. The credit and capital markets experienced extreme volatility and disruption over the past year, leading to recessionary conditions and depressed levels of consumer and commercial spending. These recessionary conditions have caused customers to reduce, modify, delay or cancel plans to purchase our products and services. While recent indicators suggest modest improvement in the United States and global economy, we cannot predict the timing or extent of any economic recovery or the extent to which our customers will return to more normalized spending behaviors. If the recessionary conditions continue or worsen, our customers may terminate existing purchase orders or reduce the volume of products or services they purchase from us in the future. Adverse economic and financial market conditions may also cause our suppliers to be unable to meet their commitments to us or may cause suppliers to make changes in the credit terms they extend to us, such as shortening the required payment period for outstanding accounts receivable or reducing the maximum amount of trade credit available to us. These types of actions by our suppliers could significantly affect our liquidity and could have a material adverse effect on our results of operations and financial condition. If we are unable to successfully anticipate changing economic and financial market conditions, we may be unable to effectively plan for and respond to those changes, and our business could be negatively affected.
In addition, the amount of goodwill and other intangible assets on our consolidated balance sheet have increased significantly in recent years, primarily as a result of the acquisition of Arrow International in 2007. Adverse economic and financial market conditions may result in future charges to recognize impairment in the carrying value of our goodwill and other intangible assets, which could have a material adverse effect on our financial results.
Our technology is important to our success, and our failure to protect this technology could put us at a competitive disadvantage.
Because many of our products rely on proprietary technology, we believe that the development and protection of our intellectual property rights is important, though not essential, to the future success of our business. In addition to relying on our patents, trademarks and copyrights, we rely on confidentiality agreements with employees and other measures to protect our know-how and trade secrets. Despite our efforts to protect proprietary rights, unauthorized parties or competitors may copy or otherwise obtain and use these products or technology. The steps we have taken may not prevent unauthorized use of this technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the U.S. Moreover, there can be no assurance that others will not independently develop the know-how and trade secrets or develop better technology than ours or that current and former employees, contractors and other parties will not breach confidentiality agreements, misappropriate proprietary information and copy or otherwise obtain and use our information and proprietary technology without authorization or otherwise infringe on our intellectual property rights. Our inability to protect our proprietary technology could result in competitive harm that could adversely affect our business.
We depend upon relationships with physicians and other health care professionals.
The research and development of some of our products is dependent on our maintaining strong working relationships with physicians and other health care professionals. We rely on these professionals to provide us with considerable knowledge and experience regarding our products and the development of our products. Physicians assist us as researchers, product consultants, inventors and as public speakers. If we fail to maintain our working relationships with physicians and receive the benefits of their knowledge, advice and input, our products may not be developed and marketed in line with the needs and expectations of the professionals who use and support our products, which could have a material adverse effect on our business, financial condition and results of operations.
Our workforce covered by collective bargaining and similar agreements could cause interruptions in our provision of services.
Approximately 13% of our net revenues are generated by operations for which a significant part of our workforce is covered by collective bargaining agreements and similar agreements in foreign jurisdictions. It is likely that a portion of our workforce will remain covered by collective bargaining and similar agreements for the foreseeable future. Strikes or work stoppages could occur that would adversely impact our relationships with our customers and our ability to conduct our business.
Our operations have approximately 118 owned and leased properties consisting of plants, engineering and research centers, distribution warehouses, offices and other facilities. We believe that the properties are maintained in good operating condition and are suitable for their intended use. In general, our facilities meet current operating requirements for the activities currently conducted therein.
Our major facilities are as follows:
In addition to the properties listed above, we own or lease approximately 1.0 million square feet of warehousing, manufacturing and office space located in the United States, Canada, Mexico, South America, Europe, Australia, Asia and Africa. We also own or lease certain properties that are no longer being used in our operations. We are actively marketing these properties for sale or sublease. At December 31, 2009, the unused owned properties were classified as held for sale.
On October 11, 2007, the Companys subsidiary, Arrow International, Inc. (Arrow), received a corporate warning letter from the U.S. Food and Drug Administration (FDA). The letter cited three site-specific warning letters issued by the FDA in 2005 and subsequent inspections performed from June 2005 to February 2007 at Arrows facilities in the United States. The letter expressed concerns with Arrows quality systems, including complaint handling, corrective and preventive action, process and design validation, inspection and training procedures. It also advised that Arrows corporate-wide program to evaluate, correct and prevent quality system issues has been deficient. Limitations on pre-market approvals and certificates for foreign governments had
previously been imposed on Arrow based on prior inspections and the corporate warning letter did not impose additional sanctions that are expected to have a material financial impact on the Company.
In connection with its acquisition of Arrow, completed on October 1, 2007, the Company developed an integration plan that included the commitment of significant resources to correct these previously-identified regulatory issues and further improve overall quality systems. Senior management officials from the Company have met with FDA representatives, and a comprehensive written corrective action plan was presented to FDA in late 2007. At the end of 2009, the FDA began its reinspections of the Arrow facilities covered by the corporate warning letter. These inspections have been substantially completed, and the FDA has issued certain written observations to Arrow as a result of those inspections. We are currently in the process of responding to those observations and communicating with the FDA regarding resolution of all outstanding issues.
While the Company continues to believe it has substantially remediated these issues through the corrective actions taken to date, there can be no assurances that these issues have been resolved to the satisfaction of the FDA. If the Companys remedial actions are not satisfactory to the FDA, the Company may have to devote additional financial and human resources to its efforts, and the FDA may take further regulatory actions against the Company.
In addition, 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 matters. Based on information currently available, advice of counsel, established reserves and other resources, we do not believe that any such actions are likely to be, individually or in the aggregate, material to our business, financial condition, results of operations or liquidity. However, in the event of unexpected further developments, it is possible that the ultimate resolution of these matters, or other similar matters, if unfavorable, may be materially adverse to our business, financial condition, results of operations or liquidity.
Our common stock is listed on the New York Stock Exchange, Inc. (symbol TFX). Our quarterly high and low stock prices and dividends for 2009 and 2008 are shown below.
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, on an annual basis $223 million of retained earnings was available for dividends and stock repurchases at December 31, 2009. On February 23, 2010, the Board of Directors declared a quarterly dividend of $0.34 per share on our common stock, which is payable on March 15, 2010 to holders of record on March 3, 2010. As of February 23, 2010, we had approximately 804 holders of record of our common stock.
On June 14, 2007, the Companys Board of Directors authorized the repurchase of up to $300 million of outstanding Company common stock. Through December 31, 2009, no shares have been purchased under this Board authorization. See Stock Repurchase Programs contained in the Management Discussion and Analysis of Financial Condition and Results of Operations on page 42 for more information.
The following graph provides a comparison of five year cumulative total stockholder returns of Teleflex common stock, the Standard & Poor (S&P) 500 Stock Index and the S&P MidCap 400 Index. We have selected the S&P MidCap 400 Index because, due to the diverse nature of our businesses, we do not believe that there exists a relevant published industry or line-of-business index and do not believe we can reasonably identify a peer group. The annual changes for the five-year period shown on the graph are based on the assumption that $100 had been invested in Teleflex common stock and each index on December 31, 2004 and that all dividends were reinvested.
Comparison of Cumulative Five Year Total Return
The selected financial data in the following table includes the results of operations for acquired companies from the respective date of acquisition, including Arrow International from October 1, 2007. See note (2) below for a description of special charges included in the 2008 and 2007 financial results.
Teleflex strives to maintain a portfolio of businesses that provide consistency of performance, improved profitability and sustainable growth. We are focused on achieving consistent and sustainable growth through our internal growth initiatives, which include the development of new products, expansion of market share, moving existing products into new geographies, and through selected acquisitions which enhance or expedite our development initiatives and our ability to grow market share.
Over the past several years, we significantly changed the composition of our portfolio through acquisitions, principally in our Medical Segment, and divestitures in both our Aerospace and Commercial segments. These portfolio actions resulted in a significant expansion of our Medical Segment operations and a significant reduction in our Aerospace and Commercial Segment operations. As a result, our Medical Segment now accounts for over 75% of our revenues from continuing operations and over 90% of our segment operating profit. The following bullet points summarize our more significant acquisitions and divestitures, which occurred in 2007 and 2009. The results for the acquired businesses are included in the respective segments. See Notes 3 and 18 to our consolidated financial statements included in this Annual Report on Form 10-K for additional information regarding our significant acquisitions and divestitures.
We incurred significant indebtedness to fund a portion of the consideration for our October 2007 acquisition of Arrow. As of December 31, 2009, our outstanding indebtedness was approximately $1.2 billion, down from $1.5 billion as of December 31, 2008, primarily due to the use of $240 million of the proceeds from the sale of the ATI businesses to repay and reduce indebtedness. For additional information regarding our indebtedness, please see Liquidity and Capital Resources below and Note 9 to our consolidated financial statements included in this Annual Report on Form 10-K.
The global recessionary conditions that prevailed throughout 2009 have had an adverse impact on market activities including, among other things, failure of financial institutions, falling asset values, diminished liquidity, and reduced demand for products and services. At Teleflex, these economic developments principally affected our Aerospace and Commercial Segments during 2009, and, in response, we adjusted production levels and engaged in new restructuring activities. Although, on a consolidated basis, the economic conditions did not have a significant adverse impact on our financial position, results of operations or liquidity during 2009, the continuation of the broad economic trends could adversely affect our operations in the future, as described below. The potential effect of these factors on our current and future liquidity is discussed below under Liquidity and Capital Resources in this Managements Discussion and Analysis of Financial Condition and Results of Operations.
Hospitals in some regions of the United States experienced a decline in admissions, a weaker payor mix, and a reduction in elective procedures. Hospitals consequently took actions to reduce their costs, including limiting their capital spending, and distributors in the supply chain reduced inventory levels during 2009. The impact of these actions were most pronounced in capital goods markets, which affected our surgical instrument and cardiac assist businesses, and in the orthopedic sector which impacted our orthopedic OEM business. Approximately 80 percent of our Medical revenues come from disposable products used in critical care and surgical applications, and our sales volume could be negatively impacted if hospital admission rates or payor mix decline further as a result of continuing high unemployment rates (and subsequent loss of insurance coverage by consumers).
Although the impact of the global recession outside the United States has been less pronounced to date, funding for foreign healthcare institutions could be affected in the future as governments make further spending adjustments and enact versions of healthcare reform to lower overall healthcare costs. During 2009, the public healthcare systems in certain countries in Western Europe, most notably Greece, Spain, Portugal and Italy, have experienced reduced liquidity due to recessionary conditions which has resulted in a slow down in payments to us. We believe this situation will be with us until these countries are able to find alternative funding sources to their respective public healthcare sectors. In 2009, sales into the public hospital systems in these countries were approximately 4% of our total sales.
Distributors in certain Asian markets were negatively impacted by credit availability and large swings in currency values early in 2009 but returned to more normal order patterns later in the year.
Significant fundamental changes are currently being proposed to the healthcare system in the U.S. The U.S. House of Representatives and Senate passed versions of health care reform legislation late in 2009. The bills in their current form contain provisions that (i) mandate health insurance coverage, (ii) introduce various insurance market reforms and (iii) seek to finance the cost of health care reform by reductions in Medicare and Medicaid reimbursement and the levy of a variety of payroll taxes and fees on individuals and employers, including the imposition of fees on medical device manufacturers, such as Teleflex. The potential impact of these reforms remains uncertain. The addition of significant numbers of currently uninsured patients into the healthcare system could spur additional volume demand for our products. However, reductions in Medicare and Medicaid reimbursement could negatively affect pricing. We continue to study the evolution of the House and Senate bills, but until legislation is passed in final form, we will be unable to ascertain the anticipated impact on Teleflex.
Discussion of growth from acquisitions reflects the impact of a purchased company for up to 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.
The following comparisons exclude the impact of the operations of the ATI businesses, Power Systems, TAMG, and the GMS businesses which have been presented in our consolidated financial results as discontinued operations (see Note 18 to our consolidated financial statements included in this Annual Report on Form 10-K and Discontinued Operations in this Managements Discussion and Analysis of Financial Condition and Results of Operations for discussion of discontinued operations).
Net revenues decreased approximately 9% to $1.89 billion in 2009 from $2.07 billion in 2008. Reduced revenues from core business caused 6% of the decline while foreign currency movements caused the other 3% of the decline. As a result of 2% core growth in the fourth quarter in the Medical Segment, core revenue in that segment was flat in 2009 compared to 2008, but core revenue declined in the Aerospace and Commercial segments 24% and 17%, respectively in 2009 compared to 2008. Weak global economic conditions have negatively impacted markets served by our Aerospace and Commercial segments throughout 2009.
Net revenues increased approximately 31% to $2.07 billion in 2008 from $1.58 billion in 2007. Businesses acquired in 2008 accounted for almost all of this increase in revenues, as foreign currency translation contributed 1% to revenue growth, while revenues from core business were essentially unchanged compared to 2007. Core revenue growth in the Medical (2%) and Aerospace (1%) segments was offset by a 9% decline in core revenues in the Commercial Segment, which was primarily due to a significant decrease in sales of recreational marine products.
Gross profit as a percentage of revenues increased to 43.1% in 2009 from 41.4% in 2008 with all three segments experiencing increases in gross profit as a percentage of revenues. The principal factors that impact the overall increase were a higher percentage of Medical revenues (77% of total revenues in 2009 compared to 73% in 2008), a $7 million fair value adjustment to inventory in the first quarter of 2008 related to inventory acquired in the Arrow acquisition, which did not recur in 2009, synergies from the Arrow acquisition and manufacturing cost reductions implemented in each of our three segments, partly offset by higher pension expense in 2009 because of the decline in the value of our pension assets at the end of 2008 as a result of losses experienced in the global equity markets.
Gross profit as a percentage of revenues increased to 41.4% in 2008 from 37.6% in 2007. This trend was driven by increases in the Medical and Aerospace segments as the gross profit percentage in the Commercial Segment was unchanged from 2007. Improved margins in the Medical Segment were largely due to the inclusion of higher margin Arrow critical care product lines for the full year in 2008 compared to only the fourth quarter in 2007 and volume related manufacturing efficiencies in the Medical OEM product line. Improved margins in the Aerospace Segment were principally due to a shift in sales favoring engine repair services and away from sales of lower margin replacement parts in the engine repairs business.
Selling, engineering and administrative expenses (operating expenses) as a percentage of revenues were 27.5% in 2009 compared to 27.2% in 2008. The increase in the amount as a percentage of revenues is due to the year-on-year decline in revenues. The reduction in the dollar value of these costs was principally the result of cost reduction initiatives throughout the Company, including restructuring and integration activities in connection with the Arrow acquisition and the 2008 Commercial segment restructuring program, and lower spending on remediation of FDA regulatory issues. These factors resulted in an aggregate reduction in expenses of approximately $45 million.
Selling, engineering and administrative expenses as a percentage of revenues were 27.2% in 2008 compared to 25.9% in 2007, principally due to approximately $25 million higher amortization expense related to the Arrow acquisition and approximately $20 million higher expenses in the Medical Segment related to the remediation of FDA regulatory issues.
Goodwill impairment and in-process R&D charge
In 2009, we performed an interim review of goodwill for our Cargo Container reporting unit during the second quarter as a result of the difficult market conditions confronting the Cargo Container reporting unit and the significant deterioration in its operating performance, which accelerated in the second quarter of 2009. Upon conclusion of this review, we determined that goodwill in the Cargo Container operations was impaired, and we recorded an impairment charge of $6.7 million in the second quarter of 2009.
In 2007, we recorded a $2.4 million goodwill impairment charge related to a write-down to the agreed selling price of one of our variable interest entities in the Commercial Segment.
The $30.0 million write-off of in-process research and development costs in 2007 is related to in-process R&D projects acquired in the Arrow acquisition which we determined had no alternative future use in their current state.
Interest income and expense
Interest expense decreased in 2009 due to an approximate $350 million reduction in debt during the year, principally reflecting the $240 million of debt repaid in the first quarter of 2009 from the proceeds of the sale of the ATI business.
Interest expense increased significantly in 2008 compared to 2007 principally as a result of the full year impact of the debt incurred in connection with the Arrow acquisition in October 2007. Interest income decreased in 2008 compared to 2007 primarily due to lower amounts of invested funds combined with lower average interest rates.
The effective tax rate in 2009 was 21.8% compared to 32.6% in 2008. Taxes on income from continuing operations in 2009 were $39.9 million compared to $47.5 million in 2008. The decrease in the effective tax rate was due to (i) a decrease in deferred state tax liabilities driven by changes to applicable state tax laws and (ii) a reduction in the current year for reserves for uncertain tax positions as audits and settlements were closed, and fewer new reserves were established than in the prior year.
The effective tax rate in 2008 was 32.6% compared to 140.4% in 2007. Taxes on income from continuing operations of $109.9 million in 2007 include discrete income tax charges incurred in connection with the Arrow acquisition. Specifically, in connection with funding the acquisition of Arrow, the Company (i) repatriated approximately $197.0 million of cash from foreign subsidiaries which had previously been deemed to be permanently reinvested in the respective foreign jurisdictions; and (ii) changed its position with respect to certain additional previously untaxed foreign earnings to treat these earnings as no longer permanently reinvested. These items resulted in a discrete income tax charge in 2007 of approximately $80.9 million. The Company did not incur similar charges in 2009 or 2008.
In December 2008, we began certain restructuring initiatives that affect the Commercial Segment. These initiatives involved the consolidation of operations and a related reduction in workforce at three of our facilities in Europe and North America. We implemented these initiatives as a means to address an expected continuation of weakness in the marine and industrial markets. These costs amounted to approximately $2.2 million during 2009. As of December 31, 2009, we have completed the 2008 Commercial Segment restructuring program. We expect to have realized annual pre-tax savings of between $3.5 - $4.5 million in 2010 as a result of actions taken in connection with this program.
In connection with the acquisition of Arrow during 2007, we formulated a plan related to the integration of Arrow and our other Medical businesses. The integration plan focused on the closure of Arrow corporate functions and the consolidation of manufacturing, sales, marketing, and distribution functions in North America, Europe and Asia. Costs related to actions that affect employees and facilities of Arrow have been included in the allocation of the purchase price of Arrow. Costs related to actions that affect employees and facilities of Teleflex are charged to earnings and included in restructuring and impairment charges within the consolidated statement of operations. These costs amounted to approximately $7.0 million during 2009. As of December 31, 2009, we estimate that the aggregate of future restructuring and impairment charges that we will incur in connection with the Arrow integration plan are approximately $1.3 $2.3 million in 2010. Of this amount, $1.0 $1.5 million relates to employee termination costs, $0.2 $0.5 million relates to contract termination costs associated with the termination of leases and certain distribution agreements and $0.1 $0.3 million relates to other restructuring costs. We also have incurred restructuring related costs in the Medical Segment which do not qualify for classification as restructuring costs. In 2009 these costs amounted to
$2.5 million and are reported in the Medical Segments operating results in materials, labor and other product costs and in selling, engineering and administrative expenses. We expect to have realized annual pre-tax savings of between $70-$75 million by the end of 2010 when these integration and restructuring actions are complete.
In June 2006, we began certain restructuring initiatives that affected all three of our operating segments. These initiatives involved the consolidation of operations and a related reduction in workforce at several of our facilities in Europe and North America. We took these initiatives as a means to improving operating performance and to better leverage our existing resources and these activities are now complete.
For additional information regarding our restructuring programs, see Note 4 to our consolidated financial statements included in this Annual Report on Form 10-K.
During the second quarter of 2009, we recorded $2.3 million in impairment charges with respect to an intangible asset in our Commercial Segment. During the third quarter of 2009, we recorded a $3.3 million impairment charge related to our investment in a California real estate venture. In 2004, we contributed property and other assets that had been part of one of our former manufacturing sites to the real estate venture. During the third quarter of 2009, based on continued deterioration in the California real estate market, we concluded that our investment was not recoverable and recorded the impairment charge to fully write-off our investment in this venture.
Impairment charges in 2008 included $2.7 million related to five of our minority held investments precipitated by the deteriorating economic conditions in the fourth quarter of 2008, $0.8 million related to an intangible asset in the Commercial Segment that was identified during the annual impairment testing process, and a $0.2 million reduction in the carrying value of a building held for sale. In 2007, we determined that two minority-held investments and a building held for sale were impaired and recorded an aggregate charge of $3.9 million.
The percentage increases or (decreases) in revenues during the years ended December 31, 2009 and 2008 compared to the respective prior years were due to the following factors:
The following is a discussion of our segment operating results. Additional information regarding our segments, including a reconciliation of segment operating profit to income from continuing operations before interest, taxes and minority interest, is presented in Note 17 to our consolidated financial statements included in this Annual Report on Form 10-K.
Medical Segment net revenues declined 3% in 2009 to $1,457.1 million, from $1,499.1 million in 2008, entirely due to foreign currency fluctuations, mainly the stronger U.S. dollar against the Euro during the first three quarters of 2009. In the aggregate, we experienced no growth in core revenue in 2009 over 2008, as growth in critical care products in Europe and Asia/Latin America of approximately $11 million was offset by approximately $9 million lower sales of orthopedic instrumentation products to OEMs in North America and approximately $8 million lower sales of surgical products in North America and Europe.
Net sales for 2009, 2008 and 2007 by product group for the Medical Segment are comprised of the following:
The decrease in critical care product sales during 2009 compared to 2008 was entirely due to currency fluctuations as core revenue in this product group increased approximately 1% in 2009. Higher sales of vascular access, urology and anesthesia products of approximately $12 million were partially offset by approximately $6 million lower sales of respiratory products, principally as a result of distributor de-stocking in North America in early 2009.
Surgical product sales declined approximately 4% in 2009 compared to 2008. Foreign currency movements negatively impacted sales by approximately 3%, and lower sales in the instrumentation product line in Europe and North America led the 1% decline in core revenue. We believe this decline in sales resulted from hospitals limiting their capital budgets for these products and distributors reducing inventory in the supply chain.
The decrease in sales of cardiac care products in 2009 compared to 2008 is mainly due to currency movements, hospital capital budget constraints and a voluntary product recall during the first quarter of 2009.
Sales of devices to OEMs decreased primarily as a result of approximately $9 million lower sales of orthopedic instrumentation as higher sales of specialty sutures and other devices of approximately $2 million was offset by the impact of currency movements. A reduction in new product launches by OEM customers and overall weakness in OEM orthopedic markets due to hospital budgetary constraints and postponement of certain elective surgical procedures have had a negative impact on demand for our orthopedic instrumentation products.
Operating profit in the Medical Segment increased 7% in 2009 to $305.1 million, from $286.3 million in 2008. The negative impact on operating profit from a stronger U.S. dollar during the first three quarters of 2009 was more than offset by approximately $20 million of lower manufacturing and selling, general and administrative costs during 2009 as a result of cost reduction initiatives, including restructuring and integration activities in connection with the Arrow acquisition, and approximately $18 million lower expenses related to the remediation of FDA regulatory issues. Also, a $7 million expense for fair value adjustment to inventory in the first quarter of 2008 related to inventory acquired in the Arrow acquisition, which did not recur in 2009, had a favorable impact on the comparison of 2009 operating profit to the prior year.
During the first quarter 2010, we undertook a voluntary recall of our custom IV tubing product. Estimated costs to be incurred for the recall are in a range of approximately $4.5 million to $7.5 million, pretax. Of that amount, $1.7 million relates to units sold or produced in 2009 and is included in materials, labor and other product costs in the 2009 consolidated statement of income.
Medical Segment net revenues grew 44% in 2008 to $1,499.1 million, from $1,041.3 million in 2007. The acquisition of Arrow accounted for 40% of this increase in revenues. Of the remaining 4% increase in net revenues, 2% was due to foreign currency fluctuations and 2% was due to core revenue growth. Medical Segment core revenue growth in 2008 reflects higher sales volume for critical care and surgical products in Europe and Asia/Latin America of approximately $13 million and $8 million, respectively, and a $17 million increase in sales of specialty medical devices to OEMs, partially offset by $23 million lower sales volumes for critical care and surgical products in North America.
Operating profit in the Medical Segment increased 57% in 2008 to $286.3 million, from $182.6 million in 2007, principally due to the addition of higher margin Arrow critical care product lines. Other factors that contributed to the higher operating profit were improved cost and operational efficiencies in North America, higher volumes in Europe and Asia/Latin America, lower fair value adjustment to inventory acquired in the Arrow acquisition ($7 million in 2008 versus $29 million in 2007) and the favorable impact from the stronger Euro. The impact of these factors was partially offset by the impact of approximately $25 million higher amortization expense related to the Arrow acquisition and $20 million in higher costs incurred in 2008 in connection with a plan to remediate FDA regulatory issues.
Aerospace Segment net revenues declined 27% in 2009 to $185.1 million, from $253.8 million in 2008. Core revenue reductions accounted for nearly all (24%) of the decline in revenue. Weakness in the commercial aviation sector throughout 2009 resulted in reduced sales to commercial airlines and freight carriers of wide body cargo spare components and repairs, cargo containers and actuators. This market weakness has also reduced the number of aftermarket cargo system conversions, resulting in lower sales of multi-deck wide body cargo handling systems, which offset the impact of higher sales of single deck wide body systems on passenger aircraft.
Segment operating profit decreased 41% in 2009 to $15.4 million, from $26.1 million in 2008. This decline was principally due to the sharply lower sales volumes across all product lines, including the unfavorable mix in 2009 of lower margin single deck system sales compared with a mix in 2008 that was weighted more toward aftermarket multi-deck system conversions and spares and repairs. The impact from lower sales volumes was partially offset by cost reduction initiatives that resulted in operating cost reductions of approximately $9 million during 2009.
Aerospace Segment net revenues grew 28% in 2008 to $253.8 million, from $197.8 million in 2007. The expansion of the cargo containers product line due to the acquisition of Nordisk Aviation Products accounted for 24% of this increase. The 1% increase in core growth is primarily attributable to increased sales of narrow body cargo loading systems and wide body and narrow body cargo spare components and repairs.
Segment operating profit increased 43% in 2008 to $26.1 million, from $18.3 million in 2007. The increase was principally due to the impact of the Nordisk acquisition and favorable product mix of repair versus replacement in the engine repair services business as a result of technology investments we have made. Consolidation of operations and phasing out of lower margin product lines in the engine repair services business during 2007 also had a positive impact on operating profit in 2008.
Commercial Segment net revenues declined approximately 21% in 2009 to $247.9 million, from $313.8 million in 2008. Core revenue reductions accounted for 17% of the decline, which was principally the result of a decrease in demand for rigging services (7%), and a decline in sales of marine products to OEM manufacturers for the recreational boat market (15%), partially offset by approximately $20 million of higher sales of the modern burner unit to the U.S. Military.
In 2009, segment operating profit decreased 42% to $15.2 million compared to $26.1 million in 2008. This decrease was principally due to the lower sales volumes of rigging products and marine products to OEM manufacturers for the recreational boat market and sale of higher cost inventory in the rigging services business, which more than offset the impact from the elimination of approximately $8 million of operating costs in 2009 and higher sales of the modern burner unit to the U.S. Military.
Commercial Segment net revenues declined approximately 7% in 2008 to $313.8 million, from $336.0 million in 2007. Core revenue declined 9% as a result of a 12% decline in sales of marine products for the recreational boat market offset by a 3% increase in sales of rigging services products. Extreme volatility in fuel costs, accompanied by deterioration in the general state of the global economy in the second half of 2008 adversely impacted the markets served by our marine products.
In 2008, segment operating profit decreased 19% to $26.1 million compared to $32.0 million in 2007. This decrease was principally due to a lower operating profit in the marine business resulting from lower sales in 2008 and unfavorable currency impact of approximately $3 million partially offset by an increase in the rigging services business due to an acquisition during 2007.
During the third quarter of 2009, we completed the sale of our Power Systems operations to Fuel Systems Solutions, Inc. for $14.5 million and realized a loss of $3.3 million, net of tax. During the second quarter, we recognized a non-cash goodwill impairment charge of $25.1 million to adjust the carrying value of these operations to their estimated fair value. In the third quarter of 2009, we reported the Power Systems operations, including the goodwill impairment charge, in discontinued operations.
On March 20, 2009, we completed the sale of our 51 percent ownership interest in ATI Singapore to GE Pacific Private Limited for $300 million in cash. ATI Singapore, which provides engine repair products and services for critical components of flight turbines, was part of a joint venture between General Electric Company (GE) and us. In December 2009, we completed the transfer of our ownership interest in the remaining ATI business (together with ATI Singapore, the ATI businesses) to GE for a nominal amount.
At the end of 2007, we completed the sale of our GMS businesses to Kongsberg Automotive Holding ASA for $560 million in cash. In the second quarter of 2008, we refined our estimates for the post-closing adjustments based on the provisions of the purchase agreement with Kongsberg Automotive Holdings on the sale of the GMS businesses. Also during 2008, we recorded a charge for the settlement of a contingency related to the sale of the GMS businesses. These activities resulted in a decrease in the gain on sale of the GMS businesses and are reported in discontinued operations as a loss of $14.2 million, net of taxes of $6.0 million.
On June 29, 2007, we completed the sale of a precision-machined components business in our Aerospace Segment for approximately $134 million in cash.
The Company has reported results of operations, cash flows and gains (losses) on the disposition of these businesses as discontinued operations for all periods presented. See Note 18 to our consolidated financial statements included in this Annual Report on Form 10-K for further information regarding divestiture activity and accounting for discontinued operations.
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our principal source of liquidity is operating cash flows. In addition to operating cash flows, other significant factors that affect our overall management of liquidity include: capital expenditures, acquisitions, pension funding, dividends, common stock repurchases, adequacy of available bank lines of credit, and access to other capital markets.
The global recessionary conditions that persisted throughout 2009 affected the operating results of our various businesses as described above in Results of Operations. Nevertheless, we currently do not foresee any difficulties in meeting our cash requirements or accessing credit as needed in the next twelve months. To date, we have not experienced an inordinate amount of payment defaults by our customers, and we have sufficient lending commitments in place to enable us to fund additional operating needs. However, in light of current economic conditions, there is an increased risk that our customers and suppliers may be unable to access liquidity. If current market conditions deteriorate further, we may experience delays in customer payments and reductions in our customers purchases from us, which could have a material adverse effect on our liquidity.
The precipitous deterioration in the securities markets that occurred during 2008 and the subsequent moderate recovery in these markets during 2009 has impacted the market value of the assets included in our defined benefit pension plans. As a result of these market conditions, the market value of assets in our domestic
pension funds declined in value by approximately $76 million, or 29%, during 2008 and recovered approximately $37 million, or 22%, in 2009. These events did not have a significant impact on our pension funding requirements in 2009, nor do we expect a significant impact on 2010 funding requirements, because amounts funded to the plans in prior years exceeded the minimum amounts required in those years. The volatility in the securities markets has not significantly affected the liquidity of our pension plans or counterparty exposure. A majority of our domestic pension plans are invested in mutual funds registered with the SEC under the Investment Company Act of 1940. Underlying holdings of the mutual funds are primarily invested in publicly traded equity and fixed income securities.
We manage our worldwide cash requirements by monitoring the funds available among our subsidiaries and determining the extent to which those funds can be accessed on a cost effective basis. The repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences; however, those balances are generally available without legal restrictions to fund ordinary business operations. We have and will continue to transfer cash from those subsidiaries to the U.S. and to other international subsidiaries when it is cost effective to do so. During 2009 we repatriated approximately $363 million of cash from our foreign subsidiaries and we expect to access approximately $70 million of cash from foreign subsidiaries in 2010 to help fund debt service and other cash requirements. Substantially all of our debt service requirements are United States based and we depend on foreign sources of cash to fund a portion of these requirements. During 2009 we repaid approximately $359 million of debt from the proceeds of the sale of businesses and from cash generated from operations. As a result, we have no scheduled principal payments under our senior credit facility until September 2011. Our next scheduled senior note principal payment is in July 2011 for $145 million. We anticipate our domestic interest payments for 2010 will be approximately $69 million. To the extent we cannot, or choose not to, repatriate cash from foreign subsidiaries in time to meet quarterly debt service or other requirements our revolving credit facility can be utilized as a source of liquidity until such cash can be repatriated in a cost effective manner.
We believe our cash flow from operations, available cash and cash equivalents, borrowings under our revolving credit facility and additional sales of accounts receivable under our securitization program will enable us to fund our operating requirements, capital expenditures and debt obligations.
A summary of our cash flows for the last three years is as follows:
Lower tax payments of approximately $25 million, lower interest payments of approximately $25 million and approximately $16 million greater reduction in working capital were the primary contributors to the higher cash flow from operations in 2009 compared to 2008.
Changes in our operating assets and liabilities resulted in an aggregate decrease in cash from operations of approximately $101 million during 2009 which was comprised of a reduction in taxes of approximately $121 million offset by the impact from a reduction of working capital of approximately $20 million. The
reduction in taxes includes $97.5 million of taxes paid in connection with businesses divested in 2009. The reduction in working capital results principally from (i) lower accounts receivable, primarily in the Commercial and Aerospace segments generally, reflecting lower sales, partly offset by higher receivables in the Medical Segment due to a slow down in payments from public hospitals in Italy, Spain, Portugal and Greece where funding has been under pressure due to weak economic conditions; (ii) lower inventory due largely to efforts in both the Aerospace and Commercial segments in response to weak demand during 2009, generally, coupled with deliveries of cargo handling systems in the Aerospace Segment whose delivery schedules had been delayed from 2008 into 2009; partly offset by (iii) lower accounts payable and accrued expenses largely due to reduced spending on inventory in the Aerospace and Commercial segments coupled with payments of termination benefits and contract termination costs in restructuring and integration reserves.
Higher tax payments of approximately $112 million (net of refunds of approximately $27 million) and higher interest payments of approximately $60 million were the principal factors in the year-on-year decrease in cash flows from operating activities in 2008 compared to 2007. The largest factor contributing to the higher tax payments is approximately $90 million of taxes paid in connection with businesses divested in 2007.
Changes in our operating assets and liabilities resulted in an aggregate decrease in cash from operations of approximately $104 million during 2008 which is principally attributable to the $90 million of tax payments mentioned previously. The cash flow impact from changes in other operating assets and liabilities offset one another; an inventory increase of approximately $14 million, increase in accounts payable and accrued expenses of $3 million, decrease in accounts receivable of $11 million, and a decrease in other operating assets of $4 million. The ramp up in production of cargo handling systems to meet the delivery schedules communicated earlier in the year from aircraft manufacturers and the late in the year delay of those delivery schedules into 2009 was the principal ($14 million) cause of the year-on-year increase in inventory. Nearly all of the increase in accounts payable and accrued expenses is due to a year-on-year increase in accounts payable in the Medical Segment that results from changes in payment patterns to suppliers of the Arrow operations during 2008 where early payment discounts were forgone in favor of longer payment terms. The $11 million decrease in accounts receivable reflects focused collection efforts in all segments and is in spite of higher sales during the fourth quarter of 2008 compared to the same period of a year ago, and a heavier mix of sales in our cargo handling systems business to aircraft manufacturers in 2008 which carry longer payment terms compared to the aftermarket side of that business. During 2008 we repatriated approximately $104 million of cash from our foreign subsidiaries.
Our cash flows from investing activities from continuing operations in 2009 consisted primarily of proceeds from the sales of the ATI businesses and Power Systems operations, partly offset by capital expenditures of $30.4 million.
Our cash flows from investing activities from continuing operations in 2008 consisted primarily of capital expenditures of $35.2 million, deferred payments of $6.1 million with respect to acquired businesses, which primarily pertained to our acquisitions of Nordisk ($4.7 million) and Southern Wire ($1.0 million), and proceeds of $8.5 million from the sale of assets and investments, principally $5.3 million related to post closing adjustments in connection with the sale of the GMS business, $1.8 million derived from the sale of investments in non-consolidated affiliates and $1.0 million from the sale of a building held for sale.
Our cash flows from financing activities from continuing operations in 2009 consisted primarily of $357.6 million repayment of long-term debt and payment of dividends of $54.0 million, partly offset by borrowings of $10.0 million under our revolving credit facility.
Our cash flows from financing activities from continuing operations in 2008 consisted primarily of $133.9 million repayment of long-term debt, $92.8 million repayment of borrowings under our revolving credit facility and payment of dividends of $53.0 million, partly offset by borrowings under our revolving credit facility of $92.9 million.
The following table provides our net debt to total capital ratio:
In connection with our acquisition of Arrow, in October 2007, we entered into a credit agreement, which we refer to as our senior credit agreement, that provides for a five-year term loan facility of $1.4 billion and a five-year revolving line of credit facility of $400 million, both of which carried initial interest rates of LIBOR plus a spread of 150 basis points. The spread is subject to adjustment based upon our consolidated leverage ratio (generally, Consolidated Total Indebtedness to Consolidated EBITDA, each as defined in the senior credit agreement). At December 31, 2009, the spread over LIBOR was 125 basis points. We executed an interest rate swap for $600 million of the term loan from a floating 3 month LIBOR rate to a fixed rate of 4.75%. The notional value of the interest rate swap amortizes down to $350 million at maturity in 2012. Our obligations under the senior credit agreement are guaranteed by substantially all of our material wholly-owned domestic subsidiaries, and are secured by a pledge of the shares of certain of our subsidiaries.
Also in connection with our acquisition of Arrow, in October 2007, we issued $200 million in new senior notes, which we refer to as the 2007 notes, and amended certain terms of our outstanding notes issued in July 2004, which we refer to as the 2004 notes, and October 2002, which we refer to as the 2002 notes. We collectively refer to the 2004 notes and the 2002 notes as the amended notes. In addition, we repaid $10.5 million of outstanding notes issued on November 1, 1992 and December 15, 1993, which we collectively refer to as the retired notes. The retired notes consisted of the 7.40% Senior Notes due November 15, 2007 and the 6.80% Series B Senior Notes due December 15, 2008.
The 2007 notes and the amended notes, referred to collectively as the senior notes, rank pari passu in right of repayment with our obligations under our senior credit agreement and are secured and guaranteed in the same manner as the senior credit agreement. The senior notes have mandatory prepayment requirements upon the sale of certain assets and may be accelerated upon certain events of default, in each case, on the same basis as our senior credit agreement.
The interest rates payable on the amended notes were also modified in connection with the foregoing transactions. Effective as of October 1, 2007:
Interest rates on the amended notes are subject to reduction based on positive performance relative to certain financial ratios. During 2009, we repaid the 2002 notes and attained a 25 basis point reduction on the 2004 notes.
Fixed rate borrowings, excluding the effect of derivative instruments, comprised 42% of total borrowings at December 31, 2009. Fixed rate borrowings, including the effect of derivative instruments, comprised 80% of total borrowings at December 31, 2009. Less than 1% of our total borrowings of $1,196.5 million are denominated in currencies other than the U.S. dollar, principally the Euro.
Our senior credit agreement and the senior note agreements contain covenants that, among other things, limit or restrict our ability, and the ability of our subsidiaries, to incur debt, create liens, consolidate, merge or dispose of certain assets, make certain investments, engage in acquisitions, pay dividends on, repurchase or make distributions in respect of capital stock and enter into swap agreements. These agreements also require us to maintain a consolidated leverage ratio of not more than 3.50:1 and a consolidated interest coverage ratio (generally, Consolidated EBITDA to Consolidated Interest Expense, each as defined in the senior credit agreement) of not less than 3.50:1 as of the last day of any period of four consecutive fiscal quarters calculated pursuant to the definitions and methodology set forth in the senior credit agreement. At December 31, 2009 our consolidated leverage ratio was 2.95:1 and our interest coverage ratio was 4.92:1, both of which are in compliance with the limits mentioned in the preceding sentence.
At December 31, 2009, we had no borrowings outstanding and approximately $5 million in outstanding standby letters of credit under our $400 million revolving credit facility. This facility is used principally for seasonal working capital needs. The availability of loans under this facility is dependent upon our ability to maintain our financial condition and our continued compliance with the covenants contained in the senior credit agreement and senior note agreements. Moreover, additional borrowings would be prohibited if a Material Adverse Effect (as defined in the senior credit agreement) were to occur. Notwithstanding these restrictions, we believe that this revolving credit facility provides us with significant flexibility to meet our foreseeable working capital needs. At our current level of EBITDA (as defined in the senior credit agreement) for the year ended December 31, 2009, we would have been permitted $223 million of additional debt beyond the levels outstanding at December 31, 2009. Notwithstanding the borrowing capacity described above, additional capacity would be available if borrowed funds were used to acquire a business or businesses through the purchase of assets or controlling equity interests so long as the aforementioned leverage and interest coverage ratios are met after calculating EBITDA on a proforma basis to give effect to the acquisition.
As of December 31, 2009, we were in compliance with all other terms of the senior credit agreement and the senior notes, and we expect to continue to be in compliance with the terms of these agreements, including the leverage and interest coverage ratios, throughout 2010.
For additional information regarding our indebtedness, please see Note 9 to our consolidated financial statements included in this Annual Report on Form 10-K.
In addition, at December 31, 2009, the Company had an accounts receivable securitization program under which it sells a security interest in domestic accounts receivable for consideration of up to $125 million to a commercial paper conduit. This facility is utilized from time to time for increased flexibility in funding short term working capital requirements. The credit market volatility during 2009 did not have a material impact on the
availability of the accounts receivable securitization program. For additional information regarding this facility, please refer to Off Balance Sheet Arrangements included in this Managements Discussion and Analysis of Financial Condition and Results of Operations.
On June 14, 2007, the Companys Board of Directors authorized the repurchase of up to $300 million of outstanding Company common stock. Repurchases of Company stock under the Board authorization may be made from time to time in the open market and may include privately-negotiated transactions as market conditions warrant and subject to regulatory considerations. The stock repurchase program has no expiration date and the Companys ability to execute on the program will depend on, among other factors, cash requirements for acquisitions, cash generation from operations, debt repayment obligations, market conditions and regulatory requirements. In addition, the Companys senior loan agreements limit the aggregate amount of share repurchases and other restricted payments the Company may make to $75 million per year in the event the Companys consolidated leverage ratio exceeds 3.5 to 1. Accordingly, these provisions may limit the Companys ability to repurchase shares under this Board authorization. Through December 31, 2009, no shares have been purchased under this Board authorization.
Contractual obligations at December 31, 2009 are as follows:
We have recorded a noncurrent liability for uncertain tax positions of $109.9 million and $116.1 million as of December 31, 2009 and December 31, 2008, respectively. Due to uncertainties regarding the ultimate resolution of ongoing or future tax examinations we are not able to reasonably estimate the amount of any income tax payments to settle uncertain income tax positions or the periods in which any such payments will be made.
In 2009, cash contributions to all defined benefit pension plans were $9.1 million, and we estimate the amount of cash contributions will be in the range of $7.3 million to $10.0 million in 2010. Due to the potential impact of future plan investment performance, changes in interest rates and other economic and demographic assumptions and changes in legislation in the United States and other foreign jurisdictions, we are not able to
reasonably estimate the timing and amount of contributions that may be required to fund our defined benefit plans for periods beyond 2010.
See Notes 14 and 15, respectively to our consolidated financial statements included in this Annual Report on Form 10-K for additional information.
We have residual value guarantees under operating leases for certain equipment. The maximum potential amount of future payments we could be required to make under these guarantees is approximately $9.7 million.
We use an accounts receivable securitization program to gain access to credit markets with favorable interest rates and reduce financing costs. As currently structured, accounts receivable of certain domestic subsidiaries are sold on a non-recourse basis to a special purpose entity (SPE), which is a bankruptcy-remote consolidated subsidiary of Teleflex. Accordingly, the assets of the SPE are not available to satisfy the obligations of Teleflex or any of its other subsidiaries. The SPE then sells undivided interests in those receivables to an asset backed commercial paper conduit. The conduit issues notes secured by those interests and other assets to third party investors.
To the extent that cash consideration is received for the sale of undivided interests in the receivables by the SPE to the conduit, it is accounted for as a sale as we have relinquished control of the receivables. Accordingly, undivided interests in accounts receivable sold to the commercial paper conduit under these transactions are excluded from accounts receivable, net in the accompanying consolidated balance sheets. The interests for which cash consideration is not received from the conduit are retained by the SPE and remain in accounts receivable, net in the accompanying consolidated balance sheets. However, as noted below, the accounting for accounts receivables sold will change beginning in the first quarter of 2010.
The interests in receivables sold and the interest in receivables retained by the SPE are carried at face value, which is due to the short-term nature of our accounts receivable. The SPE has received cash consideration of $39.7 million and $39.7 million for the interests in the accounts receivable it has sold to the commercial paper conduit at December 31, 2009 and December 31, 2008, respectively. No gain or loss is recorded upon sale as fee charges from the commercial paper conduit are based upon a floating yield rate and the period the undivided interests remain outstanding. Fee charges from the commercial paper conduit are accrued at the end of each month. If we default under the accounts receivable securitization program, the commercial paper conduit is entitled to receive collections on receivables owned by the SPE in satisfaction of the amount of cash consideration paid to the SPE by the commercial paper conduit.
Information regarding the outstanding balances related to the SPEs interests in accounts receivables sold or retained as of December 31, 2009 is as follows:
The delinquency ratio for the qualifying receivables represented 3.8% of the total qualifying receivables as of December 31, 2009.
The following table summarizes the activity related to our interests in accounts receivable sold for the years ended December 31, 2009 and December 31, 2008:
Other fee charges related to the sale of receivables to the commercial paper conduit for the year ended December 31, 2009 were not material.
We continue to service the receivables after they are sold to the conduit pursuant to servicing agreements with the SPE. No servicing asset is recorded at the time of sale because we do not receive any servicing fees from third parties or other income related to the servicing of the receivables. We do not record any servicing liability at the time of the sale as the receivables collection period is relatively short and the costs of servicing the receivables sold over the servicing period are insignificant. Servicing costs are recognized as incurred over the servicing period.
In the first quarter of 2010, we will adopt an amendment to Accounting Standards Codification (ASC) topic 860, Transfers and Servicing that affects the accounting for transfers of financial assets. Outstanding accounts receivable that we previously treated as sold and removed from the balance sheet will be included in accounts receivable, net on our balance sheet and the amounts outstanding under our accounts receivable securitization program will be accounted for as a secured borrowing and reflected as short-term debt on our balance sheet (which as of December 31, 2009 is $39.7 million for both). In addition, while there has been no change in the arrangement under our securitization program, the adoption of this amendment will reduce cash flow from operations by approximately $39.7 million and result in a corresponding increase in cash flow from financing activities.
See also Note 16 to our consolidated financial statements included in this Annual Report on Form 10-K for additional information.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.
We have identified the following as critical accounting estimates, which are defined as those that are reflective of significant judgments and uncertainties, are the most pervasive and important to the presentation of our financial condition and results of operations and could potentially result in materially different results under different assumptions and conditions.
In the ordinary course of business, we grant non-interest bearing trade credit to our customers on normal credit terms. In an effort to reduce our credit risk, we (i) establish credit limits for all of our customer relationships, (ii) perform ongoing credit evaluations of our customers financial condition, (iii) monitor the payment history and aging of our customers receivables, and (iv) monitor open orders against an individual customers outstanding receivable balance.
An allowance for doubtful accounts is maintained for accounts receivable based on our historical collection experience and expected collectability of the accounts receivable, considering the period an account is outstanding, the financial position of the customer and information provided by credit rating services. The adequacy of this allowance is reviewed each reporting period and adjusted as necessary. Our allowance for doubtful accounts was $7.1 million at December 31, 2009 and $8.7 million at December 31, 2008 which was 2.6% of gross accounts receivable at those respective dates. In light of the disruptions in global credit markets that occurred in the fourth quarter of 2008 and continued through 2009 we have taken this heightened risk of customer payment default into account when estimating the allowance for doubtful accounts at December 31, 2009 by engaging in a more robust customer-by-customer risk assessment. Although future results cannot always be predicted by extrapolating past results, management believes that it is reasonably likely that future results will be consistent with historical trends and experience. However, if the financial condition of the Companys customers were to deteriorate, resulting in an impairment of their ability to make payments, or if unexpected events or significant future changes in trends were to occur, additional allowances may be required.
Inventories are valued at the lower of cost or market. Accordingly, we maintain a reserve for excess and obsolete inventory to reduce the carrying value of our inventories for the diminution of value resulting from product obsolescence, damage or other issues affecting marketability equal to the difference between the cost of the inventory and its estimated market value. Factors utilized in the determination of estimated market value include (i) current sales data and historical return rates, (ii) estimates of future demand, (iii) competitive pricing pressures, (iv) new product introductions, (v) product expiration dates, and (vi) component and packaging obsolescence.
The adequacy of this reserve is reviewed each reporting period and adjusted as necessary. We regularly compare inventory quantities on hand against historical usage or forecasts related to specific items in order to evaluate obsolescence and excessive quantities. In assessing historical usage, we also qualitatively assess business trends to evaluate the reasonableness of using historical information as an estimate of future usage.
Our excess and obsolete inventory reserve was $35.3 million at December 31, 2009 and $37.5 million at December 31, 2008 which was 8.9% and 8.1% of gross inventories, at those respective dates.
The ability to realize long-lived assets is evaluated periodically as events or circumstances indicate a possible inability to recover their carrying amount. Such evaluation is based on various analyses, including undiscounted cash flow projections. The analyses necessarily involve significant management judgment. Any impairment loss, if indicated, is measured as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.
Goodwill and intangible assets by reporting segment at December 31, 2009 are as follows:
Acquired intangible assets may represent indefinite-lived assets (e.g., certain trademarks or brands), determinable-lived intangibles (e.g., certain trademarks or brands, customer relationships, patents and technologies) or residual goodwill. Of these, only the costs of determinable-lived intangibles are amortized to expense over their estimated life. The value of the indefinite-lived intangible assets and residual goodwill is not amortized, but is tested at least annually for impairment. Our impairment testing for goodwill is performed separately from our impairment testing of indefinite-lived intangibles. Goodwill and indefinite-lived intangibles assets, primarily trademarks and brand names, are tested annually for impairment during the fourth quarter, using the first day of the quarter as the measurement date, or earlier upon the occurrence of certain events or substantive changes in circumstances that indicate the carrying value may not be recoverable. Such conditions may include an economic downturn in a geographic market or a change in the assessment of future operations.
Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows to measure fair value. Assumptions used in the Companys impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with internal projections and operating plans. We believe such assumptions and estimates are also comparable to those that would be used by other marketplace participants.
Impairment assessments are performed at a reporting unit level. For purposes of this assessment, the Companys reporting units are generally its businesses one level below the respective operating segment.
Goodwill impairment is determined using a two-step process. The first step of the process is to compare the fair value of a reporting unit with its carrying value, including goodwill. In performing the first step, the Company calculated fair values of the various reporting units using equal weighting of two methods; one which estimates the discounted cash flows (DCF) of each of the reporting units based on projected earnings in the future (the Income Approach) and one which is based on sales of similar assets in actual transactions (the Market Approach). If the fair value exceeds the carrying value, there is no impairment. If the reporting unit carrying amount exceeds the fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss, if any.
Determining fair value requires the exercise of significant judgment. The more significant judgments and assumptions made to determine the fair value of our reporting units were (1) the amount and timing of expected future cash flows which are based primarily on our estimates of future sales, operating income, industry trends and the regulatory environment of the individual reporting units, (2) the expected long-term growth rates for each of our reporting units which approximate the expected long-term growth rate of the global economy and of the respective industries in which the reporting units operate, (3) discount rates that are used to discount future cash flows to their present values which are based on an assessment of the risk inherent in the future cash flows of the respective reporting units along with various market based inputs, (4) relevant comparable company selection, and (5) calculation of comparable company multiples. There were no changes to the underlying methods used in the current year as compared to the prior year valuations of our reporting units. The DCF analysis utilized in the fourth quarter 2009 impairment test was performed over a ten year time horizon for each reporting unit where the compound growth rates during this period range from approximately 4% to 8% for revenue and from approximately 4% to 12% for operating income. Discount rates were 10.5% for reporting units in the Medical Segment and 13.5% for reporting units in the Aerospace and Commercial segments. A perpetual growth rate of 2.5% was assumed for all reporting units.
In arriving at our estimate of the fair value of each reporting unit, we considered the results of both the DCF and the market comparable methods and concluded the fair value to be the average of the results yielded by the two methods for each reporting unit. Then, the current market capitalization of the Company was reconciled to the sum of the estimated fair values of the individual reporting units, plus a control premium, to ensure the fair value conclusions were reasonable in light of current market capitalization. The control premium implied by our
analysis was approximately 34%, which was deemed to be within a reasonable range of observed average industry control premiums.
No impairment in the carrying value of any of our reporting units was evident as a result of the assessment of their respective fair values as determined under the methodology described above. The fair values of our reporting units whose assets include goodwill, other than the North America reporting unit within the Medical segment, exceed their respective carrying values by 51% to 150%. For the Medical North America reporting unit, the fair value is approximately 18% higher than its carrying value and at approximately $960 million the goodwill attributed to the Medical North America reporting unit is approximately 66% of our total goodwill.
Our expected future growth rates are based on our estimates of future sales, operating income and cash flow and are consistent with our internal budgets and business plans which reflect a modest amount of core revenue growth coupled with the successful launch of new products each year which, together, more than offset volume losses from products that are expected to reach the end of their life cycle. As a result of this analysis, the compound annual growth rate of sales and cash flows over the projected ten year period in the Medical North America reporting unit is estimated to be 4.8% and 4.9%, respectively. Under the income approach, significant changes in assumptions would be required for this reporting unit to fail the step one test. For example, an increase of over one-and-a-quarter percent in the discount rate or a decrease of over 30% percent in the compound annual growth rate of operating income would be required.
Intangible assets are assets acquired that lack physical substance and that meet the specified criteria for recognition apart from goodwill. Intangible assets obtained through acquisitions are comprised mainly of technology, customer relationships, and trade names. The fair value of acquired technology and trade names is estimated by the use of a relief from royalty method, which values an intangible asset by estimating the royalties saved through the ownership of an asset. Under this method, an owner of an intangible asset determines the arms length royalty that likely would have been charged if the owner had to license the asset from a third party. The royalty, which is based on a reasonable rate applied against forecasted sales, is tax-effected and discounted to present value using a discount rate commensurate with the relative risk of achieving the cash flow attributable to the asset. The fair value of acquired customer relationships is estimated by the use of an income approach known as the excess earnings method. The excess earnings method measures economic benefit indirectly by calculating residual profit attributable to an asset after appropriate returns are paid to complementary or contributory assets. The residual profit is tax-effected and discounted to present value at an appropriate discount rate that reflects the risk factors associated with the estimated income stream. Determining the useful life of an intangible asset requires judgment as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives.
Management tests indefinite-lived intangible assets on at least an annual basis, or more frequently if necessary. In connection with the analysis, management tests for impairment by comparing the carrying value of intangible assets to their estimated fair values. Since quoted market prices are seldom available for intangible assets, we utilize present value techniques to estimate fair value. Common among such approaches is the relief from royalty methodology described above, under which management estimates the direct cash flows associated with the intangible asset. Management must estimate the hypothetical royalty rate, discount rate, and residual growth rate to estimate the forecasted cash flows associated with the asset.
Discount rates and perpetual growth rates utilized in the impairment test of indefinite-lived assets during the fourth quarter of 2009 are comparable to the rates utilized in the impairment test of goodwill by segment. Compound annual growth rates in revenues projected to be generated from certain trade names in the Medical Segment ranged from 3.7% to 10.2% and a royalty rate of 4.0% was assumed. The compound annual growth rate in revenues projected to be generated from certain trade names in the Commercial Segment was 2.0% and a royalty rate of 2.0% was assumed. Discount rate assumptions are based on an assessment of the risk inherent
in the future cash flows generated as a result of the respective intangible assets. Assumptions about royalty rates are based on the rates at which similar trademarks or technologies are being licensed in the marketplace.
No impairment in the carrying value of any of our trade names was evident as a result of the assessment of their respective fair values as determined under the methodology described above, nor would impairment be evident had the fair value of each Companys indefinite-lived assets been hypothetically lower than presently estimated by 10% as of September 28, 2009.
We are not required to perform an annual impairment test for long-lived assets, including finite-lived intangible assets (e.g., customer relationships); instead, long-lived assets are tested for impairment upon the occurrence of a triggering event. Triggering events include the likely (i.e., more likely than not) disposal of a portion of such assets or the occurrence of an adverse change in the market involving the business employing the related assets. Significant judgments in this area involve determining whether a triggering event has occurred and re-assessing the reasonableness of the remaining useful lives of finite-lived assets by, among other things, validating customer attrition rates.
In connection with the acquisition of Arrow International, the Company recorded a $30 million charge to operations during 2007 for in-process research and development (IPR&D) assets acquired that the Company determined had no alternative future use in their current state. This amount represents the estimated value based on risk-adjusted cash flows related to in-process projects that had not yet reached technological feasibility and had no alternative future uses as of the date of the acquisition. The primary basis for determining the technological feasibility of these projects is obtaining regulatory approval to market the underlying products.
The value assigned to the acquired in-process technology was determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to their present value. The revenue projections used to value the acquired in-process research and development were based on estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by us and our competitors. The resulting net cash flows from such projects were based on our estimates of cost of sales, operating expenses, and income taxes from such projects.
The rate of 14 percent utilized to discount the net cash flows to their present value was based on estimated cost of capital calculations and the implied rate of return from the Companys acquisition model plus a risk premium. Due to the nature of the forecasts and the risks associated with the developmental projects, appropriate risk-adjusted discount rates were used for the in-process research and development projects. The discount rates are based on the stage of completion and uncertainties surrounding the successful development of the purchased in-process technology projects.
The purchased in-process technology of Arrow relates to research and development projects in the Central Venus Access Catheters, Peripherally Inserted Catheters and Specialty Care Catheters product families.
We provide a range of benefits to eligible employees and retired employees, including pensions and postretirement healthcare. Several statistical and other factors which are designed to project future events are used in calculating the expense and liability related to these plans. These factors include actuarial assumptions about discount rates, expected rates of return on plan assets, compensation increases, turnover rates and healthcare cost trend rates. We review the actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when appropriate.
The weighted average assumptions for U.S. and foreign plans used in determining net benefit cost were as follows:
Significant differences in our actual experience or significant changes in our assumptions may materially affect our pension and other postretirement obligations and our future expense. The following table shows the sensitivity to changes in the weighted average assumptions:
We warrant to the original purchaser of certain of our products that we will, at our option, repair or replace, without charge, such products if they fail due to a manufacturing defect. Warranty periods vary by product. We have recourse provisions for certain products that would enable recovery from third parties for amounts paid under the warranty. We accrue 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. Our estimated product warranty liability was $12.1 million and $17.1 million at December 31, 2009 and December 31, 2008, respectively.
We estimate the fair value of share-based awards on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods. Share-based compensation expense is measured using a multiple point Black-Scholes option pricing model that takes into account highly subjective and complex assumptions. The expected life of options granted is derived from the vesting period of the award, as well as historical exercise behavior, and represents the period of time that options granted are expected to be outstanding. Expected volatilities are based on a blend of historical volatility and implied volatility derived from publicly traded options to purchase our common stock, which we believe is more reflective of the market conditions and a better indicator of expected volatility than solely using historical volatility. The risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of the option.
Our annual provision for income taxes and determination of the deferred tax assets and liabilities require management to assess uncertainties, make judgments regarding outcomes and utilize estimates. We conduct a broad range of operations around the world, subjecting us to complex tax regulations in numerous
international taxing jurisdictions, resulting at times in tax audits, disputes and potential litigation, the outcome of which is uncertain. Management must make judgments about such uncertainties and determine estimates of our tax assets and liabilities. Deferred tax assets and liabilities are measured and recorded using current enacted tax rates, which the Company expects will apply to taxable income in the years in which those temporary differences are recovered or settled. The likelihood of a material change in the Companys expected realization of these assets is dependent on future taxable income, its ability to use foreign tax credit carryforwards and carrybacks, final U.S. and foreign tax settlements, and the effectiveness of its tax planning strategies in the various relevant jurisdictions. While management believes that its judgments and interpretations regarding income taxes are appropriate, significant differences in actual experience may require future adjustments to our tax assets and liabilities and such adjustments could be material.
We are also required to assess the realizability of our deferred tax assets. We evaluate all positive and negative evidence and use judgments regarding past and future events, including operating results and available tax planning strategies that could be implemented to realize the deferred tax assets to help determine when it is more likely than not that all or some portion of our deferred tax assets may not be realized. Based on this assessment, we evaluate the need for, and amount of, valuation allowances to offset future tax benefits that may not be realized. To the extent facts and circumstances change in the future, adjustments to the valuation allowances may be required.
The valuation allowance for deferred tax assets of $49.2 million and $57.9 million at December 31, 2009 and December 31, 2008, respectively, relates principally to the uncertainty of the utilization of certain deferred tax assets, primarily tax loss and credit carryforwards in various jurisdictions. We believe that we will generate sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax asset. The valuation allowance was calculated in accordance with the provisions under ASC topic 740 Income Taxes, 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. The valuation allowance decrease in 2009 was primarily attributable to the sale of entities associated with Power Systems operations, utilization of certain foreign net operating losses and movement in unrealized gain/loss in relation to pension valuation.
Significant judgment is required in determining income tax provisions and in evaluating tax positions. We establish additional provisions for income taxes when, despite the belief that tax positions are fully supportable, there remain certain positions that do not meet the minimum probability threshold, as defined under the Income Taxes topic, which is a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority. In the normal course of business, the Company and its subsidiaries are examined by various Federal, State and foreign tax authorities. We regularly assess the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of our provision for income taxes. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, the current tax liability and deferred taxes in the period in which the facts that give rise to a revision become known. Specifically, we are currently in the midst of examinations by the U.S. and German taxing authorities with respect to our income tax returns for those countries for various tax years. The ultimate outcomes of the examinations of these returns could result in increases or decreases to our recorded tax liabilities, which could impact our financial results.
See Note 14 to our consolidated financial statements in this Annual Report on Form 10-K for additional information regarding the Companys uncertain tax positions.
The following amendments to existing accounting standards have been issued but have not yet been adopted by the Company: Amendment to Transfers and Servicing, Amendment to Consolidation, Amendment to Software, Amendment to Revenue Recognition and Amendment to Fair Value Measurements and Disclosures. See Note 2 for further discussion on these amendments and their effective dates.
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 earnings.
We are exposed to changes in interest rates as a result of our borrowing activities and our cash balances. An interest rate swap is used to manage a portion of our interest rate risk. The table below is an analysis of the amortization and related interest rates by year of maturity for our fixed and variable rate debt obligations. Variable interest rates shown below are weighted average rates of the debt portfolio based on December 31, 2009 rates. For the swap, the notional amount and the related interest rate is shown by year of maturity. The fair value, net of tax, of the interest rate swap as of December 31, 2009 was a loss of $17.6 million reflected in accumulated other comprehensive income.
A 1.0% change in variable interest rates would adversely or positively impact our expected net earnings by approximately $1.8 million, for the year ended December 31, 2010.
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. These are primarily contracts to buy or sell a foreign currency against the U.S. dollar. The fair value of the open forward contracts as of December 31, 2009 was a gain of $0.3 million. The following table presents our open forward currency contracts as of December 31, 2009, which mature in 2010. Forward contract notional amounts presented below are expressed in the stated currencies (in thousands). The total notional amount for all contracts translates to approximately $74.8 million.
Forward Currency Contracts:
A strengthening of 10% in the value of the U.S. dollar against foreign currencies would, on a combined basis, adversely impact the translation of our non-US subsidiary net earnings and transactions in currencies other than the functional currency of certain subsidiaries by approximately $9.5 million, for the year ended December 31, 2010.
The financial statements and supplementary data required by this Item are included herein, commencing on page F-1.
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
(b) Managements Report on Internal Control Over Financial Reporting
Our managements report on internal control over financial reporting is set forth on page F-2 of this Annual Report on Form 10-K and is incorporated by reference herein.
(c) Change in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
For the information required by this Item 10, other than with respect to our Executive Officers, see Election Of Directors, Nominees for Election to the Board of Directors, Corporate Governance and Section 16(a) Beneficial Ownership Reporting Compliance, in the Proxy Statement for our 2010 Annual Meeting, which information is incorporated herein by reference. The Proxy Statement for our 2010 Annual Meeting will be filed within 120 days of the close of our fiscal year.
For the information required by this Item 10 with respect to our Executive Officers, see Part I of this report on pages 11 12, which information is incorporated herein by reference.
For the information required by this Item 11, see Executive Compensation, Compensation Committee Report on Executive Compensation and Compensation Committee Interlocks and Insider Participation in the Proxy Statement for our 2010 Annual Meeting, which information is incorporated herein by reference.
For the information required by this Item 12 with respect to beneficial ownership of our common stock, see Security Ownership of Certain Beneficial Owners and Management in the Proxy Statement for our 2010 Annual Meeting, which information is incorporated herein by reference.
The following table sets forth certain information as of December 31, 2009 regarding our 1990 Stock Compensation Plan, 2000 Stock Compensation Plan and 2008 Stock Incentive Plan:
For the information required by this Item 13, see Certain Transactions and Corporate Governance in the Proxy Statement for our 2010 Annual Meeting, which information is incorporated herein by reference.
For the information required by this Item 14, see Audit and Non-Audit Fees and Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Registered Public Accounting Firm in the Proxy Statement for our 2010 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 Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized as of the date indicated below.
Jeffrey P. Black
Chairman and Chief Executive Officer
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.
Richard A. Meier
Executive Vice President and Chief Financial Officer
Charles E. Williams
Corporate Controller and Chief Accounting Officer
Dated: February 24, 2010
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The management of Teleflex Incorporated and its subsidiaries (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Companys internal control over financial reporting as of December 31, 2009. In making this assessment, management used the framework established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As a result of this assessment and based on the criteria in the COSO framework, management has concluded that, as of December 31, 2009, the Companys internal control over financial reporting was effective.
The effectiveness of the Companys internal control over financial reporting as of December 31, 2009 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
February 24, 2010
To the Board of Directors and Shareholders of Teleflex Incorporated:
In our opinion, the consolidated financial statements listed in the accompanying index appearing on page F-1 present fairly, in all material respects, the financial position of Teleflex Incorporated and its subsidiaries at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index appearing on page F-1 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Managements Report on Internal Control over Financial Reporting, appearing on page F-2. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Companys internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
February 24, 2010
TELEFLEX INCORPORATED AND SUBSIDIARIES
The accompanying notes are an integral part of the consolidated financial statements.
TELEFLEX INCORPORATED AND SUBSIDIARIES
The accompanying notes are an integral part of the consolidated financial statements.
TELEFLEX INCORPORATED AND SUBSIDIARIES
The accompanying notes are an integral part of the consolidated financial statements.
TELEFLEX INCORPORATED AND SUBSIDIARIES