EX-13 3 w84287exv13.txt TELEFLEX INCORPORATED ANNUAL REPORT . . . Teleflex Incorporated and Subsidiaries EXHIBIT 13 CONSOLIDATED STATEMENT OF INCOME
Year ended ---------------------------------------------------------------------------------------------------- DECEMBER 29, December 30, December 31, 2002 2001 2000 ---------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share) REVENUES $ 2,076,229 $ 1,905,004 $ 1,764,482 ---------------------------------------------------------------------------------------------------- COSTS AND EXPENSES Materials, labor and other product costs 1,523,779 1,369,713 1,274,203 Selling, engineering and administrative expenses 365,024 347,131 311,278 Interest expense, net 25,023 28,465 20,787 Non-operating gains (10,085) -- -- ---------------------------------------------------------------------------------------------------- 1,903,741 1,745,309 1,606,268 ---------------------------------------------------------------------------------------------------- Income before taxes 172,488 159,695 158,214 Taxes on income 47,222 47,384 48,990 ---------------------------------------------------------------------------------------------------- NET INCOME $ 125,266 $ 112,311 $ 109,224 ---------------------------------------------------------------------------------------------------- EARNINGS PER SHARE Basic $ 3.19 $ 2.90 $ 2.86 Diluted $ 3.15 $ 2.86 $ 2.83 ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 17 Teleflex Incorporated and Subsidiaries CONSOLIDATED BALANCE SHEET
Year ended -------------------------------------------------------------------------------------------------- DECEMBER 29, December 30, 2002 2001 -------------------------------------------------------------------------------------------------- (Dollars in thousands) ASSETS Current assets Cash and cash equivalents $ 44,494 $ 46,900 Accounts receivable, less allowance for doubtful accounts, 2002 - $10,059; 2001 - $9,004 401,888 363,674 Inventories 365,535 308,775 Prepaid expenses 25,978 28,128 -------------------------------------------------------------------------------------------------- Total current assets 837,895 747,477 -------------------------------------------------------------------------------------------------- Plant assets Land and buildings 230,261 204,915 Machinery and equipment 856,793 774,796 -------------------------------------------------------------------------------------------------- 1,087,054 979,711 Less accumulated depreciation 482,813 414,016 -------------------------------------------------------------------------------------------------- Net plant assets 604,241 565,695 Goodwill 257,999 223,911 Intangibles and other assets 68,810 56,444 Investments in affiliates 44,439 41,493 -------------------------------------------------------------------------------------------------- $ 1,813,384 $ 1,635,020 -------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable $ 148,254 $ 170,257 Current portion of long-term borrowings 34,522 41,865 Accounts payable 141,786 122,518 Accrued expenses 135,152 129,287 Income taxes payable 38,769 31,499 -------------------------------------------------------------------------------------------------- Total current liabilities 498,483 495,426 Long-term borrowings 240,123 228,180 Deferred income taxes and other 162,497 133,271 -------------------------------------------------------------------------------------------------- Total liabilities 901,103 856,877 -------------------------------------------------------------------------------------------------- Shareholders' equity Common shares, $1 par value Issued: 2002 - 39,398,036 shares; 2001 - 38,932,948 shares 39,398 38,933 Additional paid-in capital 112,243 96,143 Retained earnings 786,674 689,269 Accumulated other comprehensive income (26,034) (46,202) -------------------------------------------------------------------------------------------------- Total shareholders' equity 912,281 778,143 -------------------------------------------------------------------------------------------------- $ 1,813,384 $ 1,635,020 --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 18 Teleflex Incorporated and Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended ----------------------------------------------------------------------------------------------------------- DECEMBER 29, December 30, December 31, 2002 2001 2000 ----------------------------------------------------------------------------------------------------------- (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 125,266 $ 112,311 $ 109,224 Adjustments to reconcile net income to cash flows from operating activities: Depreciation expense 89,435 74,382 62,728 Amortization expense 5,682 18,019 14,689 Deferred income taxes 7,281 9,682 8,972 (Increase) decrease in accounts receivable (14,805) 3,287 (6,620) (Increase) in inventories (25,250) (14,621) (18,150) Decrease (increase) in prepaid expenses 3,138 (4,563) 1,030 Increase (decrease) in accounts payable and accrued expenses 4,444 (9,497) 15,297 Increase (decrease) in income taxes payable 5,394 (743) 2,245 ----------------------------------------------------------------------------------------------------------- 200,585 188,257 189,415 ----------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term borrowings 53,000 75,000 46,390 Reduction in long-term borrowings (35,040) (46,304) (64,706) (Decrease) increase in notes payable and current borrowings (74,167) 74,531 13,902 Proceeds from stock compensation plans 9,846 8,228 5,258 Dividends (27,861) (25,586) (22,163) ----------------------------------------------------------------------------------------------------------- (74,222) 85,869 (21,319) ----------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for plant assets (87,163) (97,744) (80,652) Payments for businesses acquired (57,229) (170,700) (87,846) Proceeds from sale of businesses and assets 11,419 -- 17,812 Investments in affiliates (219) (766) (4,423) Other 4,423 (3,155) 3,112 ----------------------------------------------------------------------------------------------------------- (128,769) (272,365) (151,997) ----------------------------------------------------------------------------------------------------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,406) 1,761 16,099 Cash and cash equivalents at the beginning of the year 46,900 45,139 29,040 ----------------------------------------------------------------------------------------------------------- Cash and cash equivalents at the end of the year $ 44,494 $ 46,900 $ 45,139 -----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 19 Teleflex Incorporated and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Year ended ----------------------------------------------------------------------------------------------------- DECEMBER 29, December 30, December 31, 2002 2001 2000 ----------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share) COMMON SHARES Balance, beginning of year $ 38,933 $ 38,344 $ 38,019 Shares issued under compensation plans 465 589 325 ----------------------------------------------------------------------------------------------------- Balance, end of year 39,398 38,933 38,344 ----------------------------------------------------------------------------------------------------- ADDITIONAL PAID-IN CAPITAL Balance, beginning of year 96,143 79,546 73,786 Shares issued under compensation plans 16,100 16,597 5,760 ----------------------------------------------------------------------------------------------------- Balance, end of year 112,243 96,143 79,546 ----------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance, beginning of year 689,269 602,544 515,483 Net income 125,266 112,311 109,224 Cash dividends (27,861) (25,586) (22,163) ----------------------------------------------------------------------------------------------------- Balance, end of year 786,674 689,269 602,544 ----------------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE INCOME Cumulative translation adjustment (16,808) (44,404) (30,012) Financial instruments marked to market (3,622) (1,798) -- Minimum pension liability adjustment, net of tax (5,604) -- -- ----------------------------------------------------------------------------------------------------- Balance, end of year (26,034) (46,202) (30,012) ----------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY $ 912,281 $ 778,143 $ 690,422 ----------------------------------------------------------------------------------------------------- CASH DIVIDENDS PER SHARE $ .71 $ .66 $ .58 ----------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME Net income $ 125,266 $ 112,311 $ 109,224 Financial instruments marked to market (1,824) (1,798) -- Cumulative translation adjustment 27,596 (14,392) (9,137) Minimum pension liability adjustment, net of tax (5,604) -- -- Unrealized holding gain on securities -- -- 5,520 Reclassification for gain included in net income -- -- (1,671) ----------------------------------------------------------------------------------------------------- Total comprehensive income $ 145,434 $ 96,121 $ 103,936 -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 20 Teleflex Incorporated and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share) DESCRIPTION OF BUSINESS Teleflex Incorporated designs, manufactures and distributes engineered products and services for the automotive, marine, industrial, medical and aerospace markets worldwide. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of Teleflex Incorporated and its subsidiaries. These consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include management's estimates and assumptions that affect the recorded amounts. Cash and cash equivalents include funds invested in a variety of liquid short-term investments with an original maturity of three months or less. Inventories are stated principally at the lower of average cost or market and consist of the following:
2002 2001 -------------------------------------------------------------------------------- Raw materials $154,552 $133,364 Work-in-process 59,596 44,530 Finished goods 151,387 130,881 -------------------------------------------------------------------------------- $365,535 $308,775 --------------------------------------------------------------------------------
Plant assets include the cost of additions and those improvements which increase the capacity or lengthen the useful lives of the assets. Repairs and maintenance costs are expensed as incurred. With minor exceptions, straight-line composite lives for depreciation of plant assets are as follows: buildings 20 to 40 years; machinery and equipment 8 to 12 years. Intangible assets consisting of intellectual property, customer lists and distribution rights are being amortized over periods from 5 to 30 years with a weighted average amortization period of 12 years. Assets and liabilities of non-domestic subsidiaries are translated at the rates of exchange at the balance sheet date; income and expenses are translated at the average rates of exchange prevailing during the year. The related translation adjustments are accumulated in shareholders' equity. Investments in companies in which ownership interests range from 20% to 50% and the company exercises significant influence over operating and financial policies are accounted for using the equity method. Revenues are recognized when the earnings process is complete. This generally occurs when products are shipped in accordance with terms of agreements, title and risk of loss transfers to customers, collection is probable, and pricing is fixed or determinable. ACQUISITIONS AND DISPOSITIONS During 2002 and 2001, the company acquired various smaller businesses across several markets for cash of $47,229 and $35,700, respectively. In February 2001, the company acquired Morse Controls for $145,000 in cash, $10,000 of which was paid in 2002. For 2002 and 2001, liabilities of $30,981 and $45,945 were assumed in connection with the acquisitions. The assets, liabilities and operating results of these businesses are included in the company's financial statements from their dates of acquisition. Financial position and results of operation would not have been materially different had the acquisitions occurred at the beginning of the years acquired. In 2002, the company sold 50% of one of its investments. In addition, the company sold two minor non-core businesses and also received insurance proceeds resulting in a $10,085 gain, which is reported in the statement of income as non-operating gains. GOODWILL AND OTHER INTANGIBLE ASSETS Beginning in 2002, the company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142), which requires that goodwill no longer be amortized, but requires testing for impairment annually. Accordingly, the company discontinued the amortization of goodwill effective December 31, 2001. The company determined that goodwill impairment was not incurred in 2002. A reconciliation of previously reported net income and earnings per share to the amounts adjusted for the exclusion of goodwill amortization net of the related income tax effect is as follows:
2001 2000 -------------------------------------------------------------------------------- Reported net income $ 112,311 $ 109,224 Add: Goodwill amortization, net of tax 9,482 7,827 -------------------------------------------------------------------------------- Adjusted net income $ 121,793 $ 117,051 -------------------------------------------------------------------------------- Basic earnings per share $ 2.90 $ 2.86 Add: Goodwill amortization, net of tax per basic share $ .24 $ .20 -------------------------------------------------------------------------------- Adjusted basic earnings per share $ 3.14 $ 3.06 -------------------------------------------------------------------------------- Diluted earnings per share $ 2.86 $ 2.83 Add: Goodwill amortization, net of tax per diluted share .24 .20 -------------------------------------------------------------------------------- Adjusted diluted earnings per share $ 3.10 $ 3.03 --------------------------------------------------------------------------------
Changes in the carrying amount of goodwill for 2002 are as follows:
COMMERCIAL MEDICAL AEROSPACE TOTAL -------------------------------------------------------------------------------- December 30, 2001 $ 79,048 $120,551 $ 24,312 $223,911 Goodwill acquired 12,371 15,319 1,684 29,374 Translation adjustment 3,147 1,402 165 4,714 -------------------------------------------------------------------------------- December 29, 2002 $ 94,566 $137,272 $ 26,161 $257,999 --------------------------------------------------------------------------------
21 Teleflex Incorporated and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share) Intangible assets consist of the following at December 29, 2002:
GROSS CARRYING ACCUMULATED AMOUNTS AMORTIZATION -------------------------------------------------------------------------------- Intellectual property $33,378 $ 6,211 Customer lists 21,000 1,580 Distribution rights 19,646 6,595
Amortization expense related to those intangible assets was $5,682 for 2002. Estimated annual amortization expense for each of the five succeeding years is as follows: 2003 $ 6,387 2004 6,060 2005 5,260 2006 4,551 2007 4,150
BORROWINGS AND LEASES
2002 2001 -------------------------------------------------------------------------------- Senior notes at an average fixed rate of 6.6%, due in installments through 2012 $ 118,500 $ 76,000 Term loan notes, primarily Euro, at an average fixed rate of 5.4%, with an average maturity of two and one-half years 133,791 159,198 Other debt, mortgage notes and capital lease obligations, at interest rates ranging from 3% to 8% 22,354 34,847 -------------------------------------------------------------------------------- 274,645 270,045 Current portion of borrowings (34,522) (41,865) -------------------------------------------------------------------------------- $ 240,123 $ 228,180 --------------------------------------------------------------------------------
The various senior note agreements provide for the maintenance of certain financial ratios and limit the repurchase of the company's stock and payment of cash dividends. Under the most restrictive of these provisions, $243,000 of retained earnings was available for dividends at December 29, 2002. Notes payable consists of demand loans due to banks of $70,106 at an average interest rate of 4.5%, loans under committed facilities of $45,325 at an average rate of 4.7% and a $32,823 loan secured by certain accounts receivable at an interest rate of 1.8%. In addition, the company has approximately $330,000 available under several interest rate alternatives in unused lines of credit. Interest expense in 2002, 2001 and 2000 did not differ materially from interest paid, nor did the carrying value of year end long-term borrowings differ materially from fair value. The aggregate amounts of debt, including capital leases, maturing in each of the four years after 2003 are as follows: 2004 - $86,488; 2005 - $49,525; 2006 - $23,316; 2007 - $7,625. The company has entered into certain operating leases which require minimum annual payments as follows: 2003 - $31,048; 2004 - $27,253; 2005 - $22,026; 2006 - $17,626; 2007 - $12,018. The total rental expense for all operating leases was $36,347, $33,934 and $29,640 in 2002, 2001 and 2000, respectively. The company warrants the reliability of its products under various arrangements with its customers. Warranty expense and settlements are approximately $5,000 in 2002 and the product warranty liability is $7,500 at December 29, 2002. FINANCIAL INSTRUMENTS The company uses forward rate contracts to manage currency transaction exposure and interest rate swaps for exposure to interest rate changes. All derivative financial instruments are recorded on the balance sheet at fair market value and subsequent changes in value are recognized in the statement of income or as part of comprehensive income. Approximately $1,343 of the amount in accumulated other comprehensive income would be reclassified as an expense to the statement of income during 2003 should foreign currency exchange rates and interest rates remain at December 29, 2002 levels. The following table provides financial instruments activity included as part of accumulated other comprehensive income:
2002 2001 -------------------------------------------------------------------------------- Liability at beginning of year $(1,798) $ (200) Additions and revaluations (2,955) (5,675) Clearance of hedge results to income 1,131 4,077 -------------------------------------------------------------------------------- Liability at end of year $(3,622) $(1,798) --------------------------------------------------------------------------------
22 SHAREHOLDERS' EQUITY AND STOCK COMPENSATION PLANS The authorized capital of the company is comprised of 100,000,000 common shares, $1 par value, and 500,000 preference shares. No preference shares were outstanding during the last three years. Basic earnings per share is computed by dividing net income by the average number of common shares outstanding during the period. Diluted earnings per share is computed in the same manner except that the weighted average number of shares is increased for dilutive securities. The difference between basic and diluted weighted average common shares results from the assumption that dilutive stock options were exercised. The company has stock-based compensation plans that provide for the granting of incentive and non-qualified options to officers and key employees to purchase shares of common stock at the market price of the stock on the dates options are granted. Outstanding options generally are exercisable three to five years after the date of the grant and expire no more than ten years after the grant. No stock-based employee compensation cost related to stock options is reflected in net income. The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation:
2002 2001 2000 -------------------------------------------------------------------------------- Net income, as reported $ 125,266 $ 112,311 $ 109,224 Deduct: Stock-based employee compensation expense using a fair value method (3,497) (2,092) (2,238) -------------------------------------------------------------------------------- Pro forma net income $ 121,769 $ 110,219 $ 106,986 -------------------------------------------------------------------------------- Earnings per share: Basic As reported $ 3.19 $ 2.90 $ 2.86 Pro forma $ 3.10 $ 2.84 $ 2.80 Diluted As reported $ 3.15 $ 2.86 $ 2.83 Pro forma $ 3.08 $ 2.83 $ 2.79 --------------------------------------------------------------------------------
The fair value for options granted in 2002, 2001 and 2000 was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
2002 2001 2000 -------------------------------------------------------------------------------- Risk-free interest rate 4.0% 5.3% 6.5% Expected life of option 5.2 YRS. 7.5 yrs. 7.5 yrs Expected dividend yield 1.7% 2.0% 2.0% Expected volatility 29.0% 29.0% 28.0% --------------------------------------------------------------------------------
Options exercisable and shares available for future grant at year end are:
2002 2001 2000 -------------------------------------------------------------------------------- Options exercisable 932,784 894,799 1,035,864 Weighted average option price per share of options exercisable $ 32.25 $ 28.85 $ 25.13 Weighted average fair value of options granted during the year $ 13.86 $ 14.51 $ 10.56 Shares available for grant 3,092,323 3,521,763 4,011,948 --------------------------------------------------------------------------------
A summary of the status and changes of shares subject to options outstanding and the related average prices per share follows:
SHARES AVERAGE SUBJECT OPTION PRICE TO OPTIONS PER SHARE -------------------------------------------------------------------------------- Outstanding December 31, 2000 1,976,914 $ 29.13 -------------------------------------------------------------------------------- Granted 514,150 $ 42.43 Exercised (371,290) $ 22.01 Cancelled (83,580) -------------------------------------------------------------------------------- Outstanding December 30, 2001 2,036,194 $ 33.65 -------------------------------------------------------------------------------- Granted 509,900 $ 49.02 Exercised (322,510) $ 29.66 Cancelled (87,760) -------------------------------------------------------------------------------- Outstanding December 29, 2002 2,135,824 $ 37.92 --------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at December 29, 2002: -------------------------------------------------------------------------------- Range of exercise prices $14-$25 $26-$35 $36-$48 -------------------------------------------------------------------------------- Options outstanding 283,449 481,615 1,370,760 Weighted-average remaining contractual life 2.5 yrs 6.3 yrs 8.3 yrs Weighted-average exercise price of options outstanding $ 20.26 $ 29.63 $ 44.48 Options exercisable 283,449 265,445 383,890 Weighted-average exercise price of options exercisable $ 20.26 $ 30.75 $ 42.14
23 Teleflex Incorporated and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share) INCOME TAXES The provision for income taxes consists of the following:
2002 2001 2000 -------------------------------------------------------------------------------- Current Federal $22,968 $25,415 $27,842 State 2,725 2,902 3,269 Foreign 14,248 9,385 8,907 Deferred 7,281 9,682 8,972 -------------------------------------------------------------------------------- $47,222 $47,384 $48,990 --------------------------------------------------------------------------------
The deferred income taxes provided and the balance sheet amounts of $61,653 in 2002 and $60,785 in 2001 relate substantially to the methods of accounting for depreciation. Income taxes paid were $36,879, $36,170 and $36,961 in 2002, 2001 and 2000, respectively.
2002 2001 2000 -------------------------------------------------------------------------------- Tax at U.S. statutory rate 35.0% 35.0% 35.0% State income taxes 1.0 1.2 1.3 Foreign income taxes (4.5) (4.6) (3.9) Export sales benefit (1.7) (1.7) (1.5) Other (2.4) (.2) .1 -------------------------------------------------------------------------------- Effective income tax rate 27.4% 29.7% 31.0% --------------------------------------------------------------------------------
Other in the above table for 2002 includes a reduction in the effective tax rate from favorable tax settlements of $3,100. PENSION AND OTHER POSTRETIREMENT BENEFITS The company provides defined benefit pension and postretirement plans to eligible employees. Net benefit cost consists of the following:
Pension Other Benefits -------------------------------------------------------------------------------- 2002 2001 2002 2001 -------------------------------------------------------------------------------- Service cost $ 4,618 $ 4,303 $ 324 $ 276 Interest cost 8,330 7,648 1,584 1,095 Actual return 5,347 (2,282) -- -- Net amortization and deferral (14,239) (5,560) 612 357 Foreign plans 1,215 933 -- -- -------------------------------------------------------------------------------- Net benefit cost $ 5,271 $ 5,042 $ 2,520 $ 1,728 --------------------------------------------------------------------------------
Summarized information on the company's postretirement plans is as follows:
Pension Other Benefits -------------------------------------------------------------------------------- 2002 2001 2002 2001 -------------------------------------------------------------------------------- Benefit obligations, beginning of year $ 108,054 $ 98,505 $ 22,790 $ 16,418 Service cost 4,618 4,303 324 276 Interest cost 8,330 7,648 1,584 1,095 Amendments 983 (70) (1,100) (752) Actuarial loss (gain) 12,266 (3,122) 5,065 5,540 Acquisitions 1,443 6,032 -- 1,375 Currency translation 3,661 (831) -- -- Benefits paid (5,880) (5,344) (1,683) (1,162) Foreign plans 1,215 933 -- -- -------------------------------------------------------------------------------- Benefit obligations, end of year 134,690 108,054 26,980 22,790 -------------------------------------------------------------------------------- Fair value of plan assets, beginning of year 94,229 84,694 -- -- Actual return (5,347) 2,282 -- -- Acquisitions -- 9,484 -- -- Contributions 2,961 2,771 -- -- Benefits paid (5,192) (5,002) -- -- -------------------------------------------------------------------------------- Fair value of plan assets, end of year 86,651 94,229 -- -- -------------------------------------------------------------------------------- Funded status (48,039) (13,825) (26,980) (22,790) Unrecognized transition (asset) obligation (529) (666) 4,184 4,603 Unrecognized net actuarial loss (gain) 20,098 (5,810) 9,663 5,202 Unrecognized prior service cost 2,450 3,637 (55) (85) -------------------------------------------------------------------------------- Net amount recognized $ (26,020) $ (16,664) $ (13,188) $ (13,070) -------------------------------------------------------------------------------- Amounts recognized in the consolidated balance sheet: Accrued benefit liability $ (37,911) $ (16,664) $ (13,188) $ (13,070) Intangible asset 2,852 -- -- -- Accumulated other comprehensive income 9,039 -- -- -- -------------------------------------------------------------------------------- Net amount recognized $ (26,020) $ (16,664) $ (13,188) $ (13,070) --------------------------------------------------------------------------------
24 Weighted average assumptions as of end of year:
Pension Other Benefits -------------------------------------------------------------------------------- 2002 2001 2002 2001 -------------------------------------------------------------------------------- Discount rate 7.0% 7.5% 7.0% 7.7% Expected return on plan assets 8.75% 9.0% -- -- Rate of compensation increase 4.5% 5.0% -- --
The above assumptions are for U.S. plans only. Non-U.S. plans are primarily unfunded and reflect assumptions applicable to each country. The assumed health care trend rates used in determining other benefits are 7.5% decreasing gradually to 4.5% over four years. Increasing the trend rate by 1% would increase the benefit obligation by $2,127 and would increase the 2002 benefit expense by $214. Decreasing the trend rate by 1% would decrease the benefit obligation by $1,752 and would decrease the 2002 benefit expense by $168. BUSINESS SEGMENTS AND OTHER INFORMATION The company has determined that its reportable segments are Commercial, Medical and Aerospace. This assessment reflects the aggregation of businesses which have similar products and services, manufacturing processes, customers and distribution channels and is consistent with both internal management reporting and resource and budgetary allocations. Reference is made to page 26 (excluding book value per share and return on average shareholders' equity) for a summary of operations by business segment. A summary of revenues, identifiable assets and operating profit (adjusted to reflect the exclusion of goodwill amortization in 2001 and 2000) relating to the company's non-domestic operations, substantially European, and export sales is as follows:
2002 2001 2000 -------------------------------------------------------------------------------- Revenues $907,790 $752,579 $675,787 Identifiable assets $781,358 $652,924 $580,756 Operating profit $ 90,547 $ 70,815 $ 63,270 Export sales $220,593 $234,800 $196,500 --------------------------------------------------------------------------------
REPORT OF INDEPENDENT [PRICEWATERHOUSECOOPERS LLP LOGO] ACCOUNTANTS To the Board of Directors and Shareholders Teleflex Incorporated In our opinion, the consolidated financial statements appearing on pages 17 through 25 of this Annual Report present fairly, in all material respects, the financial position of Teleflex Incorporated and its subsidiaries at December 29, 2002 and December 30, 2001 and the results of their operations and cash flows for each of the three years in the period ended December 29, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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. We believe that our audits provide a reasonable basis for our opinion. As described in the notes to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" on December 31, 2001. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Philadelphia, Pennsylvania February 12, 2003
-------------------------------------------------------------------------------- QUARTERLY DATA (unaudited) -------------------------------------------------------------------------------- 2002 FIRST SECOND THIRD FOURTH -------------------------------------------------------------------------------- Revenues $508,396 $546,306 $508,238 $513,289 Gross profit 135,106 148,916 132,489 135,939 Net income 30,418 33,536 26,280 35,032 Basic earnings per share .78 .85 .67 .89 Diluted earnings per share .77 .84 .66 .88
-------------------------------------------------------------------------------- 2001 First Second Third Fourth -------------------------------------------------------------------------------- Revenues $470,734 $503,004 $466,014 $465,252 Gross profit 135,233 143,535 128,592 127,931 Net income 29,981 31,061 22,102 29,167 Basic earnings per share .78 .80 .57 .75 Diluted earnings per share .77 .79 .56 .74
25 Teleflex Incorporated and Subsidiaries SELECTED FINANCIAL AND BUSINESS SEGMENT DATA
2002 2001 2000 ------------------------------------------------------------------------------------------ Revenues Commercial $ 1,085,497 $ 908,183 $ 860,201 Medical 448,677 429,338 411,815 Aerospace 542,055 567,483 492,466 Other income -- -- -- ------------------------------------------------------------------------------------------ $ 2,076,229 $ 1,905,004 $ 1,764,482 ------------------------------------------------------------------------------------------ Operating profit(a) Commercial $ 99,841 $ 86,702 $ 89,325 Medical 72,313 71,177 64,105 Aerospace 34,176 61,822 53,750 ------------------------------------------------------------------------------------------ 206,330 219,701 207,180 Interest expense, net 25,023 28,465 20,787 Corporate expenses, net of other income 18,904 18,640 17,508 Goodwill amortization expense (a) -- 12,901 10,671 Non-operating gain (10,085) -- -- ------------------------------------------------------------------------------------------ Income before taxes 172,488 159,695 158,214 Taxes on income 47,222 47,384 48,990 ------------------------------------------------------------------------------------------ Net income $ 125,266 $ 112,311 $ 109,224 ------------------------------------------------------------------------------------------ Basic earnings per share $ 3.19 $ 2.90 $ 2.86 Diluted earnings per share $ 3.15 $ 2.86 $ 2.83 Cash dividends per share $ .71 $ .66 $ .58 Average common shares outstanding 39,251 38,752 38,203 Average shares, assuming dilution 39,786 39,280 38,633 Net income as a percent of revenues 6.0% 5.9% 6.2% Average number of employees 17,746 16,927 15,986 Identifiable assets Commercial $ 769,399 $ 683,188 $ 513,217 Medical $ 497,243 $ 442,648 $ 424,183 Aerospace $ 446,592 $ 405,315 $ 360,123 Capital expenditures Commercial $ 43,220 $ 40,768 $ 35,528 Medical $ 18,637 $ 20,688 $ 19,592 Aerospace $ 24,586 $ 35,681 $ 24,815 Depreciation and amortization(a) Commercial $ 42,921 $ 34,897 $ 25,945 Medical $ 22,951 $ 18,537 $ 17,126 Aerospace $ 27,533 $ 25,235 $ 22,800 Long-term borrowings $ 240,123 $ 228,180 $ 220,557 Shareholders' equity $ 912,281 $ 778,143 $ 690,422 Book value per share $ 23.16 $ 19.99 $ 18.01 Return on average shareholders' equity 14.8% 15.3% 16.9% ------------------------------------------------------------------------------------------
(a) Goodwill amortization from 2001 and prior has been reclassified as a separate line item to facilitate comparison with 2002 results. 26
1999 1998 1997 1996 1995 1994 1993 1992 -------------------------------------------------------------------------------------------------------------------------- (Dollars and shares in thousands, except per share and employee data) $ 757,720 $ 649,644 $ 497,366 $ 422,443 $ 403,637 $ 356,708 $ 284,106 $ 210,464 372,282 338,305 323,114 307,555 293,341 253,020 180,623 179,376 471,067 449,629 325,293 201,185 215,711 202,944 202,067 177,292 -- -- -- -- -- -- -- 3,206 -------------------------------------------------------------------------------------------------------------------------- $1,601,069 $1,437,578 $1,145,773 $ 931,183 $ 912,689 $ 812,672 $ 666,796 $ 570,338 -------------------------------------------------------------------------------------------------------------------------- $ 77,543 $ 63,402 $ 62,020 $ 58,045 $ 59,874 $ 53,483 $ 37,951 $ 25,828 54,875 45,202 38,709 37,058 32,599 34,881 22,754 26,690 53,174 55,203 38,787 21,028 12,722 5,394 14,929 16,124 -------------------------------------------------------------------------------------------------------------------------- 185,592 163,807 139,516 116,131 105,195 93,758 75,634 68,642 17,732 17,054 14,435 13,876 18,632 18,361 14,466 15,482 17,826 17,238 14,975 12,831 10,407 9,725 7,410 3,185 7,278 4,755 3,701 2,645 2,556 2,681 1,448 1,325 -- -- -- -- -- -- -- -- -------------------------------------------------------------------------------------------------------------------------- 142,756 124,760 106,405 86,779 73,600 62,991 52,310 48,650 47,536 42,210 36,333 29,617 24,730 21,795 18,624 16,638 -------------------------------------------------------------------------------------------------------------------------- $ 95,220 $ 82,550 $ 70,072 $ 57,162 $ 48,870 $ 41,196 $ 33,686 $ 32,012 -------------------------------------------------------------------------------------------------------------------------- $ 2.52 $ 2.21 $ 1.91 $ 1.61 $ 1.40 $ 1.20 $ .99 $ .95 $ 2.47 $ 2.15 $ 1.86 $ 1.58 $ 1.37 $ 1.17 $ .98 $ .93 $ .51 $ .45 $ .39 $ .34 $ .30 $ .26 $ .23 $ .21 37,857 37,347 36,759 35,482 34,885 34,373 33,958 33,557 38,525 38,425 37,661 36,197 35,574 35,061 34,533 34,264 5.9% 5.7% 6.1% 6.1% 5.4% 5.1% 5.1% 5.6% 13,980 12,603 10,830 9,373 9,553 8,740 7,920 6,920 $ 451,389 $ 405,347 $ 351,345 $ 227,594 $ 201,808 $ 184,971 $ 158,206 $ 142,041 $ 388,430 $ 361,282 $ 333,698 $ 320,699 $ 331,349 $ 311,547 $ 266,239 $ 206,562 $ 332,109 $ 324,532 $ 276,708 $ 194,305 $ 183,636 $ 188,348 $ 202,130 $ 142,523 $ 43,623 $ 26,243 $ 22,570 $ 12,821 $ 15,445 $ 13,489 $ 7,967 $ 7,386 $ 17,751 $ 13,943 $ 10,611 $ 10,421 $ 12,107 $ 7,029 $ 7,361 $ 5,316 $ 33,523 $ 28,561 $ 40,992 $ 16,767 $ 2,794 $ 4,538 $ 8,865 $ 6,384 $ 23,155 $ 21,961 $ 13,877 $ 11,711 $ 11,291 $ 9,771 $ 9,094 $ 6,188 $ 15,250 $ 14,721 $ 15,216 $ 13,839 $ 12,725 $ 9,199 $ 6,762 $ 5,278 $ 20,898 $ 17,812 $ 14,440 $ 9,806 $ 10,432 $ 10,744 $ 10,153 $ 7,978 $ 246,191 $ 275,581 $ 237,562 $ 195,945 $ 196,844 $ 190,499 $ 183,504 $ 134,600 $ 602,564 $ 534,450 $ 463,753 $ 409,176 $ 355,364 $ 309,024 $ 269,790 $ 240,467 $ 15.85 $ 14.21 $ 12.49 $ 11.30 $ 10.13 $ 8.94 $ 7.90 $ 7.12 16.7% 16.5% 16.1% 15.0% 14.7% 14.2% 13.2% 14.2% --------------------------------------------------------------------------------------------------------------------------
27 2002 FINANCIAL REVIEW CRITICAL ACCOUNTING POLICIES Accounting policies that management believes are most critical to the company's financial condition and operating results pertain to the valuation of accounts receivable, inventory, goodwill and revenue recognition. In developing estimates management considered available information and used judgment. OVERVIEW The company's major financial objectives are to achieve a 15% to 20% average annual growth rate in revenues and net income, to generate a 20% return on average shareholders' equity and to pay dividends of 20% of trailing twelve months' earnings. Over the last five years revenues and net income have grown at a compounded rate of 13% and 12%, respectively. Return on average shareholders' equity declined to 14.8% in 2002 from 15.3% in 2001. Over the past five years, dividends paid per share have increased at a compounded rate of 13% and in 2002 the annualized quarterly dividend rate was increased 6% to 72 cents per share. REVENUES (IN MILLIONS) [BAR CHART] The company is committed to maintaining a balance among its three segments: Commercial, Medical, and Aerospace. Balance among the three segments reduces the company's risk of changes in the business cycle of any one segment, thus enabling the company to consistently achieve its growth objectives. Diversification gives the company the opportunity to invest in all stages of a segment's market cycle and provides a broader base of markets in which to grow. The company also diversifies within each segment by entering into new geographic areas and different sectors within a market and by extending products to additional markets. As a result, despite cyclical downturns within each of the segments, the company's total operating profit has, over time, continued to increase. The company intends to achieve its growth objectives through a combination of core growth, development of new products and new markets for existing products, and acquisitions. Over the past five years, the company's core growth has accounted for approximately one-third of its overall growth. During the same time, the company has invested more than $350 million for acquisitions. These acquisitions fit strategically within the company's businesses and bring new technologies, capabilities and market opportunities that will supplement future core growth. During 2001 and 2002, the company purchased fourteen businesses with annualized sales of approximately $300 million, $119 million of which contributed to revenue growth in 2002. Acquisitions, while adding initially to revenues, may not contribute proportionately to earnings in the early years. In these years, earnings generally are reduced by up-front costs such as interest, depreciation and amortization, and, in many instances, the expenses of integrating a newly acquired business into an existing operation. Additionally, many of the acquisitions include new technologies and products that require incremental investment to enhance their growth prospects. The company has maintained a conservative capital structure with total debt ranging from 30% to 40% of total capitalization. This provides the flexibility to increase borrowings should growth opportunities arise. Under these circumstances, it is conceivable that debt for a period of time may be as high as 50% of total capitalization. The use of debt financing enables the company to maintain a lower cost of capital thus further enhancing value for shareholders. The company finances non-domestic operations primarily in their local currencies, reducing exposure to exchange rate fluctuations. Historically, operations have generated sufficient cash flow to finance the company's core growth while borrowings have been incurred largely to finance acquisitions. Over the past five years cash flow from operations has totaled over $800 million. This operating cash flow is reinvested in the company's core businesses, provides for the payment of dividends and enables the company to continue to upgrade and expand its plant and equipment. The company, while not particularly capital intensive, has spent approximately 4% to 5% of sales annually on plant and equipment. RESULTS OF OPERATIONS Beginning in 2002, the company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142), which requires that goodwill no longer be amortized but requires testing for impairment. The company determined that a goodwill impairment was not incurred in 2002. For comparative purposes, 2001 goodwill amortization expense of $12.9 million (Commercial- $2.9 million, Medical - $8.5 million, Aerospace - $1.5 million) and 2000 goodwill amortization expense of $10.7 million (Commercial- $2.4 million, Medical - $7.6 million, Aerospace - $0.7 million) has been reclassified from operating profit to a corporate expense item. Discussion of operating profit and margin in this Financial Review reflects the reclassified amounts. 28 2002 VS. 2001: Revenues increased 9% in 2002 to $2.08 billion from $1.90 billion resulting from gains in the Commercial and Medical segments, which offset a decline in the Aerospace Segment. Acquisitions, net of dispositions, accounted for two-thirds of the company's increase in revenue. Core operations and the impact of currency exchange rates provided the remainder of the revenue increase. Sales from non-domestic operations, which represented 44% of the company's revenues, increased 21% in 2002 from acquisitions, core growth, and in part from the company's shift of production to countries where the cost of manufacturing is lower. The Commercial, Medical and Aerospace segments accounted for 52%, 22% and 26% of the company's revenues, respectively. In 2002 the gross profit margin decreased to 26.6% of sales compared with 28.1% in 2001, as an improvement in the Commercial Segment was more than offset by a decline in the Aerospace and, to a lesser extent, the Medical Segment. Selling, engineering and administrative expenses (operating expenses) declined to 17.6% of sales in 2002 compared with 18.2% in 2001 because operating expenses in 2002 exclude the amortization of goodwill in accordance with SFAS No. 142. The company sold two minor non-core businesses and also received insurance proceeds resulting in a $10.1 million gain, or $0.16 per share reported in the statement of income as non-operating gains. Operating profit declined 6% to $206.3 million from $219.7 million as a decline in the Aerospace Segment more than offset increases in the Commercial and Medical segments. Operating margin declined from 11.5% to 9.9%, as all three segments were lower. Pricing pressures in several markets, the impact of cost reduction programs including plant closings and employee severance expenses, and the dilutive effect of acquisitions had a negative impact on operating margin. The Commercial, Medical and Aerospace segments represented 48%, 35% and 17% of the company's operating profit, respectively. Interest expense declined in 2002 due primarily to lower interest rates, and interest expense decreased to 1.2% of sales NET INCOME (IN MILLIONS) [BAR CHART] from 1.5% in 2001. The effective income tax rate declined to 27.4% in 2002 from 29.7% in 2001. The reduction in the income tax rate includes a benefit of $3.1 million, or $0.08 per share, from favorable tax settlements. Excluding the effects of these settlements, the effective tax rate would have been 29.2%. Net income increased 12% in 2002 to $125.3 million from $112.3 million and diluted earnings per share increased 10% to $3.15 in 2002 from $2.86 per share in 2001. Adjusting for the elimination of goodwill amortization in 2001, net income and diluted earnings per share would have increased 3% and 2%, respectively. 2001 VS. 2000: Revenues increased 8% in 2001 to $1.90 billion from $1.76 billion in 2000 due to gains in each of the company's three segments. An increase in sales from acquisitions was offset by declines from core sales, the impact of currency exchange rates and product line dispositions. Core sales declined because of weakness in the automotive and recreational marine markets and, after the events of September 11, in the aerospace market. Non-domestic operations comprised 40% of the company's revenues and gained 11% over 2000 from acquisitions and core sales, despite a decline from currency exchange rates. For 2001, the Commercial, Medical and Aerospace segments comprised 48%, 22% and 30% of the company's net sales, respectively. In 2001 gross profit margin increased slightly resulting from gains in the Aerospace and Medical segments, which more than offset a decline in the Commercial Segment. Operating expenses as a percentage of sales increased in 2001 as a reduction in the Medical Segment was more than offset by increases in the Commercial and Aerospace segments. Operating profit increased 6% in 2001 to $219.7 million from $207.2 million in 2000. The increase was due to gains in the Medical and Aerospace segments which compensated for a decline in the Commercial Segment. Operating margin declined to 11.5% from 11.7% as an increase in Medical was offset by a decline in Commercial. Expenses associated with the company's cost reduction programs contributed to the decline in operating margin. For 2001 the Commercial, Medical and Aerospace segments represented 40%, 32% and 28% of the company's operating profit, respectively. Interest expense increased as a result of additional borrowings incurred to finance acquisitions, offset by lower interest rates. Interest expense as a percentage of sales increased to 1.5% in 2001 from 1.2% in 2000. The effective income tax rate declined to 29.7% in 2001 from 31.0% in 2000 because a higher proportion of income was earned in countries with relatively lower tax rates, including tax holidays. Net income in 2001 increased 3% to $112.3 million while diluted earnings per share increased 1% to $2.86. Basic earnings per share increased 1% to $2.90. 29 2002 FINANCIAL REVIEW (continued) COMMERCIAL SEGMENT The Commercial Segment designs and manufactures proprietary mechanical and electrical controls for the automotive market; mechanical, electronic and hydraulic controls, and electronic products for the recreational marine market; and proprietary products for fluid transfer and industrial applications. Products in the Commercial Segment generally are produced in higher unit volume than those of the company's other two segments. They are manufactured for broad distribution as well as custom fabricated to meet individual customer needs. For the most part consumer spending patterns influence the market trends for these products. 2002 VS. 2001: Sales in the Commercial Segment increased 20% to $1.09 billion in 2002 from $0.91 billion in 2001. All three product lines, Automotive, Marine and Industrial reported gains, with two-thirds of the improvement coming from acquisitions. Automotive sales increased from the acquisition of a Japanese cable manufacturer, additional adjustable pedal system volume, and new programs in Europe. Higher vehicle production in North America helped offset the effect of lower prices. In Marine, a stronger marine market in the niches served by the company led to higher original equipment manufacturers (OEM) and aftermarket volume. Sales of non-marine products such as auxiliary power units for locomotives and the modern burner unit also contributed to sales growth. The growth in Industrial resulted primarily from acquisitions as core growth in light-duty cables was offset by declines in alternative fuel system sales. Operating profit rose 15% in 2002 to $99.8 million from $86.7 million as all three product lines improved generally on the higher volume, while operating margin declined slightly from 9.5% in 2001 to 9.2 % in 2002. An increase in operating margin in the Marine product line was offset by declines in the Automotive and Industrial product lines. Within Automotive, operating profit was enhanced by gains in Europe and the OPERATING PROFIT (IN MILLIONS) [BAR CHART] adjustable pedal system; however, operating margin was lower primarily from price declines and plant shut down and curtailment costs and also from the dilutive impact of the acquisition. Marine gained in both operating profit and margin from the increase in sales and from the full year benefits of combining Morse Controls with existing Teleflex facilities. Within Industrial, operating profit increased from the acquisitions, which also lowered operating margin. Assets in this Segment increased from acquisitions in the Automotive and Industrial product lines, and from the impact of currency exchange rates. Return on average assets declined in 2002 to 13.7% from 14.5% in 2001 due to a lower return from the acquisitions. 2001 VS. 2000: Sales in the Commercial Segment increased 6% in 2001 to $908.2 million from $860.2 million in 2000. This Segment's overall increase in sales resulted from acquisitions, as core volume was lower from the recession-driven weakness in the automotive and marine markets. An increase in sales of the Marine and Industrial product lines offset a decline in the Automotive product line. The gain in Marine resulted from the acquisition of Morse Controls, which offset a decline in core sales from lower consumer demand in the marine market. The increase in the Industrial product line resulted from an acquisition of a manufacturer of fluid handling systems and from new applications for light-duty cables. The decline in the Automotive product line was the result of lower vehicle production and pricing pressures in the North American automotive industry, which was partially offset by increased sales of the adjustable pedal system. Operating profit declined 3% in 2001 to $86.7 million from $89.3 million in 2000 and operating margin dropped to 9.5% from 10.4%. In Marine, an increase in operating profit resulted from the acquisition of Morse Controls while additional development expenses for integrated electronic engine systems and a new line of fishfinders reduced operating margin. In Industrial, operating profit and margin increased from the additional volume of light-duty cables. The decline in North American build rate reduced operating profit and margin in the Automotive product line. Total assets in this Segment grew as a result of acquisitions. Return on average assets decreased in 2001 to 14.5% from 18.5% in 2000 due to the lower operating profits in the Automotive product line. 30 MEDICAL SEGMENT The Medical Segment manufactures and distributes a broad range of invasive disposable and reusable devices for the urology, gastroenterology, anesthesiology and respiratory care markets worldwide. It also designs and manufactures a variety of specialty surgical products and provides instrument management services. CAPITAL EXPENDITURES (IN MILLIONS) [BAR CHART] Products in the Medical Segment generally are required to meet exacting standards of performance and have long product life cycles. Economic influences on sales relate primarily to spending patterns in the worldwide medical devices and supply market. 2002 VS. 2001: In 2002, Medical Segment sales increased 5% to $448.7 million from $429.3 million due to gains in both the Health Care Supply (formerly Hospital Supply) and Surgical Devices product lines. In Health Care Supply, sales growth in core products supplemented by a number of new products provided the increase, with the impact of currency exchange rates also adding to sales. Within the Surgical Devices product line, growth in sales of instruments and instrument management services as well as the acquisition of an orthopedic instrument manufacturer offset a decline in core closure products sales. Operating profit increased 2% in 2002 to $72.3 million from $71.2 million, while operating margin declined to 16.1% from 16.6%. The increase in operating profit is due primarily to the volume gains in Health Care Supply while Surgical Devices declined slightly, and the drop in operating margin resulted from declines in both product lines. Within Health Care Supply, operating margin declined due to sales from lower margin products. Within Surgical Devices, a change in product mix, severance expenses and expenses related to the closing of an instrument management services facility resulted in the operating margin decline. Assets increased due to the acquisition and from increases in currency exchange rates. Return on average assets declined from 16.4% to 15.4% as a result of the lower return from the acquisition. 2001 VS. 2000: In 2001 Medical Segment sales increased 4% to $429.3 million from $411.8 million in 2000 as a result of gains in both product lines, Health Care Supply and Surgical Devices. Within Health Care Supply, core growth and acquisitions more than offset declines from the divestiture of two product lines and weaker foreign currencies. In Surgical Devices, an increase in closure systems core products, new products such as Hem-o-lok clips and a gain in instrument management services compensated for a decline in instruments. Operating profit grew 11% in 2001 to $71.2 million from $64.1 million in 2000 and operating margin increased to 16.6% from 15.6%. In Health Care Supply, increased sales volume contributed to the gain in operating profit and margin. The disposition of two lower-margin product lines, the addition of direct distribution in Europe and the elimination of a distribution site also improved operating margin. In Surgical Devices the gains were due primarily to increased volume of closure products. DIVIDENDS PER SHARE [BAR CHART] Assets increased in 2001 as a result of the acquisitions, which offset the negative effects of currency translation. Return on average assets increased to 16.4% from 15.8% due to the higher operating profit combined with a relatively smaller increase in the asset base. 31 2002 FINANCIAL REVIEW (continued) AEROSPACE SEGMENT The Aerospace Segment serves the commercial aerospace, industrial turbomachinery markets and, to a lesser extent, the military market. Its businesses design and manufacture cargo handling systems and containers for aviation and provide surface treatments, repair services and manufactured components for users of both flight and ground-based turbine engines. Sales are both to original equipment manufacturers (OEMs) and to the aftermarket. CASH FLOW FROM OPERATIONS (IN MILLIONS) [BAR CHART] These products and services, many of which are proprietary, require a high degree of engineering sophistication, and are often custom-designed. Economic influences on these products and services relate primarily to spending patterns in the world-wide aerospace industry and to demand for power generation. 2002 VS. 2001: Sales in the Aerospace Segment decreased 4% in 2002 to $542.1 million from $567.5 million in 2001. Sales dropped in three of four product lines in this Segment - cargo handling systems, industrial gas turbine (IGT) services and manufactured components - due to a decline in the commercial aerospace and power generation markets. Repair services sales increased due to an expansion in lower margin product offerings. Operating profit declined 45% to $34.2 million from $61.8 million, and operating margin fell to 6.3% from 10.9%, due to reductions in all four product lines in this Segment. Throughout the product lines workforce reduction expenses lowered both operating profit and margin. In addition, the results in cargo handling systems were impacted by lower volume and prices, and expenses related to the launch of wide-body products. In IGT services, costs relating to the aftermarket parts and services business reduced the operating profit and operating margin. In manufactured components a drop in volume lowered the operating profit and margin, and in repair services a change in mix to lower margin services impacted results. It is expected that expenses associated with the Aerospace Segment cost reduction efforts will continue into 2003. The increase in assets in 2002 was due primarily to an increase in inventory in connection with new wide-body cargo handling systems, repair services programs and IGT aftermarket parts products. Return on average assets decreased to 8.0% in 2002 from 16.2% in 2001 due to the decline in operating profit combined with the increase in assets. 2001 VS. 2000: Sales in the Aerospace Segment grew 15% in 2001 to $567.5 million from $492.5 million in the prior year. Sales increases in cargo handling systems from both wide and narrow body products, IGT services from an acquisition and a strong market, and in repair services, offset a decline in manufactured components. A portion of the Aerospace Segment's sales were negatively impacted in the fourth quarter by September 11, particularly engine repair services that are dependent on airline flight hours. Operating profit increased 15% in 2001 to $61.8 million from $53.8 million in 2000 while operating margin remained constant at 10.9%. The higher operating profit is the result of the additional volumes in cargo handling systems, repair services and IGT services. Despite improvement from volume increases, operating margin was adversely affected by the sharp decline in fourth quarter volume, particularly in repair services; additional expenses associated with the start up of several IGT services facilities and, lower margins of acquired businesses. Assets increased in 2001 from the start up of several IGT facilities, from acquisitions and from inventory in the cargo handling systems product line related to volume. Return on average assets increased to 16.2% in 2001 from 15.5% in 2000 due to the gain in operating profit. CAPITALIZATION (IN MILLIONS) [BAR CHART] 32 LIQUIDITY, MARKET RISK AND CAPITAL RESOURCES Cash flows from operating activities were $200.6 million in 2002 compared to $188.3 million in 2001 and $189.4 million in 2000. In 2002, higher net income and depreciation offset additional working capital requirements. Amortization expense declined in 2002 because of the implementation of SFAS No. 142, which requires that goodwill no longer be amortized. Accounts receivable as a percentage of sales was constant in 2002 compared to 2001 while inventory as a percentage of sales increased 1% due to the increase in inventory in the Aerospace Segment primarily for new wide-body cargo handling systems and IGT aftermarket parts programs. In 2001 higher net income and depreciation and amortization were offset by additional working capital requirements, primarily related to the timing of accounts payable. Both accounts receivable and inventories increased relative to sales in 2001. Accounts receivable collections were hampered by the recession-related weakness in Commercial Segment markets and the slow down in the aerospace market while inventories were increased in part from the integration of Morse Controls. In addition to the cash generated from operations the company has approximately $130 million in committed and $200 million in uncommitted unused lines of credit available. The availability of the lines of credit is dependent upon the company maintaining its strong financial condition including its continued compliance with bank covenants. Various senior note agreements provide for the maintenance of ratios and limit the payment of cash dividends. Under the most restrictive of these provisions, $243 million of retained earnings was available for dividends at December 29, 2002. In 2002 total borrowings decreased $17 million from repayments offset by currency translation increases. Total debt to total capitalization decreased from 36% to 32% as a result of the reductions in borrowings. Approximately 45% of the company's total borrowings of $423 million are denominated in currencies other than the U.S. dollar, principally Euro, providing a natural hedge against fluctuations in the value of assets outside the United States. For 2001 total borrowings increased $102 million as the financing of the Morse Controls acquisition was partially offset by declines from currency exchange rates and by scheduled debt repayments. Total debt to total capitalization in 2001 increased from 33% to 36% as a result of the additional borrowings. Contractual obligations at December 29, 2002 are summarized as follows:
Payments Due by Period LESS THAN 1 - 3 4 - 5 AFTER TOTAL 1 YEAR YEARS YEARS 5 YEARS -------------------------------------------------------------------------------- Long-term borrowings $275 $ 35 $136 $ 31 $ 73 -------------------------------------------------------------------------------- Operating lease obligations 141 31 49 30 31 -------------------------------------------------------------------------------- Total contractual obligations $416 $ 66 $185 $ 61 $104 ================================================================================
In summary, the company's financial condition remains strong. The company believes that its cash flows from operations and the ability to access additional funds through the credit facilities will enable it to fund its operating requirements, capital expenditures and additional acquisition opportunities. CONTINGENCIES AND ENVIRONMENTAL MATTERS The company is subject to numerous federal, state and local environmental laws and regulations including the Resource Conservation and Recovery Act, Comprehensive Environmental Response, Compensation and Liability Act, the Clean Air Act and the Clean Water Act. Environmental programs are in place throughout the company including training, auditing and monitoring to ensure compliance with such laws and regulations. The company has been named as a Potentially Responsible Party by the Environmental Protection Agency at various sites throughout the country. Environmental costs, including liabilities associated with such sites, and the costs of complying with existing environmental regulations are not expected to result in a liability material to the company's consolidated financial position or results of operations. The company is a party to lawsuits and claims arising in the normal course of business. In the opinion of management, there are no pending claims or litigation, the outcome of which would have a material effect on the company's consolidated financial position or results of operations. 33 Teleflex Incorporated and Subsidiaries INVESTOR INFORMATION ANNUAL MEETING The Annual Meeting of shareholders will take place on April 25, 2003 at the: Jefferson House Restaurant (in the Ballroom) 2519 DeKalb Pike (Rte. 202) Norristown, Pennsylvania The meeting will convene at 10:00 a.m. All shareholders are cordially invited to attend. MARKET AND OWNERSHIP OF COMMON STOCK New York Stock Exchange [TFX LISTED NYSE LOGO] Trading Symbol: TFX As of December 29, 2002, the company's fiscal year end, the approximate number of direct-registered individual shareholders of record was 1,140. In addition, more than 250 mutual funds, insurance companies, banks and other institutional investors own Teleflex stock. Investors, analysts and others seeking information about the company should contact: Julie McDowell Vice President, Corporate Communications Teleflex Incorporated (610) 834-6301 e-mail: jmcdowell@teleflex.com Financial and product information about Teleflex may be obtained on the company's Web site at WWW.TELEFLEX.COM. A copy of the Annual Report as filed with the Securities and Exchange Commission on Form 10-K, interim reports on Form 10-Q and current reports on Form 8-K can be accessed on the Investor Relations page of the company's Web site or can be mailed upon request. TRANSFER AGENT AND REGISTRAR Questions concerning transfer requirements, lost certificates, dividends, duplicate mailings, change of address, or other stockholder matters should be addressed to: American Stock Transfer & Trust Company 40 Wall Street, 46th Floor New York, New York 10005 (800) 937-5449 DIVIDENDS Quarterly dividends customarily are mailed to reach shareholders on or about the 15th of March, June, September and December. Shareholders may have dividends deposited directly into their savings or checking account. Teleflex Incorporated offers a dividend reinvestment and direct stock purchase and sale plan. Contact American Stock Transfer & Trust Company for further information. PRICE RANGE AND DIVIDENDS OF COMMON STOCK
2002 High Low Last Dividends -------------------------------------------------------------------------------- First Quarter $55.60 $43.60 $54.67 $ 0.17 Second Quarter $59.35 $53.78 $57.15 $ 0.18 Third Quarter $57.53 $40.85 $45.27 $ 0.18 Fourth Quarter $47.08 $40.64 $41.30 $ 0.18
2001 High Low Last Dividends -------------------------------------------------------------------------------- First Quarter $44.81 $38.38 $40.95 $ 0.15 Second Quarter $50.99 $39.80 $44.00 $ 0.17 Third Quarter $50.31 $34.00 $37.39 $ 0.17 Fourth Quarter $47.70 $37.10 $47.70 $ 0.17
INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP Philadelphia, Pennsylvania FORWARD-LOOKING STATEMENTS In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the Company notes that certain statements contained in this report are forward-looking in nature. These forward-looking statements include matters such as business strategies, market potential, future financial performance, product deployments and other future-oriented matters. Such matters inherently involve many risks and uncertainties (including risks and uncertainties associated with changes in competitive and market conditions, changes in regulation and technology, policies of suppliers and customer acceptance of new products), which can cause actual results to differ materially from those projected in the forward-looking statements. For additional information, please refer to the Company's Securities and Exchange Commission filings including its most recent Form 10-K. 34