UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 26, 2011
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 1-5353
TELEFLEX INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware | 23-1147939 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. employer identification no.) | |
155 South Limerick Road, Limerick, Pennsylvania | 19468 | |
(Address of principal executive offices) | (Zip Code) |
(610) 948-5100
(Registrants telephone number, including area code)
(None)
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
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 x No ¨
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
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 filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The registrant had 40,681,073 shares of common stock, $1.00 par value, outstanding as of July 15, 2011.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 26, 2011
TABLE OF CONTENTS
Page | ||||||
PART I FINANCIAL INFORMATION | ||||||
Item 1. | Financial Statements (Unaudited): | |||||
2 | ||||||
Condensed Consolidated Balance Sheets as of June 26, 2011 and December 31, 2010 |
3 | |||||
4 | ||||||
5 | ||||||
Notes to Condensed Consolidated Financial Statements | 6 | |||||
6 | ||||||
6 | ||||||
7 | ||||||
8 | ||||||
8 | ||||||
8 | ||||||
9 | ||||||
11 | ||||||
13 | ||||||
14 | ||||||
15 | ||||||
15 | ||||||
17 | ||||||
18 | ||||||
26 | ||||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 29 | ||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 36 | ||||
Item 4. | Controls and Procedures | 36 | ||||
PART II OTHER INFORMATION | ||||||
Item 1. | Legal Proceedings | 37 | ||||
Item 1A. | Risk Factors | 37 | ||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 37 | ||||
Item 3. | Defaults Upon Senior Securities | 37 | ||||
Item 5. | Other Information | 37 | ||||
Item 6. | Exhibits | 38 | ||||
SIGNATURES | 39 |
1
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements |
TELEFLEX INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 26, 2011 |
June 27, 2010 |
June 26, 2011 |
June 27, 2010 |
|||||||||||||
(Dollars and shares in thousands, except per share) | ||||||||||||||||
Net revenues |
$ | 391,286 | $ | 358,427 | $ | 745,290 | $ | 701,964 | ||||||||
Cost of goods sold |
207,254 | 184,126 | 396,754 | 356,852 | ||||||||||||
Gross profit |
184,032 | 174,301 | 348,536 | 345,112 | ||||||||||||
Selling, general and administrative expenses |
111,751 | 99,768 | 215,137 | 195,419 | ||||||||||||
Research and development expenses |
12,456 | 10,288 | 23,494 | 19,599 | ||||||||||||
Restructuring and other impairment charges |
3,176 | 75 | 3,771 | 538 | ||||||||||||
Income from continuing operations before interest, loss on extinguishments of debt and taxes |
56,649 | 64,170 | 106,134 | 129,556 | ||||||||||||
Interest expense |
15,785 | 19,534 | 31,931 | 38,454 | ||||||||||||
Interest income |
(253 | ) | (150 | ) | (358 | ) | (356 | ) | ||||||||
Loss on extinguishments of debt |
816 | | 15,413 | | ||||||||||||
Income from continuing operations before taxes |
40,301 | 44,786 | 59,148 | 91,458 | ||||||||||||
Taxes on income from continuing operations |
8,714 | 12,440 | 13,564 | 26,363 | ||||||||||||
Income from continuing operations |
31,587 | 32,346 | 45,584 | 65,095 | ||||||||||||
Operating income (loss) from discontinued operations (including gain (loss) on disposal of ($4,504) and $52,269 for the three and six month period in 2011, respectively, and $28,825 and $38,562 for the three and six month periods in 2010, respectively) |
(4,360 | ) | 45,634 | 59,576 | 60,009 | |||||||||||
Taxes (benefit) on income from discontinued operations |
(7,260 | ) | 17,454 | (7,521 | ) | 26,620 | ||||||||||
Income from discontinued operations |
2,900 | 28,180 | 67,097 | 33,389 | ||||||||||||
Net income |
34,487 | 60,526 | 112,681 | 98,484 | ||||||||||||
Less: Income from continuing operations attributable to noncontrolling interest |
258 | 259 | 481 | 431 | ||||||||||||
Income from discontinued operations attributable to noncontrolling interest |
159 | 119 | 318 | 233 | ||||||||||||
Net income attributable to common shareholders |
$ | 34,070 | $ | 60,148 | $ | 111,882 | $ | 97,820 | ||||||||
Earnings per share available to common shareholders: |
||||||||||||||||
Basic: |
||||||||||||||||
Income from continuing operations |
$ | 0.77 | $ | 0.80 | $ | 1.12 | $ | 1.62 | ||||||||
Income from discontinued operations |
0.07 | 0.70 | 1.66 | 0.83 | ||||||||||||
Net income |
$ | 0.84 | $ | 1.51 | $ | 2.78 | $ | 2.45 | ||||||||
Diluted: |
||||||||||||||||
Income from continuing operations |
$ | 0.77 | $ | 0.80 | $ | 1.11 | $ | 1.61 | ||||||||
Income from discontinued operations |
0.07 | 0.70 | 1.64 | 0.82 | ||||||||||||
Net income |
$ | 0.83 | $ | 1.49 | $ | 2.75 | $ | 2.43 | ||||||||
Dividends per common share |
$ | 0.34 | $ | 0.34 | $ | 0.68 | $ | 0.68 | ||||||||
Weighted average common shares outstanding: |
||||||||||||||||
Basic |
40,536 | 39,913 | 40,297 | 39,852 | ||||||||||||
Diluted |
40,872 | 40,356 | 40,648 | 40,277 | ||||||||||||
Amounts attributable to common shareholders: |
||||||||||||||||
Income from continuing operations, net of tax |
$ | 31,329 | $ | 32,087 | $ | 45,103 | $ | 64,664 | ||||||||
Income from discontinued operations, net of tax |
2,741 | 28,061 | 66,779 | 33,156 | ||||||||||||
Net income |
$ | 34,070 | $ | 60,148 | $ | 111,882 | $ | 97,820 | ||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
2
TELEFLEX INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 26, 2011 |
December 31, 2010 |
|||||||
(Dollars in thousands) | ||||||||
ASSETS | ||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 365,809 | $ | 208,452 | ||||
Accounts receivable, net |
283,181 | 294,196 | ||||||
Inventories, net |
293,822 | 338,598 | ||||||
Prepaid expenses and other current assets |
30,580 | 28,831 | ||||||
Income taxes receivable |
25,079 | 3,888 | ||||||
Deferred tax assets |
34,997 | 39,309 | ||||||
Assets held for sale |
115,460 | 7,959 | ||||||
Total current assets |
1,148,928 | 921,233 | ||||||
Property, plant and equipment, net |
255,253 | 287,705 | ||||||
Goodwill |
1,475,436 | 1,442,411 | ||||||
Intangible assets, net |
917,552 | 918,522 | ||||||
Investments in affiliates |
2,284 | 4,899 | ||||||
Deferred tax assets |
376 | 358 | ||||||
Other assets |
78,403 | 68,027 | ||||||
Total assets |
$ | 3,878,232 | $ | 3,643,155 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities |
||||||||
Current borrowings |
$ | 29,700 | $ | 103,711 | ||||
Accounts payable |
67,558 | 84,846 | ||||||
Accrued expenses |
114,753 | 117,488 | ||||||
Payroll and benefit-related liabilities |
68,655 | 71,418 | ||||||
Derivative liabilities |
15,498 | 15,634 | ||||||
Accrued interest |
13,355 | 18,347 | ||||||
Income taxes payable |
3,786 | 4,886 | ||||||
Deferred tax liabilities |
5,147 | 4,433 | ||||||
Liabilities held for sale |
45,827 | | ||||||
Total current liabilities |
364,279 | 420,763 | ||||||
Long-term borrowings |
949,866 | 813,409 | ||||||
Deferred tax liabilities |
392,557 | 370,819 | ||||||
Pension and postretirement benefit liabilities |
114,911 | 141,769 | ||||||
Noncurrent liability for uncertain tax positions |
65,005 | 62,602 | ||||||
Other liabilities |
41,277 | 46,515 | ||||||
Total liabilities |
1,927,895 | 1,855,877 | ||||||
Commitments and contingencies |
||||||||
Total common shareholders equity |
1,945,625 | 1,783,376 | ||||||
Noncontrolling interest |
4,712 | 3,902 | ||||||
Total equity |
1,950,337 | 1,787,278 | ||||||
Total liabilities and equity |
$ | 3,878,232 | $ | 3,643,155 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
TELEFLEX INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended | ||||||||
June 26, 2011 | June 27, 2010 | |||||||
(Dollars in thousands) | ||||||||
Cash Flows from Operating Activities of Continuing Operations: |
||||||||
Net income |
$ | 112,681 | $ | 98,484 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Income from discontinued operations |
(67,097 | ) | (33,389 | ) | ||||
Depreciation expense |
20,928 | 21,359 | ||||||
Amortization expense of intangible assets |
22,115 | 21,384 | ||||||
Amortization expense of deferred financing costs and debt discount |
6,642 | 1,890 | ||||||
Loss on extinguishments of debt |
15,413 | | ||||||
Stock-based compensation |
955 | 4,320 | ||||||
Impairment of investments in affiliates |
3,061 | | ||||||
Deferred income taxes, net |
941 | 24,262 | ||||||
Other |
1,391 | 378 | ||||||
Changes in operating assets and liabilities, net of effects of acquisitions and disposals: |
||||||||
Accounts receivable |
(37,870 | ) | (50,870 | ) | ||||
Inventories |
(17,098 | ) | (5,258 | ) | ||||
Prepaid expenses and other current assets |
(3,640 | ) | 1,667 | |||||
Accounts payable and accrued expenses |
(3,635 | ) | (28,082 | ) | ||||
Income taxes receivable and payable, net |
(15,153 | ) | 23,591 | |||||
|
|
|
|
|||||
Net cash provided by operating activities from continuing operations |
39,634 | 79,736 | ||||||
|
|
|
|
|||||
Cash Flows from Investing Activities of Continuing Operations: |
||||||||
Expenditures for property, plant and equipment |
(15,277 | ) | (13,658 | ) | ||||
Proceeds from sales of businesses and assets, net of cash sold |
100,916 | 74,734 | ||||||
Payments for businesses and intangibles acquired, net of cash acquired |
(30,570 | ) | (81 | ) | ||||
|
|
|
|
|||||
Net cash provided by investing activities from continuing operations |
55,069 | 60,995 | ||||||
|
|
|
|
|||||
Cash Flows from Financing Activities of Continuing Operations: |
||||||||
Proceeds from long-term borrowings |
515,000 | | ||||||
Repayment of long-term borrowings |
(455,800 | ) | (64,170 | ) | ||||
Increase in notes payable and current borrowings |
| 39,700 | ||||||
Proceeds from stock compensation plans |
30,577 | 8,032 | ||||||
Payments to noncontrolling interest shareholders |
| (637 | ) | |||||
Dividends |
(27,438 | ) | (27,120 | ) | ||||
Debt extinguishment, issuance and amendment fees |
(19,058 | ) | | |||||
|
|
|
|
|||||
Net cash provided by (used in) financing activities from continuing operations |
43,281 | (44,195 | ) | |||||
|
|
|
|
|||||
Cash Flows from Discontinued Operations: |
||||||||
Net cash provided by operating activities |
13,068 | 19,738 | ||||||
Net cash used in investing activities |
(1,241 | ) | (1,846 | ) | ||||
|
|
|
|
|||||
Net cash provided by discontinued operations |
11,827 | 17,892 | ||||||
|
|
|
|
|||||
Effect of exchange rate changes on cash and cash equivalents |
7,546 | (15,604 | ) | |||||
|
|
|
|
|||||
Net increase in cash and cash equivalents |
157,357 | 98,824 | ||||||
Cash and cash equivalents at the beginning of the period |
208,452 | 188,305 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at the end of the period |
$ | 365,809 | $ | 287,129 | ||||
|
|
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
TELEFLEX INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
Common Stock | Additional Paid in |
Retained | Accumulated Other Comprehensive |
Treasury Stock | Noncontrolling | Total | Comprehensive | |||||||||||||||||||||||||||||||||
Shares | Dollars | Capital | Earnings | Income | Shares | Dollars | Interest | Equity | Income | |||||||||||||||||||||||||||||||
(Dollars and shares in thousands, except per share) | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2009 |
42,033 | $ | 42,033 | $ | 277,050 | $ | 1,431,878 | $ | (34,120 | ) | 2,278 | $ | (136,600 | ) | $ | 4,833 | $ | 1,585,074 | ||||||||||||||||||||||
Net income |
97,820 | 664 | 98,484 | $ | 98,484 | |||||||||||||||||||||||||||||||||||
Cash dividends ($0.68 per share) |
(27,120 | ) | (27,120 | ) | ||||||||||||||||||||||||||||||||||||
Financial instruments designated as cash flow hedges, net of tax of $243 |
469 | 469 | 469 | |||||||||||||||||||||||||||||||||||||
Cumulative translation adjustment, net of tax of $(6,815) |
(89,986 | ) | 15 | (89,971 | ) | (89,971 | ) | |||||||||||||||||||||||||||||||||
Pension liability adjustment, net of tax of $910 |
2,449 | 2,449 | 2,449 | |||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interest shareholders |
(637 | ) | (637 | ) | ||||||||||||||||||||||||||||||||||||
Deconsolidation of VIE |
253 | (365 | ) | (112 | ) | |||||||||||||||||||||||||||||||||||
Comprehensive income |
$ | 11,431 | ||||||||||||||||||||||||||||||||||||||
Shares issued under compensation plans |
158 | 158 | 12,269 | (8 | ) | 439 | 12,866 | |||||||||||||||||||||||||||||||||
Deferred compensation |
(6 | ) | 240 | 240 | ||||||||||||||||||||||||||||||||||||
Balance at June 27, 2010 |
42,191 | $ | 42,191 | $ | 289,319 | $ | 1,502,831 | $ | (121,188 | ) | 2,264 | $ | (135,921 | ) | $ | 4,510 | $ | 1,581,742 | ||||||||||||||||||||||
Balance at December 31, 2010 |
42,245 | $ | 42,245 | $ | 349,156 | $ | 1,578,913 | $ | (51,880 | ) | 2,250 | $ | (135,058 | ) | $ | 3,902 | $ | 1,787,278 | ||||||||||||||||||||||
Net income |
111,882 | 799 | 112,681 | $ | 112,681 | |||||||||||||||||||||||||||||||||||
Cash dividends ($0.68 per share) |
(27,438 | ) | (27,438 | ) | ||||||||||||||||||||||||||||||||||||
Financial instruments designated as cash flow hedges, net of tax of $2,332 |
3,325 | 3,325 | 3,325 | |||||||||||||||||||||||||||||||||||||
Cumulative translation adjustment, net of tax of $3,008 |
64,344 | 11 | 64,355 | 64,355 | ||||||||||||||||||||||||||||||||||||
Pension liability adjustment, net of tax of $3,483 |
5,582 | 5,582 | 5,582 | |||||||||||||||||||||||||||||||||||||
Divestiture of marine business, net of tax of $(4,612) |
(24,997 | ) | (24,997 | ) | (24,997 | ) | ||||||||||||||||||||||||||||||||||
Comprehensive income |
$ | 160,946 | ||||||||||||||||||||||||||||||||||||||
Shares issued under compensation plans |
609 | 609 | 25,503 | (55 | ) | 3,315 | 29,427 | |||||||||||||||||||||||||||||||||
Deferred compensation |
(39 | ) | (4 | ) | 163 | 124 | ||||||||||||||||||||||||||||||||||
Balance at June 26, 2011 |
42,854 | $ | 42,854 | $ | 374,620 | $ | 1,663,357 | $ | (3,626 | ) | 2,191 | $ | (131,580 | ) | $ | 4,712 | $ | 1,950,337 | ||||||||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 Basis of presentation
We prepared the accompanying unaudited condensed consolidated financial statements of Teleflex Incorporated on the same basis as our annual consolidated financial statements.
In the opinion of management, our financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of financial statements for interim periods in accordance with U.S. generally accepted accounting principles (GAAP) and with Rule 10-01 of SEC Regulation S-X, which sets forth the instructions for financial statements included in Form 10-Q. The preparation of condensed 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 our financial statements, as well as the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
In accordance with applicable accounting standards, the accompanying condensed consolidated financial statements do not include all of the information and footnote disclosures that are required to be included in our annual consolidated financial statements. The year-end condensed balance sheet data was derived from audited financial statements, but, as permitted by Rule 10-01 of SEC Regulation S-X, does not include all disclosures required by GAAP for complete financial statements. Accordingly, our quarterly condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 1, 2011 (the Form 8-K). The consolidated financial statements included in the Form 8-K update and supersede the consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2010 to report the Companys former marine business, which the Company sold on March 22, 2011, and the Companys cargo container business, for which the Company approved a plan of sale, as discontinued operations. Subsequent to the filing of the Form 8-K, management approved a plan to sell the cargo systems business, which has been presented as a discontinued operation in this quarterly report on Form 10-Q for all periods presented.
Certain reclassifications have been made to prior years information to conform with current year presentation.
As used in this report, the terms we, us, our, Teleflex and the Company mean Teleflex Incorporated and its subsidiaries, unless the context indicates otherwise. The results of operations for the periods reported are not necessarily indicative of those that may be expected for a full year.
Note 2 New accounting standards
The Company adopted the following new accounting standards as of January 1, 2011, the first day of its 2011 fiscal year:
Amendment to Revenue Recognition: In October 2009, the Financial Accounting Standards Board (FASB) revised the criteria for multiple-deliverable revenue arrangements by establishing new guidance on how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. Additionally, the guidance requires companies to expand their disclosures regarding multiple-deliverable revenue arrangements. The guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The amendment did not have an impact on the Companys results of operations, cash flows or financial position.
The Company will adopt the following new accounting standards as of January 1, 2012, the first day of its 2012 fiscal year:
Amendment to Fair Value Measurement: In May 2011, the FASB revised the fair value measurement and disclosure requirements so that the requirements under GAAP and International Financial Reporting Standards (IFRS) are the same. The guidance clarifies the FASBs intent about the application of existing fair value measurements and requires enhanced disclosures, most significantly related to unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy. The guidance is effective prospectively during interim and annual periods beginning after December 15, 2011.
6
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amendment to Comprehensive Income: In June 2011, the FASB amended guidance relating to the presentation requirements of comprehensive income within an entitys financial statements. Under the guidance, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income in a single continuous statement or in two separate but consecutive statements. The amended guidance eliminates the previously available option of presenting the components of other comprehensive income as part of the statement of changes in equity. In addition, an entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. The amendment is effective for fiscal years beginning after December 15, 2011 and will be applied retrospectively.
On January 10, 2011, the Company acquired 100% of the outstanding equity of VasoNova Inc. (VasoNova), a developer of central venous catheter navigation technology that allows for real-time confirmation of the placement of peripherally inserted central catheters and central venous catheters. The acquisition of VasoNova complements the vascular access product line in the Companys Critical Care division. In connection with the acquisition, the Company made an initial payment to the former VasoNova security holders of $24.9 million and agreed to make additional payments of between $15.0 million and $30.0 million contingent upon the achievement of certain regulatory approvals and specified sales targets within three years after closing. In March 2011, $6.0 million of the contingent consideration was paid to the former VasoNova security holders upon receipt of 510(k) clearance from the U.S. Food and Drug Administration with respect to an expanded use of VasoNovas VPS peripherally inserted central catheter tip location technology.
The fair value of the consideration is estimated at $40.3 million, which includes the initial payment of $24.9 million in cash and the estimated fair value of the contingent consideration to be paid to the former VasoNova security holders of $15.4 million. The fair value of the contingent consideration is estimated based on the probability of obtaining the applicable regulatory approvals and achieving the specified sales targets. Any future change in the estimated fair value of the contingent consideration will be recognized in the statement of income for the period in which it occurs. A change in fair value of the contingent consideration could have a material effect on the Companys results of operations and financial position for the period in which the change in estimate occurs.
We estimated the fair value of the acquisition-related contingent consideration using a probability-weighted discounted cash flow model. This fair value measurement is based on significant inputs not observed in the market and thus is categorized within Level 3 of the fair value hierarchy (see Note 9, Fair value measurements).
The following table summarizes the purchase price allocation of the cost to acquire VasoNova based on the fair values of the net assets acquired as of January 10, 2011:
(Dollars in thousands) | ||||
Assets |
||||
Current assets |
$ | 942 | ||
Property, plant and equipment |
314 | |||
Intangible assets |
29,550 | |||
Goodwill |
13,048 | |||
Other assets |
50 | |||
|
|
|||
Total assets acquired |
43,904 | |||
|
|
|||
Less: |
||||
Current liabilities |
(536 | ) | ||
Deferred tax liabilities |
(3,023 | ) | ||
|
|
|||
Total liabilities assumed |
(3,559 | ) | ||
|
|
|||
Net assets acquired |
$ | 40,345 | ||
|
|
As of June 26, 2011, the Company finalized the valuation of tangible and intangible assets and the purchase price allocation as of the acquisition date with no further adjustments.
Certain assets acquired in the VasoNova acquisition qualify for recognition as intangible assets, apart from goodwill. The estimated fair values of intangible assets acquired include purchased technology of $26.8 million and trade names of $2.8 million. Purchased technology and trade names have useful lives of 15 years and 10 years, respectively. The goodwill resulting from the VasoNova acquisition is primarily due to the expected revenue growth that is attributable to anticipated increased market penetration from future products and customers. Goodwill and the step-up in basis of the intangible assets are not deductible for tax purposes.
7
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The unaudited pro forma results reflecting the acquisition of VasoNova in prior periods is not materially different from the Companys financial results as reported.
The following table provides information about inventories as of June 26, 2011 and December 31, 2010:
June 26, 2011 |
December 31, 2010 |
|||||||
(Dollars in thousands) | ||||||||
Raw materials |
$ | 89,236 | $ | 128,752 | ||||
Work-in-process |
50,037 | 54,098 | ||||||
Finished goods |
188,212 | 194,032 | ||||||
327,485 | 376,882 | |||||||
Less: Inventory reserve |
(33,663 | ) | (38,284 | ) | ||||
Inventories, net |
$ | 293,822 | $ | 338,598 | ||||
Note 5 Other impairment charges
During the six months ended June 26, 2011, the Company recognized impairment charges of $3.1 million related to the decline in value of its investments in affiliates that are considered to be other than temporary. In making this determination, the Company considered multiple factors, including its intent and ability to hold investments, operating losses of investees that demonstrate an inability to recover the carrying value of the investments, the investees liquidity and cash position and market acceptance of the investees products and services.
Note 6 Goodwill and other intangible assets
The following table provides information relating to changes in the carrying amount of goodwill, by segment, for the six months ended June 26, 2011:
Medical Segment |
Former Commercial Segment |
Total | ||||||||||
(Dollars in thousands) | ||||||||||||
Balance at beginning of year |
$ | 1,434,921 | $ | 7,490 | $ | 1,442,411 | ||||||
Goodwill related to dispositions |
| (7,490 | ) | (7,490 | ) | |||||||
Goodwill related to acquisitions |
13,048 | | 13,048 | |||||||||
Reversal of Arrow integration accrual, net of tax |
(81 | ) | | (81 | ) | |||||||
Translation adjustment |
27,548 | | 27,548 | |||||||||
Balance at end of period |
$ | 1,475,436 | $ | | $ | 1,475,436 | ||||||
As of June 26, 2011, there were no goodwill impairment losses recorded against these carrying values.
The following table provides information, as of June 26, 2011 and December 31, 2010, regarding the gross carrying amount of, and accumulated amortization relating to, intangible assets:
Gross Carrying Amount | Accumulated Amortization | |||||||||||||||
June 26, 2011 | December 31, 2010 | June 26, 2011 | December 31, 2010 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Customer lists |
$ | 546,490 | $ | 553,923 | $ | (106,917 | ) | $ | (98,013 | ) | ||||||
Intellectual property |
224,404 | 207,248 | (77,522 | ) | (77,166 | ) | ||||||||||
Distribution rights |
17,285 | 16,728 | (13,785 | ) | (13,016 | ) | ||||||||||
Trade names |
328,539 | 332,049 | (942 | ) | (3,231 | ) | ||||||||||
$ | 1,116,718 | $ | 1,109,948 | $ | (199,166 | ) | $ | (191,426 | ) | |||||||
8
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amortization expense related to intangible assets was approximately $11.1 million and $10.9 million for the three months ended June 26, 2011 and June 27, 2010, respectively, and $22.1 and $21.4 for the six months ended June 26, 2011 and June 27, 2010, respectively. Estimated annual amortization expense for each of the five succeeding years is as follows (dollars in thousands):
2011 |
$ | 44,700 | ||
2012 |
44,500 | |||
2013 |
43,700 | |||
2014 |
39,400 | |||
2015 |
33,500 |
The following table provides the components of long-term debt as of June 26, 2011 and December 31, 2010:
June 26, 2011 |
December 31, 2010 |
|||||||
(Dollars in thousands) | ||||||||
Senior Credit Facility: |
||||||||
Term loan, at an average rate of 1.31%, due 10/1/2012 |
$ | | $ | 36,123 | ||||
Term loan, at an average rate of 2.56%, due 10/1/2014 |
375,000 | 363,877 | ||||||
2004 Notes: |
||||||||
6.66% Series 2004-1 Tranche A Senior Notes due 7/8/2011 |
| 72,500 | ||||||
7.14% Series 2004-1 Tranche B Senior Notes due 7/8/2014 |
| 48,250 | ||||||
7.46% Series 2004-1 Tranche C Senior Notes due 7/8/2016 |
| 45,050 | ||||||
3.875% Convertible Senior Subordinated Notes due 2017 |
400,000 | 400,000 | ||||||
6.875% Senior Subordinated Notes due 2019 |
250,000 | | ||||||
|
|
|
|
|||||
1,025,000 | 965,800 | |||||||
Less: Unamortized debt discount on 3.875% Convertible Senior Subordinated Notes due 2017 |
(75,134 | ) | (79,891 | ) | ||||
|
|
|
|
|||||
949,866 | 885,909 | |||||||
Less: Current portion of borrowings |
| (72,500 | ) | |||||
|
|
|
|
|||||
Total long-term debt |
$ | 949,866 | $ | 813,409 | ||||
|
|
|
|
6.875% Senior Subordinated Notes
On June 13, 2011, the Company issued $250.0 million of 6.875% Senior Subordinated Notes due 2019 (the Notes). The Notes and the guarantees of the Companys obligations under the Notes were issued under the Second Supplemental Indenture (the Second Supplemental Indenture) executed by the Company, the subsidiaries of the Company named as guarantors therein and Wells Fargo Bank, N.A., as trustee (the Trustee). The Second Supplemental Indenture supplements the Indenture, dated as of August 2, 2010 (the Base Indenture and, as supplemented by the Second Supplemental Indenture, the Indenture) between the Company and the Trustee. The Company will pay interest on the Notes semi-annually on June 1 and December 1, commencing on December 1, 2011, at a rate of 6.875% per year. The Notes will mature on June 1, 2019, unless earlier redeemed or purchased by the Company at the holders option under specified circumstances following a Change of Control or Asset Sale (each as defined in the Indenture) or upon the Companys election to exercise its optional redemption rights, as described below. The Company incurred estimated transaction fees of approximately $4.2 million, including underwriters discounts and commissions in connection with the public offering of the Notes. The Company used $125 million of the proceeds to repay term loan borrowings under its senior credit facility and recorded a $0.8 million write-off of unamortized debt issuance costs as a loss on extinguishment of debt during the second quarter of 2011.
The Notes constitute the Companys general unsecured senior subordinated obligations and are subordinated in right of payment to all of the Companys existing and future senior indebtedness, including the Companys indebtedness under its credit facilities, and will be equal in right of payment with all of the Companys existing and future senior subordinated indebtedness, including the Companys 3.875% Convertible Senior Subordinated Notes due 2017. The obligations under the Notes will be fully and unconditionally guaranteed, jointly and severally, by each of the Companys existing and future domestic subsidiaries that is a guarantor or other obligor under the Companys credit facilities and by certain of the Companys other domestic subsidiaries. The guarantees of the Notes will be subordinated in right of payment to all of the existing and future senior indebtedness of such Guarantors and will be equal in right of payment with all of the future senior subordinated indebtedness of such Guarantors. The Notes
9
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and the guarantees will be junior to the existing and future secured indebtedness of the Company and the Guarantors to the extent of the value of the assets securing such indebtedness and will be structurally subordinated to all of the existing and future indebtedness and other liabilities of the Companys non-guarantor subsidiaries.
At any time on or after June 1, 2015, the Company may redeem some or all of the Notes at a redemption price of 103.438% of the principal amount of the Notes subject to redemption, declining to 100% of the principal amount on June 1, 2017, plus accrued and unpaid interest. In addition, at any time prior to June 1, 2015, the Company may, on one or more occasions, redeem some or all of the Notes at a redemption price equal to 100% of the principal amount of the Notes redeemed plus a make-whole premium and any accrued and unpaid interest. The make-whole premium is the greater of (i) 1.0% of the principal amount of the Notes subject to redemption or (ii) the present value, on the redemption date, of (a) the excess, if any, of the June 1, 2015 option redemption price over the principal amount of the Notes. Present value is determined based upon the present value of the redemption price of the Notes at June 1, 2015 plus all required interest payments on the Notes through June 1, 2015 (other than accrued and unpaid interest to the redemption date), based on a specified Treasury rate for the period most closely corresponding to the period from the redemption date to June 1, 2015, plus 50 basis points. In addition, at any time prior to June 1, 2014, the Company may redeem up to 35% of the aggregate principal amount of the Notes, using the proceeds of certain Company specified equity offerings, at a redemption price equal to 106.875% of the principal amount of the Notes redeemed, plus accrued and unpaid interest.
Prepayment of 2004 Senior Notes
During the first quarter of 2011, the Company prepaid the entire outstanding $165.8 million principal amount of its senior notes issued in 2004 (2004 Notes). In addition, the Company paid the holders of the 2004 Notes a $13.9 million prepayment make-whole amount and accrued and unpaid interest. The Company recorded the prepayment make-whole amount and a $0.7 million write-off of unamortized debt issuance costs incurred prior to the prepayment of the 2004 Notes as a loss on extinguishment of debt during the first quarter of 2011. The Company used $150 million in borrowings under its revolving credit facility and available cash to fund the prepayment of the 2004 Notes.
Amendments to Credit Facility
In March 2011, the Company entered into an agreement (the Incremental Agreement), which supplemented the Credit Agreement, dated as of October 1, 2007 (the Credit Agreement) among the Company, the guarantors party thereto, the lending institutions identified in the Credit Agreement, Bank of America, N.A., as syndication agent, and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent. The Incremental Agreement provided for additional term loan borrowings under the Credit Agreement in an aggregate principal amount of $100 million (the Incremental Term Loans). The proceeds of the Incremental Term Loans were used to repay $80 million of borrowings under the Companys revolving credit facility that were borrowed in connection with the prepayment of the 2004 Notes that occurred in March 2011.
In addition, in March 2011, $36.1 million of term loans maturing on October 1, 2012 were converted to term loans with a new maturity date of October 1, 2014. In addition, all of the Companys $33.7 million of revolving credit facility commitments with a termination date of October 1, 2012 were converted to revolving credit facility commitments with a new termination date of October 1, 2014 (as noted below, all outstanding revolving credit borrowings were repaid with proceeds from the sale of the marine business). In connection with the extension of these maturity dates, the range of the applicable interest rate margins, and the commitment fee rate on unused but committed portions of the revolving credit facility were increased. As described below under Revolving Credit Facility Borrowings, the Company incurred transaction fees of approximately $0.3 million in connection with the extensions that will be amortized over the extended term of the facility as interest expense.
As a result of the Incremental Term Loans, the amendment to the Credit Agreement and repayment of $125 million in term borrowings using the proceeds of the offering of its 6.875% Senior Subordinated Notes, the Company had $375 million of term loans outstanding on June 26, 2011. All of the term loans will mature on October 1, 2014.
Interest on the term loans bear interest at an applicable rate elected by the Company equal to either the base rate (the greater of either the federal funds effective rate plus 0.5%, the prime rate or one month LIBOR plus 1.0%) plus an applicable margin of 0.50% to 1.75%, or a LIBOR rate for the period corresponding to the applicable interest period of the borrowings plus an applicable margin of 1.50% to 2.75%. The actual amount of the applicable margin will be based on the ratio of Consolidated Total Indebtedness to Consolidated EBITDA (each as defined in the Credit Agreement). At June 26, 2011, all outstanding term loans were subject to the LIBOR rate of 0.3125% plus an applicable margin of 2.25%, resulting in an interest rate of 2.5625%.
10
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revolving Credit Facility Borrowings
During the first quarter of 2011, the Company borrowed $165 million under its $400 million revolving credit facility to fund the VasoNova acquisition and the retirement of the 2004 Notes. The borrowings were subsequently repaid with the proceeds from the sale of the marine business (for additional information regarding the sale of the marine business, see Note 15, Divestiture related activities) and borrowings under the Incremental Term Loans. As of June 26, 2011, the Company had no outstanding borrowings and approximately $3 million in outstanding standby letters of credit issued under its revolving credit facility.
In connection with the extension of term loan maturities that occurred in March 2011, the commitment fee rate on unused but committed portions of the revolving credit facility increased to a range of 0.375% to 0.50%. The actual amount of the commitment fee rate is based on the ratio of Consolidated Total Indebtedness to Consolidated EBITDA (each as defined in the Credit Agreement). At June 26, 2011, the commitment fee rate was 0.375%.
Fair Value of Long-Term Debt
The carrying amount of long-term debt reported in the condensed consolidated balance sheet as of June 26, 2011 is $949.9 million. Using a discounted cash flow technique that incorporates a market interest yield curve with adjustments for duration, optionality, and risk profile, the Company has determined the fair value of its debt to be $1,081.6 million at June 26, 2011. The Companys implied credit rating is a factor in determining the market interest yield curve.
Debt Maturities
As of June 26, 2011, the aggregate amounts of the securitization program and long-term debt maturing during the remainder of 2011, during each of the next three fiscal years and thereafter were as follows:
(Dollars in thousands) | ||||
2011 |
$ | 29,700 | ||
2012 |
| |||
2013 |
| |||
2014 |
375,000 | |||
2015 and thereafter |
650,000 |
Note 8 Financial instruments
The Company uses derivative instruments for risk management purposes and does not utilize derivative instruments for trading or speculation purposes. Foreign exchange contracts are used to manage foreign currency transaction exposure, and the interest rate swap is used to reduce exposure to interest rate changes. These derivative instruments, whose settlement dates extend through December 2012, are designated as cash flow hedges and are recorded on the balance sheet at fair market value. The effective portion of the gains or losses on derivatives is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. See Note 9, Fair value measurement for additional information.
11
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides the location and fair values of derivative instruments designated as hedging instruments in the condensed consolidated balance sheet as of June 26, 2011 and December 31, 2010:
June 26, 2011 Fair Value |
December 31, 2010 Fair Value |
|||||||
(Dollars in thousands) | ||||||||
Asset derivatives: |
||||||||
Foreign exchange contracts: |
||||||||
Other assets current |
$ | 419 | $ | 880 | ||||
Total asset derivatives |
$ | 419 | $ | 880 | ||||
Liability derivatives: |
||||||||
Interest rate swap: |
||||||||
Derivative liabilities current |
$ | 15,251 | $ | 15,004 | ||||
Other liabilities noncurrent |
3,619 | 9,566 | ||||||
Foreign exchange contracts: |
||||||||
Derivative liabilities current |
247 | 630 | ||||||
Other liabilities noncurrent |
11 | | ||||||
Total liability derivatives |
$ | 19,128 | $ | 25,200 | ||||
The following table provides the amount of the gains and losses attributable to derivative instruments in cash flow hedging relationships that were reported in other comprehensive income (OCI), and the location and amount of gains and losses attributable to such derivatives that were reclassified from accumulated other comprehensive income (AOCI) to the condensed consolidated statement of income for the three and six months ended June 26, 2011 and June 27, 2010:
After Tax Gain/(Loss) Recognized in OCI |
||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 26, 2011 |
June 27, 2010 |
June 26, 2011 |
June 27, 2010 |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Interest rate swap |
$ | 1,694 | $ | 161 | $ | 3,351 | $ | (151 | ) | |||||||
Foreign exchange contracts |
(275 | ) | (527 | ) | (26 | ) | 620 | |||||||||
Total |
$ | 1,419 | $ | (366 | ) | $ | 3,325 | $ | 469 | |||||||
Pre-Tax (Gain)/Loss Reclassified from AOCI into Income |
||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 26, 2011 |
June 27, 2010 |
June 26, 2011 |
June 27, 2010 |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Interest rate swap: |
||||||||||||||||
Interest expense |
$ | 3,935 | $ | 4,584 | $ | 7,655 | $ | 9,164 | ||||||||
Foreign exchange contracts: |
||||||||||||||||
Net revenues |
| (10 | ) | | 10 | |||||||||||
Cost of goods sold |
(78 | ) | (1,120 | ) | (662 | ) | (1,855 | ) | ||||||||
Income from discontinued operations |
(333 | ) | 89 | (768 | ) | 58 | ||||||||||
Total |
$ | 3,524 | $ | 3,543 | $ | 6,225 | $ | 7,377 | ||||||||
For the three and six months ended June 26, 2011 and June 27, 2010, there was no reclassification from AOCI to income resulting from ineffectiveness related to the Companys derivative instruments.
12
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides information on the changes in AOCI related to derivative instruments, net of tax, for the six months ended June 26, 2011 and June 27, 2010:
June 26, 2011 |
June 27, 2010 |
|||||||
(Dollars in thousands) | ||||||||
Balance at beginning of year |
$ | (15,262 | ) | $ | (17,343 | ) | ||
Additions and revaluations |
(294 | ) | (3,897 | ) | ||||
Loss reclassified from AOCI into income |
3,805 | 4,343 | ||||||
Tax rate adjustment |
(186 | ) | 23 | |||||
|
|
|
|
|||||
Balance at end of period |
$ | (11,937 | ) | $ | (16,874 | ) | ||
|
|
|
|
Based on interest rates and exchange rates at June 26, 2011, approximately $9.6 million of unrealized after tax losses within AOCI are expected to be reclassified from AOCI during the next twelve months. However, the actual amount reclassified from AOCI could vary due to future changes in interest rates and exchange rates.
Note 9 Fair value measurement
For a description of the fair value hierarchy, see Note 10 to the Companys 2010 consolidated financial statements included in its current report on Form 8-K for the year ended December 31, 2010.
The following tables provide information regarding the financial assets and liabilities carried at fair value measured on a recurring basis as of June 26, 2011 and December 31, 2010:
Total carrying value at June 26, 2011 |
Quoted prices in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Cash and cash equivalents |
$ | 65,000 | $ | 65,000 | $ | | $ | | ||||||||
Bonds - foreign government |
6,915 | 6,915 | | | ||||||||||||
Investments in marketable securities |
4,209 | 4,209 | | | ||||||||||||
Derivative assets |
419 | | 419 | | ||||||||||||
Derivative liabilities |
19,128 | | 19,128 | | ||||||||||||
Contingent consideration liabilities |
9,530 | | | 9,530 | ||||||||||||
Total carrying value at December 31, 2010 |
Quoted prices in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Investments in marketable securities |
$ | 4,108 | $ | 4,108 | $ | | $ | | ||||||||
Derivative assets |
880 | | 880 | | ||||||||||||
Derivative liabilities |
25,200 | | 25,200 | |
The following table provides a reconciliation of changes in Level 3 financial liabilities measured at fair value on a recurring basis for the six month period ending June 26, 2011:
Contingent consideration |
||||
(Dollars in thousands) | ||||
Balance at beginning of year |
$ | | ||
Initial estimate of contingent consideration |
15,400 | |||
Payment |
(6,000 | ) | ||
Revaluations |
130 | |||
|
|
|||
Balance at end of period |
$ | 9,530 | ||
|
|
See Note 7, Borrowings, for a discussion of the fair value of the Companys long-term debt.
13
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Valuation Techniques Used to Determine Fair Value
The Companys cash and cash equivalents valued based upon Level 1 inputs are comprised of overnight investments in money market funds. The funds invest in obligations of the U.S. Treasury, including Treasury bills, bonds and notes. The funds seek to maintain a net asset value of $1.00 per share.
The Companys financial assets valued based upon Level 1 inputs are comprised of investments in marketable securities held in trust, which are available to pay benefits under certain deferred compensation plans and other compensatory arrangements and zero coupon Greece government bonds. The investment assets of the trust are valued using quoted market prices multiplied by the number of securities held in the trust. The Greece government bonds were received in settlement of amounts due to the Company from sales to the public hospital system in Greece for 2007, 2008 and 2009. The bonds mature over three years. The fair value of the bonds is determined based on quoted prices in active markets for identical assets.
The Companys financial assets valued based upon Level 2 inputs are comprised of foreign exchange contracts. The Companys financial liabilities valued based upon Level 2 inputs are comprised of an interest rate swap contract and foreign exchange contracts. The Company uses foreign exchange contracts to manage foreign currency transaction exposure and the interest rate swap is used to reduce exposure to interest rate changes. The fair value of the foreign exchange contracts represents the amount required to enter into offsetting contracts with similar remaining maturities based on quoted market prices. The fair value of the interest rate swap contract is developed from market-based inputs under the income approach using cash flows discounted at relevant market interest rates. The Company has taken into account the creditworthiness of the counterparties in measuring fair value. See Note 8, Financial instruments for additional information.
The Companys financial liabilities valued based upon Level 3 inputs are comprised of contingent consideration pertaining to the VasoNova acquisition. The fair value of the contingent consideration is determined using a weighted probability of potential payment scenarios discounted at rates reflective of the Companys credit rating and expected return on the VasoNova business. The assumptions used to develop the estimated amount recognized for the contingent consideration arrangement are updated each reporting period. The second quarter changes in the discount rates and the timing of expected pay-outs resulted in an additional accrual of approximately $0.1 million. As of June 26, 2011, the Company has recorded approximately $3.9 million of contingent consideration in other current liabilities and the remaining $5.6 million in other liabilities.
Note 10 Changes in shareholders equity
In 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, under the Companys senior credit agreements, the Company is subject to certain restrictions relating to its ability to repurchase shares in the event the Companys consolidated leverage ratio exceeds certain levels, which may limit the Companys ability to repurchase shares under this Board authorization. Through June 26, 2011, no shares have been purchased under this Board authorization.
The following table provides a reconciliation of basic to diluted weighted average common shares outstanding:
Three Months Ended | Six Months Ended | |||||||||||||||
June 26, 2011 |
June 27, 2010 |
June 26, 2011 |
June 27, 2010 |
|||||||||||||
(Shares in thousands) | ||||||||||||||||
Basic |
40,536 | 39,913 | 40,297 | 39,852 | ||||||||||||
Dilutive shares assumed issued |
336 | 443 | 351 | 425 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted |
40,872 | 40,356 | 40,648 | 40,277 | ||||||||||||
|
|
|
|
|
|
|
|
Weighted average stock options that were anti-dilutive and therefore not included in the calculation of earnings per share were approximately 8,776 thousand and 8,906 thousand for the three and six month periods ended June 26, 2011, respectively, and approximately 1,004 thousand and 871 thousand for the three and six month periods ended June 27, 2010, respectively. The increase in weighted average anti-dilutive shares for the three and six month periods ended June 26, 2011 reflects the inclusion of the warrants that were issued in connection with hedge transactions entered into in connection with the Companys issuance of convertible notes in August 2010.
14
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11 Pension and other postretirement benefits
The Company has a number of defined benefit pension and postretirement plans covering eligible U.S. and non-U.S. employees. The defined benefit pension plans are noncontributory. The benefits under these plans are based primarily on years of service and employees pay near retirement. The Companys funding policy for U.S. plans is to contribute annually, at a minimum, amounts required by applicable laws and regulations. Obligations under non-U.S. plans are systematically provided for by depositing funds with trustees or by book reserves. In 2008 the Company amended the Teleflex Retirement Income Plan (TRIP) to cease future benefit accruals for all employees, other than those subject to a collective bargaining agreement, and amended its Supplemental Executive Retirement Plans (SERP) for all executives to cease future benefit accruals for both employees and executives as of December 31, 2008. The Company replaced the non-qualified defined benefits provided under the SERP with a non-qualified defined contribution arrangement under the Companys Deferred Compensation Plan, effective January 1, 2009. In addition, in 2008, the Companys postretirement benefit plans were amended to eliminate future benefits for employees, other than those subject to a collective bargaining agreement, who had not attained age 50 and whose age plus service was less than 65.
In March 2011, in connection with the Companys sale of its marine business approximately $24.4 million of the pension obligations and approximately $7.4 million of other postretirement obligations were assumed by the buyer and approximately $17.7 million of related pension assets were transferred to the buyer. The amounts are subject to further valuation by the buyer. For additional information regarding the sale of the marine business, see Note 15, Divestiture related activities.
The Company and certain of its subsidiaries provide medical, dental and life insurance benefits to pensioners and survivors. The associated plans are unfunded and approved claims are paid from Company funds.
Net benefit cost of pension and postretirement benefit plans consisted of the following:
Pension Three Months Ended |
Postretirement Benefits Three Months Ended |
Pension Six Months Ended |
Postretirement Benefits Six Months Ended |
|||||||||||||||||||||||||||||
June 26, 2011 |
June 27, 2010 |
June 26, 2011 |
June 27, 2010 |
June 26, 2011 |
June 27, 2010 |
June 26, 2011 |
June 27, 2010 |
|||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Service cost |
$ | 613 | $ | 627 | $ | 198 | $ | 190 | $ | 1,192 | $ | 1,257 | $ | 396 | $ | 380 | ||||||||||||||||
Interest cost |
4,342 | 4,275 | 549 | 653 | 8,586 | 8,578 | 1,100 | 1,305 | ||||||||||||||||||||||||
Expected return on Plan assets |
(4,943 | ) | (4,003 | ) | | | (9,843 | ) | (8,016 | ) | | | ||||||||||||||||||||
Net amortization and deferral |
976 | 995 | 69 | 131 | 2,031 | 1,999 | 138 | 262 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Net benefit cost |
$ | 988 | $ | 1,894 | $ | 816 | $ | 974 | $ | 1,966 | $ | 3,818 | $ | 1,634 | $ | 1,947 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is required to make minimum pension contributions totaling $6.4 million during 2011, of which $0.4 million and $1.4 million were made during the three and six months ended June 26, 2011, respectively.
Note 12 Commitments and contingent liabilities
Product warranty liability: The Company warrants to the original purchasers of certain of its products that it will, at its option, repair or replace such products, without charge, if they fail due to a manufacturing defect. Warranty periods vary by product. The Company has recourse provisions for certain products that would enable recovery from third parties for amounts paid under the warranty. The Company accrues for product warranties when, based on available information, it is probable that customers will make claims under warranties relating to products that have been sold, and a reasonable estimate of the costs (based on historical claims experience relative to sales) can be made. The following table provides information regarding changes in the Companys product warranty liability accruals for the six months ended June 26, 2011 (dollars in thousands):
Balance at beginning of year |
$ | 10,877 | ||
Accruals for warranties issued in 2011 |
58 | |||
Settlements (cash and in kind) |
(89 | ) | ||
Accruals related to pre-existing warranties |
(10 | ) | ||
Dispositions |
(2,281 | ) | ||
Transfers to liabilities held for sale |
(4,587 | ) | ||
Effect of translation |
6 | |||
|
|
|||
Balance at end of period |
$ | 3,974 | ||
|
|
15
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Operating leases: The Company uses various leased facilities and equipment in its operations. The terms for these leased assets vary depending on the lease agreement. In connection with these operating leases, the Company had residual value guarantees in the amount of approximately $1.9 million at June 26, 2011. The Companys future payments under the operating leases cannot exceed the minimum rent obligation plus the residual value guarantee amount. The residual value guarantee amounts are based upon the unamortized lease values of the assets under lease, and are payable by the Company if the Company declines to renew the leases or to exercise its purchase option with respect to the leased assets. At June 26, 2011, the Company had no liabilities recorded for these obligations. Any residual value guarantee amounts paid to the lessor may be recovered by the Company from the sale of the assets to a third party.
Environmental: The Company is subject to contingencies as a result of environmental laws and regulations that in the future may require the Company to take further action to correct the effects on the environment of prior disposal practices or releases of chemical or petroleum substances by the Company or other parties. Much of this liability results from the U.S. Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), often referred to as Superfund, the U.S. Resource Conservation and Recovery Act (RCRA) and similar state laws. These laws require the Company to undertake certain investigative and remedial activities at sites where the Company conducts or once conducted operations or at sites where Company-generated waste was disposed.
Remediation activities vary substantially in duration and cost from site to site. The nature of these activities, and their associated costs, depend on the mix of unique site characteristics, evolving remediation technologies, the regulatory agencies involved and enforcement policies, as well as the presence or absence of other potentially responsible parties. At June 26, 2011, the Companys condensed consolidated balance sheet included an accrued liability of approximately $7.7 million relating to these matters. Considerable uncertainty exists with respect to these costs and, if adverse changes in circumstances occur, the ultimate liability may exceed the amount accrued as of June 26, 2011. The time frame over which the accrued amounts may be paid out, based on past history, is estimated to be 15-20 years.
Regulatory matters: 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 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 had been deficient.
The Company developed and implemented a comprehensive plan to correct the issues raised in the letter and further improve overall quality systems. From the end of 2009 to the beginning of 2010, the FDA reinspected the Arrow facilities covered by the corporate warning letter, and Arrow responded to the observations issued by the FDA as a result of those inspections. In the third quarter of 2010, the FDA removed the limitations previously imposed on Arrow with respect to certificates of foreign governments, or CFGs, and Arrow subsequently submitted and received FDA approval of all eligible CFG requests, and continues to receive such approvals. In June 2011, the Company received formal notification from the FDA that all issues raised by the corporate warning letter have been addressed.
Litigation: The Company is a party to various lawsuits and claims arising in the normal course of business. These lawsuits and claims include actions involving product liability, intellectual property, employment and environmental matters. Based on information currently available, advice of counsel, established reserves and other resources, the Company does not believe that any such actions are likely to be, individually or in the aggregate, material to its 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 the Companys business, financial condition, results of operations or liquidity. Legal costs such as outside counsel fees and expenses are charged to expense in the period incurred. See Note 15, Divestiture-related activities, for a discussion of the reserves associated with retained liabilities related to businesses that have been divested.
Tax audits and examinations: The Company and its subsidiaries are routinely subject to tax examinations by various taxing authorities. As of June 26, 2011, the most significant tax examinations in process are in Canada, Czech Republic and Germany. In
16
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
conjunction with these examinations and as a regular and routine practice, the Company may determine a need to establish certain reserves or to adjust existing reserves with respect to uncertain tax positions. Accordingly, developments occurring with respect to these examinations, including resolution of uncertain tax positions, could result in increases or decreases to our recorded tax liabilities, which could impact our financial results.
Other: The Company has various purchase commitments for materials, supplies and items of permanent investment incident to the ordinary conduct of business. On average, such commitments are not at prices in excess of current market.
Note 13 Business segment information
During the second quarter of 2011, management approved a plan to divest the Companys Cargo Systems business, which was part of the Companys Aerospace Segment. Following the reclassification of the Cargo Systems business as a discontinued operation, the Companys continuing operations represent a single segment business, which consists of the design, manufacture and distribution of medical devices.
The Companys medical businesses design, manufacture and distribute medical devices primarily used in critical care, surgical applications and cardiac care. Additionally, the company designs, manufactures and supplies devices and instruments for other medical device manufacturers. The Companys products are largely sold and distributed to hospitals and healthcare providers and are most widely used in the acute care setting for a range of diagnostic and therapeutic procedures and in general and specialty surgical applications.
The following table provides total net revenues by product group for the three and six months ended June 26, 2011 and June 27, 2010:
Three Months Ended | Six Months Ended | |||||||||||||||
June 26, 2011 |
June 27, 2010 |
June 26, 2011 |
June 27, 2010 |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net revenues: |
||||||||||||||||
Critical Care |
$ | 253,648 | $ | 233,673 | $ | 490,786 | $ | 459,602 | ||||||||
Surgical Care |
72,891 | 66,218 | 137,909 | 129,337 | ||||||||||||
Cardiac Care |
22,140 | 18,769 | 39,809 | 37,098 | ||||||||||||
OEM and Development Services |
42,373 | 38,961 | 76,240 | 74,294 | ||||||||||||
Other |
234 | 806 | 546 | 1,633 | ||||||||||||
Total net revenues |
$ | 391,286 | $ | 358,427 | $ | 745,290 | $ | 701,964 | ||||||||
The following table provides total net revenues by geographic region for the three and six months ended June 26, 2011 and June 27, 2010:
Three Months Ended | Six Months Ended | |||||||||||||||
June 26, 2011 |
June 27, 2010 |
June 26, 2011 |
June 27, 2010 |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net revenues (based on business unit location): |
||||||||||||||||
United States |
$ | 203,898 | $ | 197,780 | $ | 392,220 | $ | 381,459 | ||||||||
Europe, Middle East and Africa |
143,564 | 123,436 | 273,936 | 251,913 | ||||||||||||
Asia, Latin America, Canada and Mexico |
43,824 | 37,211 | 79,134 | 68,592 | ||||||||||||
Total net revenues |
$ | 391,286 | $ | 358,427 | $ | 745,290 | $ | 701,964 | ||||||||
17
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14 Condensed consolidated guarantor financial information
As described in Note 7, Borrowings, in June 2011, Teleflex Incorporated (referred to below as Parent Company) issued $250 million of 6.875% senior subordinated notes which were registered with the Securities and Exchange Commission. The notes are fully and unconditionally guaranteed, jointly and severally, by certain of the Parent Companys subsidiaries (each, a Guarantor Subsidiary and collectively, the Guarantor Subsidiaries). Each Guarantor Subsidiary is 100% owned by the Parent Company. The Companys condensed consolidating statements of income for the three and six month periods ending June 26, 2011 and June 27, 2010, condensed consolidating balance sheets as of June 26, 2011 and December 31, 2010 and our condensed consolidated statements of cash flows for the six month periods ending June 26, 2011 and June 27, 2010 provide consolidating information for:
i. | Parent Company, the issuer of the guaranteed obligations; |
ii. | Guarantor Subsidiaries, on a combined basis; |
iii. | Non-guarantor subsidiaries, on a combined basis; and |
iv. | Parent Company and its subsidiaries on a consolidated basis. |
Each entity in the condensed consolidating financial information follows the same accounting policies as described in the consolidated financial statements, except for the use by the Parent Company and Guarantor Subsidiaries of the equity method of accounting to reflect ownership interests in subsidiaries which are eliminated upon consolidation.
Consolidating entries and eliminations in the following consolidating financial statements represent adjustments to (a) eliminate intercompany transactions between or among the Parent Company, the Guarantor Subsidiaries and the non-guarantor subsidiaries, (b) eliminate the investments in subsidiaries and (c) record consolidating entries.
18
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
TELEFLEX INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
Three Months Ended June 26, 2011 | ||||||||||||||||||||
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Condensed Consolidated |
||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Net revenues |
$ | | $ | 247,041 | $ | 207,603 | $ | (63,358 | ) | $ | 391,286 | |||||||||
Cost of goods sold |
| 153,110 | 115,181 | (61,037 | ) | 207,254 | ||||||||||||||
Gross profit |
| 93,931 | 92,422 | (2,321 | ) | 184,032 | ||||||||||||||
Selling, general and administrative expenses |
10,526 | 62,991 | 38,296 | (62 | ) | 111,751 | ||||||||||||||
Research and development expenses |
| 10,057 | 2,399 | | 12,456 | |||||||||||||||
Restructuring and other impairment charges |
11 | 1,270 | 1,895 | | 3,176 | |||||||||||||||
Income (loss) from continuing operations before interest, loss on extinguishments of debt and taxes |
(10,537 | ) | 19,613 | 49,832 | (2,259 | ) | 56,649 | |||||||||||||
Interest expense |
28,787 | (13,134 | ) | 132 | | 15,785 | ||||||||||||||
Interest income |
(112 | ) | (18 | ) | (123 | ) | | (253 | ) | |||||||||||
Loss on extinguishments of debt |
816 | | | | 816 | |||||||||||||||
Income (loss) from continuing operations before taxes |
(40,028 | ) | 32,765 | 49,823 | (2,259 | ) | 40,301 | |||||||||||||
Taxes (benefit) on income from continuing operations |
(16,404 | ) | 11,881 | 12,915 | 322 | 8,714 | ||||||||||||||
Equity in net income of consolidated subsidiaries |
61,983 | 39,081 | | (101,064 | ) | | ||||||||||||||
Income from continuing operations |
38,359 | 59,965 | 36,908 | (103,645 | ) | 31,587 | ||||||||||||||
Operating income from discontinued operations |
(12,844 | ) | (1,652 | ) | 10,136 | | (4,360 | ) | ||||||||||||
Taxes (benefit) on income from discontinued operations |
(8,555 | ) | (1,443 | ) | 2,738 | | (7,260 | ) | ||||||||||||
Income from discontinued operations |
(4,289 | ) | (209 | ) | 7,398 | | 2,900 | |||||||||||||
Net income |
34,070 | 59,756 | 44,306 | (103,645 | ) | 34,487 | ||||||||||||||
Less: Income from continuing operations attributable to noncontrolling interests |
| | 258 | | 258 | |||||||||||||||
Income from discontinued operations attributable to noncontrolling interest |
| | 159 | | 159 | |||||||||||||||
Net income attributable to common shareholders |
$ | 34,070 | $ | 59,756 | $ | 43,889 | $ | (103,645 | ) | $ | 34,070 | |||||||||
19
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three Months Ended June 27, 2010 | ||||||||||||||||||||
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Condensed Consolidated |
||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Net revenues |
$ | | $ | 236,412 | $ | 188,112 | $ | (66,097 | ) | $ | 358,427 | |||||||||
Cost of goods sold |
| 134,139 | 115,488 | (65,501 | ) | 184,126 | ||||||||||||||
Gross profit |
| 102,273 | 72,624 | (596 | ) | 174,301 | ||||||||||||||
Selling, general and administrative expenses |
9,568 | 59,006 | 31,211 | (17 | ) | 99,768 | ||||||||||||||
Research and development expenses |
| 8,822 | 1,466 | | 10,288 | |||||||||||||||
Restructuring and other impairment charges |
| 508 | (433 | ) | | 75 | ||||||||||||||
Income (loss) from continuing operations before interest and taxes |
(9,568 | ) | 33,937 | 40,380 | (579 | ) | 64,170 | |||||||||||||
Interest expense |
33,477 | (19,256 | ) | 5,313 | | 19,534 | ||||||||||||||
Interest income |
1 | (37 | ) | (114 | ) | | (150 | ) | ||||||||||||
Income (loss) from continuing operations before taxes |
(43,046 | ) | 53,230 | 35,181 | (579 | ) | 44,786 | |||||||||||||
Taxes (benefit) on income from continuing operations |
(16,977 | ) | 17,871 | 9,861 | 1,685 | 12,440 | ||||||||||||||
Equity in net income of consolidated subsidiaries |
69,570 | (936 | ) | | (68,634 | ) | | |||||||||||||
Income from continuing operations |
43,501 | 34,423 | 25,320 | (70,898 | ) | 32,346 | ||||||||||||||
Operating income (loss) from discontinued operations |
27,720 | (16 | ) | 17,908 | 22 | 45,634 | ||||||||||||||
Taxes on income from discontinued operations |
11,073 | 547 | 5,834 | | 17,454 | |||||||||||||||
Income (loss) from discontinued operations |
16,647 | (563 | ) | 12,074 | 22 | 28,180 | ||||||||||||||
Net income |
60,148 | 33,860 | 37,394 | (70,876 | ) | 60,526 | ||||||||||||||
Less: Income from continuing operations attributable to noncontrolling interests |
| | 259 | | 259 | |||||||||||||||
Income from discontinued operations attributable to noncontrolling interest |
| | 119 | | 119 | |||||||||||||||
Net income attributable to common shareholders |
$ | 60,148 | $ | 33,860 | $ | 37,016 | $ | (70,876 | ) | $ | 60,148 | |||||||||
20
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Six Months Ended June 26, 2011 | ||||||||||||||||||||
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Condensed Consolidated |
||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Net revenues |
$ | | $ | 473,867 | $ | 389,461 | $ | (118,038 | ) | $ | 745,290 | |||||||||
Cost of goods sold |
| 290,532 | 221,715 | (115,493 | ) | 396,754 | ||||||||||||||
Gross profit |
| 183,335 | 167,746 | (2,545 | ) | 348,536 | ||||||||||||||
Selling, general and administrative expenses |
20,095 | 122,456 | 71,992 | 594 | 215,137 | |||||||||||||||
Research and development expenses |
| 19,441 | 4,053 | | 23,494 | |||||||||||||||
Restructuring and other impairment charges |
11 | 1,858 | 1,902 | | 3,771 | |||||||||||||||
Income (loss) from continuing operations before interest, loss on extinguishments of debt and taxes |
(20,106 | ) | 39,580 | 89,799 | (3,139 | ) | 106,134 | |||||||||||||
Interest expense |
59,871 | (28,147 | ) | 207 | | 31,931 | ||||||||||||||
Interest income |
(114 | ) | (41 | ) | (203 | ) | | (358 | ) | |||||||||||
Loss on extinguishments of debt |
15,413 | | | | 15,413 | |||||||||||||||
Income (loss) from continuing operations before taxes |
(95,276 | ) | 67,768 | 89,795 | (3,139 | ) | 59,148 | |||||||||||||
Taxes (benefit) on income from continuing operations |
(35,536 | ) | 25,742 | 24,390 | (1,032 | ) | 13,564 | |||||||||||||
Equity in net income of consolidated subsidiaries |
197,064 | 112,120 | | (309,184 | ) | | ||||||||||||||
Income from continuing operations |
137,324 | 154,146 | 65,405 | (311,291 | ) | 45,584 | ||||||||||||||
Operating income from discontinued operations |
(50,608 | ) | 37,759 | 72,425 | | 59,576 | ||||||||||||||
Taxes (benefit) on income from discontinued operations |
(25,166 | ) | 4,888 | 12,757 | | (7,521 | ) | |||||||||||||
Income from discontinued operations |
(25,442 | ) | 32,871 | 59,668 | | 67,097 | ||||||||||||||
Net income |
111,882 | 187,017 | 125,073 | (311,291 | ) | 112,681 | ||||||||||||||
Less: Income from continuing operations attributable to noncontrolling interests |
| | 481 | | 481 | |||||||||||||||
Income from discontinued operations attributable to noncontrolling interest |
| | 318 | | 318 | |||||||||||||||
Net income attributable to common shareholders |
$ | 111,882 | $ | 187,017 | $ | 124,274 | $ | (311,291 | ) | $ | 111,882 | |||||||||
21
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Six Months Ended June 27, 2010 | ||||||||||||||||||||
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Condensed Consolidated |
||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Net revenues |
$ | | $ | 455,697 | $ | 372,886 | $ | (126,619 | ) | $ | 701,964 | |||||||||
Cost of goods sold |
| 255,843 | 221,759 | (120,750 | ) | 356,852 | ||||||||||||||
Gross profit |
| 199,854 | 151,127 | (5,869 | ) | 345,112 | ||||||||||||||
Selling, general and administrative expenses |
17,297 | 115,510 | 62,257 | 355 | 195,419 | |||||||||||||||
Research and development expenses |
| 16,982 | 2,617 | | 19,599 | |||||||||||||||
Restructuring and other impairment charges |
| 806 | (268 | ) | | 538 | ||||||||||||||
Income (loss) from continuing operations before interest and taxes |
(17,297 | ) | 66,556 | 86,521 | (6,224 | ) | 129,556 | |||||||||||||
Interest expense |
65,430 | (37,405 | ) | 10,429 | | 38,454 | ||||||||||||||
Interest income |
2 | (79 | ) | (279 | ) | | (356 | ) | ||||||||||||
Income (loss) from continuing operations before taxes |
(82,729 | ) | 104,040 | 76,371 | (6,224 | ) | 91,458 | |||||||||||||
Taxes (benefit) on income from continuing operations |
(31,023 | ) | 37,928 | 21,896 | (2,438 | ) | 26,363 | |||||||||||||
Equity in net income of consolidated subsidiaries |
135,685 | 19,512 | | (155,197 | ) | | ||||||||||||||
Income from continuing operations |
83,979 | 85,624 | 54,475 | (158,983 | ) | 65,095 | ||||||||||||||
Operating income from discontinued operations |
23,313 | 13,006 | 23,841 | (151 | ) | 60,009 | ||||||||||||||
Taxes on income from discontinued operations |
9,472 | 9,460 | 7,688 | | 26,620 | |||||||||||||||
Income from discontinued operations |
13,841 | 3,546 | 16,153 | (151 | ) | 33,389 | ||||||||||||||
Net income |
97,820 | 89,170 | 70,628 | (159,134 | ) | 98,484 | ||||||||||||||
Less: Income from continuing operations attributable to noncontrolling interests |
| | 431 | | 431 | |||||||||||||||
Income from discontinued operations attributable to noncontrolling interest |
| | 233 | | 233 | |||||||||||||||
Net income attributable to common shareholders |
$ | 97,820 | $ | 89,170 | $ | 69,964 | $ | (159,134 | ) | $ | 97,820 | |||||||||
22
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
TELEFLEX INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
June 26, 2011 | ||||||||||||||||||||
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Condensed Consolidated |
||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 176,973 | $ | | $ | 188,836 | $ | | $ | 365,809 | ||||||||||
Accounts receivable, net |
1,133 | 297,739 | 447,724 | (463,415 | ) | 283,181 | ||||||||||||||
Inventories, net |
| 187,849 | 118,904 | (12,931 | ) | 293,822 | ||||||||||||||
Prepaid expenses and other current assets |
5,440 | 2,921 | 22,219 | | 30,580 | |||||||||||||||
Income taxes receivable |
15,903 | | 9,176 | | 25,079 | |||||||||||||||
Deferred tax assets |
10,857 | 15,292 | 9,853 | (1,005 | ) | 34,997 | ||||||||||||||
Assets held for sale |
| 2,738 | 112,722 | | 115,460 | |||||||||||||||
Total current assets |
210,306 | 506,539 | 909,434 | (477,351 | ) | 1,148,928 | ||||||||||||||
Property, plant and equipment, net |
5,936 | 146,176 | 103,141 | | 255,253 | |||||||||||||||
Goodwill |
| 956,705 | 518,731 | | 1,475,436 | |||||||||||||||
Intangibles assets, net |
| 704,277 | 213,275 | | 917,552 | |||||||||||||||
Investments in affiliates |
5,084,928 | 622,188 | 21,167 | (5,725,999 | ) | 2,284 | ||||||||||||||
Deferred tax assets |
48,682 | | | (48,306 | ) | 376 | ||||||||||||||
Other assets |
43,587 | 2,383,938 | 502,028 | (2,851,150 | ) | 78,403 | ||||||||||||||
Total assets |
$ | 5,393,439 | $ | 5,319,823 | $ | 2,267,776 | $ | (9,102,806 | ) | $ | 3,878,232 | |||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||
Current liabilities |
||||||||||||||||||||
Current borrowings |
$ | | $ | | $ | 29,700 | $ | | $ | 29,700 | ||||||||||
Accounts payable |
95,527 | 356,972 | 81,543 | (466,484 | ) | 67,558 | ||||||||||||||
Accrued expenses |
31,246 | 22,376 | 61,131 | | 114,753 | |||||||||||||||
Payroll and benefit-related liabilities |
25,227 | 12,330 | 31,098 | | 68,655 | |||||||||||||||
Derivative liabilities |
15,498 | | | | 15,498 | |||||||||||||||
Accrued interest |
13,355 | | | | 13,355 | |||||||||||||||
Income taxes payable |
| | 3,786 | | 3,786 | |||||||||||||||
Deferred tax liabilities |
| | 10,629 | (5,482 | ) | 5,147 | ||||||||||||||
Liabilities held for sale |
| | 45,827 | | 45,827 | |||||||||||||||
Total current liabilities |
180,853 | 391,678 | 263,714 | (471,966 | ) | 364,279 | ||||||||||||||
Long-term borrowings |
949,866 | | | | 949,866 | |||||||||||||||
Deferred tax liabilities |
| 363,391 | 72,994 | (43,828 | ) | 392,557 | ||||||||||||||
Pension and postretirement benefit liabilities |
66,231 | 31,242 | 17,438 | | 114,911 | |||||||||||||||
Noncurrent liability for uncertain tax positions |
11,831 | 16,490 | 36,684 | | 65,005 | |||||||||||||||
Other liabilities |
2,239,033 | 5,619 | 650,693 | (2,854,068 | ) | 41,277 | ||||||||||||||
Total liabilities |
3,447,814 | 808,420 | 1,041,523 | (3,369,862 | ) | 1,927,895 | ||||||||||||||
Total common shareholders equity |
1,945,625 | 4,511,403 | 1,221,541 | (5,732,944 | ) | 1,945,625 | ||||||||||||||
Noncontrolling interest |
| | 4,712 | | 4,712 | |||||||||||||||
Total equity |
1,945,625 | 4,511,403 | 1,226,253 | (5,732,944 | ) | 1,950,337 | ||||||||||||||
Total liabilities and equity |
$ | 5,393,439 | $ | 5,319,823 | $ | 2,267,776 | $ | (9,102,806 | ) | $ | 3,878,232 | |||||||||
23
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010 | ||||||||||||||||||||
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Condensed Consolidated |
||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 22,632 | $ | | $ | 185,820 | $ | | $ | 208,452 | ||||||||||
Accounts receivable, net |
16,163 | 643,931 | 484,333 | (850,231 | ) | 294,196 | ||||||||||||||
Inventories, net |
4,007 | 184,620 | 160,646 | (10,675 | ) | 338,598 | ||||||||||||||
Prepaid expenses and other current assets |
7,607 | 3,105 | 15,436 | 2,683 | 28,831 | |||||||||||||||
Income taxes receivable |
6,982 | | 3,591 | (6,685 | ) | 3,888 | ||||||||||||||
Deferred tax assets |
3,953 | 24,610 | 10,746 | | 39,309 | |||||||||||||||
Assets held for sale |
| 2,745 | 5,214 | | 7,959 | |||||||||||||||
Total current assets |
61,344 | 859,011 | 865,786 | (864,908 | ) | 921,233 | ||||||||||||||
Property, plant and equipment, net |
9,511 | 150,139 | 128,055 | | 287,705 | |||||||||||||||
Goodwill |
| 943,656 | 498,755 | | 1,442,411 | |||||||||||||||
Intangibles assets, net |
| 694,186 | 224,336 | | 918,522 | |||||||||||||||
Investments in affiliates |
4,863,996 | 607,815 | 22,561 | (5,489,473 | ) | 4,899 | ||||||||||||||
Deferred tax assets |
41,200 | | 2,620 | (43,462 | ) | 358 | ||||||||||||||
Other assets |
38,962 | 2,128,048 | 429,623 | (2,528,606 | ) | 68,027 | ||||||||||||||
Total assets |
$ | 5,015,013 | $ | 5,382,855 | $ | 2,171,736 | $ | (8,926,449 | ) | $ | 3,643,155 | |||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||
Current liabilities |
||||||||||||||||||||
Current borrowings |
$ | 72,500 | $ | | $ | 31,211 | $ | | $ | 103,711 | ||||||||||
Accounts payable |
1,664 | 614,494 | 322,582 | (853,894 | ) | 84,846 | ||||||||||||||
Accrued expenses |
20,634 | 22,477 | 74,377 | | 117,488 | |||||||||||||||
Payroll and benefit-related liabilities |
23,752 | 11,657 | 36,009 | | 71,418 | |||||||||||||||
Derivative liabilities |
15,634 | | | | 15,634 | |||||||||||||||
Accrued interest |
18,247 | | 100 | | 18,347 | |||||||||||||||
Income taxes payable |
| | 11,632 | (6,746 | ) | 4,886 | ||||||||||||||
Deferred tax liabilities |
| | 4,433 | | 4,433 | |||||||||||||||
Liabilities held for sale |
| | | | | |||||||||||||||
Total current liabilities |
152,431 | 648,628 | 480,344 | (860,640 | ) | 420,763 | ||||||||||||||
Long-term borrowings |
813,409 | | | | 813,409 | |||||||||||||||
Deferred tax liabilities |
| 348,603 | 65,676 | (43,460 | ) | 370,819 | ||||||||||||||
Pension and postretirement benefit liabilities |
90,391 | 31,472 | 19,906 | | 141,769 | |||||||||||||||
Noncurrent liability for uncertain tax positions |
9,771 | 19,877 | 32,954 | | 62,602 | |||||||||||||||
Other liabilities |
2,165,635 | 25 | 408,604 | (2,527,749 | ) | 46,515 | ||||||||||||||
Total liabilities |
3,231,637 | 1,048,605 | 1,007,484 | (3,431,849 | ) | 1,855,877 | ||||||||||||||
Total common shareholders equity |
1,783,376 | 4,334,250 | 1,160,350 | (5,494,600 | ) | 1,783,376 | ||||||||||||||
Noncontrolling interest |
| | 3,902 | | 3,902 | |||||||||||||||
Total equity |
1,783,376 | 4,334,250 | 1,164,252 | (5,494,600 | ) | 1,787,278 | ||||||||||||||
Total liabilities and equity |
$ | 5,015,013 | $ | 5,382,855 | $ | 2,171,736 | $ | (8,926,449 | ) | $ | 3,643,155 | |||||||||
24
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
TELEFLEX INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Six Months Ended June 26, 2011 | ||||||||||||||||
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Condensed Consolidated |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net cash (used in) provided by operating activities from continuing operations |
$ | (80,269 | ) | $ | 82,500 | $ | 37,403 | $ | 39,634 | |||||||
Cash Flows from Investing Activities of Continuing Operations: |
||||||||||||||||
Expenditures for property, plant and equipment |
(154 | ) | (10,127 | ) | (4,996 | ) | (15,277 | ) | ||||||||
Proceeds from sales of businesses and assets, net of cash sold |
| 62,044 | 38,872 | 100,916 | ||||||||||||
Payments for businesses and intangibles acquired, net of cash acquired |
| (30,570 | ) | | (30,570 | ) | ||||||||||
Net cash (used in) provided by investing activities from continuing operations |
(154 | ) | 21,347 | 33,876 | 55,069 | |||||||||||
Cash Flows from Financing Activities of Continuing Operations: |
||||||||||||||||
Proceeds from long-term borrowings |
515,000 | | | 515,000 | ||||||||||||
Repayment in long-term borrowings |
(455,800 | ) | | | (455,800 | ) | ||||||||||
Debt and equity issuance and amendment costs |
(19,058 | ) | | | (19,058 | ) | ||||||||||
Proceeds from stock compensation plans |
30,577 | | | 30,577 | ||||||||||||
Dividends |
(27,438 | ) | | | (27,438 | ) | ||||||||||
Intercompany transactions |
192,478 | (103,847 | ) | (88,631 | ) | | ||||||||||
Net cash provided by (used in) financing activities from continuing operations |
235,759 | (103,847 | ) | (88,631 | ) | 43,281 | ||||||||||
Cash Flows from Discontinued Operations: |
||||||||||||||||
Net cash (used in) provided by operating activities |
(992 | ) | | 14,060 | 13,068 | |||||||||||
Net cash used in investing activities |
(3 | ) | | (1,238 | ) | (1,241 | ) | |||||||||
Net cash (used in) provided by discontinued operations |
(995 | ) | | 12,822 | 11,827 | |||||||||||
Effect of exchange rate changes on cash and cash equivalents |
| | 7,546 | 7,546 | ||||||||||||
Net increase in cash and cash equivalents |
154,341 | | 3,016 | 157,357 | ||||||||||||
Cash and cash equivalents at the beginning of the period |
22,632 | | 185,820 | 208,452 | ||||||||||||
Cash and cash equivalents at the end of the period |
$ | 176,973 | $ | | $ | 188,836 | $ | 365,809 | ||||||||
25
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Six Months Ended June 27, 2010 | ||||||||||||||||
Parent Company |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Condensed Consolidated |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net cash (used in) provided by operating activities from continuing operations |
$ | (58,649 | ) | $ | 123,477 | $ | 14,908 | $ | 79,736 | |||||||
Cash Flows from Investing Activities of Continuing Operations: |
||||||||||||||||
Expenditures for property, plant and equipment |
(1,096 | ) | (9,704 | ) | (2,858 | ) | (13,658 | ) | ||||||||
Proceeds from sales of businesses and assets, net of cash sold |
50,000 | 24,734 | | 74,734 | ||||||||||||
Payments for businesses and intangibles acquired, net of cash acquired |
| | (81 | ) | (81 | ) | ||||||||||
Net cash provided by (used in) investing activities from continuing operations |
48,904 | 15,030 | (2,939 | ) | 60,995 | |||||||||||
Cash Flows from Financing Activities of Continuing Operations: |
||||||||||||||||
Repayment in long-term borrowings |
(64,170 | ) | | | (64,170 | ) | ||||||||||
Increase in notes payable and current borrowings |
39,700 | | | 39,700 | ||||||||||||
Proceeds from stock compensation plans |
8,032 | | | 8,032 | ||||||||||||
Payments to noncontrolling interest shareholders |
| | (637 | ) | (637 | ) | ||||||||||
Dividends |
(27,120 | ) | | | (27,120 | ) | ||||||||||
Intercompany transactions |
133,320 | (138,507 | ) | 5,187 | | |||||||||||
Net cash provided by (used in) financing activities from continuing operations |
89,762 | (138,507 | ) | 4,550 | (44,195 | ) | ||||||||||
Cash Flows from Discontinued Operations: |
||||||||||||||||
Net cash provided by operating activities |
3,315 | | 16,423 | 19,738 | ||||||||||||
Net cash used in investing activities |
(182 | ) | | (1,664 | ) | (1,846 | ) | |||||||||
Net cash provided by discontinued operations |
3,133 | | 14,759 | 17,892 | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
| | (15,604 | ) | (15,604 | ) | ||||||||||
Net increase in cash and cash equivalents |
83,150 | | 15,674 | 98,824 | ||||||||||||
Cash and cash equivalents at the beginning of the period |
31,777 | | 156,528 | 188,305 | ||||||||||||
Cash and cash equivalents at the end of the period |
$ | 114,927 | $ | | $ | 172,202 | $ | 287,129 | ||||||||
Note 15 Divestiture-related activities
Discontinued Operations
During the first six months of 2011, management approved plans to sell the Companys cargo container business and cargo systems business, reporting units constituting the Companys Aerospace Segment. The Company is actively marketing these businesses while it continues to serve its customers. For financial statement purposes, the assets, liabilities, results of operations and cash flows of these businesses have been segregated from continuing operations and are presented in the Companys condensed consolidated financial statements as discontinued operations for all periods presented. See Assets and Liabilities Held for Sale below for details of the businesses assets and liabilities.
During the second quarter of 2011, the Company recorded approximately $8.7 million of reserves associated with retained liabilities related to businesses that have been divested. These contingencies arose from and were directly related to the operations of the respective divested businesses prior to the disposal and have been reflected in operating income from discontinued operations.
On March 22, 2011, the Company completed the sale of its marine business to an affiliate of H.I.G. Capital, LLC for $123.1 million (consisting of $100.9 million in cash, net of $1.5 million of cash included in the marine business as part of the net assets sold), plus a subordinated promissory note in the amount of $4.5 million and the assumption by the buyer of approximately $15.5 million in liabilities related to the marine business). The Company realized a gain of $57.0 million, net of tax benefits, from the sale of the business. The marine business consisted of the Companys businesses that were engaged in the design, manufacture and distribution of steering and throttle controls and engine and drive assemblies for the recreational marine market, heaters for commercial vehicles and burner units for military field feeding appliances. The marine business represented the Companys entire Commercial Segment.
26
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On December 31, 2010, the Company completed the sale of the Actuation business of its subsidiary Telair International Incorporated to TransDigm Group, Incorporated for approximately $94 million and realized a gain of $51.0 million, net of tax, from the sale of the business.
On June 25, 2010, the Company completed the sale of its rigging products and services business (Heavy Lift) to Houston Wire & Cable Company for $50 million and realized a gain of $17.0 million, net of tax, from the sale of the business.
On March 2, 2010, the Company completed the sale of its SSI Surgical Services Inc. business (SSI), a reporting unit within its Medical Segment, to a privately-owned healthcare company for approximately $25 million and realized a gain of $2.2 million, net of tax, from the sale of the business.
The prior period financial statements have been revised to present the marine business and the cargo container and cargo systems businesses as discontinued operations.
The following table presents the operating results of the operations that have been treated as discontinued operations for the periods presented:
Three Months Ended | Six Months Ended | |||||||||||||||
June
26, 2011 |
June
27, 2010 |
June
26, 2011 |
June
27, 2010 |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net revenues |
$ | 53,299 | $ | 122,073 | $ | 140,352 | $ | 218,194 | ||||||||
Costs and other expenses |
53,155 | 105,264 | 133,045 | 196,747 | ||||||||||||
Gain (loss) on disposition(1) |
(4,504 | ) | 28,825 | 52,269 | 38,562 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from discontinued operations before income taxes |
(4,360 | ) | 45,634 | 59,576 | 60,009 | |||||||||||
Provision for income taxes(2) |
(7,260 | ) | 17,454 | (7,521 | ) | 26,620 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from discontinued operations |
2,900 | 28,180 | 67,097 | 33,389 | ||||||||||||
Less: Income from discontinued operations attributable to noncontrolling interest |
159 | 119 | 318 | 233 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from discontinued operations attributable to common shareholders |
$ | 2,741 | $ | 28,061 | $ | 66,779 | $ | 33,156 | ||||||||
|
|
|
|
|
|
|
|
(1) | Gain on disposition during the first quarter of 2011 includes curtailment and settlement losses of approximately $11.5 million on the pension and postretirement obligations that were transferred to the buyer in connection with the sale of the marine business. The loss on disposition during the second quarter of 2011 includes an adjustment to the pension and postretirement liabilities of $3.5 million. |
(2) | The provision for income taxes for the three months ended June 26, 2011 was impacted favorably by the realization of net tax benefits resulting from the resolution (including the expiration of statutes of limitation) of U.S. federal, state, and foreign tax matters relating to prior years. In addition, the provision for income taxes for the six months ended June 26, 2011 was further impacted favorably by tax on the sale of the marine business being incurred at significantly lower than statutory effective tax rates. |
Net assets and liabilities of the discontinued operations sold in 2011 were comprised of the following:
(Dollars in thousands) | ||||
Net assets |
$ | 109,979 | ||
Net liabilities |
(36,399 | ) | ||
|
|
|||
$ | 73,580 | |||
|
|
27
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Assets and Liabilities Held for Sale
The table below provides information regarding assets and liabilities held for sale at June 26, 2011 and December 31, 2010. At June 26, 2011, the assets and liabilities held for sale included the Companys cargo container and cargo systems businesses and five buildings which the Company is actively marketing.
June 26, 2011 | December 31, 2010 | |||||||
(Dollars in thousands) | ||||||||
Assets held for sale: |
||||||||
Accounts receivable, net |
$ | 30,512 | $ | | ||||
Inventories, net |
50,159 | | ||||||
Other current assets |
2,288 | | ||||||
Property, plant and equipment, net |
27,155 | 7,959 | ||||||
Other assets |
5,346 | | ||||||
Total assets held for sale |
$ | 115,460 | $ | 7,959 | ||||
Liabilities held for sale: |
||||||||
Current liabilities |
$ | 40,567 | $ | | ||||
Noncurrent liabilities |
5,260 | | ||||||
Total liabilities held for sale |
$ | 45,827 | $ | | ||||
The cargo systems business uses leased facilities in its operations. In connection with these operating leases, the Companys cargo systems business had a residual value guarantee in the amount of approximately $7.8 million at June 26, 2011. The future payments under the operating leases cannot exceed the minimum rent obligation plus the residual value guarantee amount. The residual value guarantee amount is based upon the unamortized lease value of the asset under lease, and is payable by the Companys cargo systems business if the lease is not renewed or the purchase option is not exercised with respect to the leased assets. At June 26, 2011, the Companys cargo systems business had no liabilities recorded for these obligations. Any residual value guarantee amounts paid to the lessor may be recovered by the Company from the sale of the assets to a third party.
28
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
All statements made in this Quarterly Report on Form 10-Q, 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 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 relating to our business, see Item 1A of this report, and the pages from our prospectus supplement, dated June 8, 2011, to the prospectus, dated June 1, 2011, incorporated by reference in Item 1A and included as Exhibit 99.1 to this report. We expressly disclaim any obligation to update these forward-looking statements, except as otherwise specifically stated by us or as required by law or regulation.
Overview
Teleflex is 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 130 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. OEM and Development Services design and manufacture instruments and devices for other medical device manufacturers.
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 our businesses serving the aerospace markets and commercial 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 single-use medical product offerings for critical care, enhanced our global footprint and added to our research and development capabilities.
We continue to 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.
During 2011, management approved plans to sell our cargo container and cargo systems businesses, reporting units constituting our former Aerospace Segment. We are actively marketing these businesses and selectively reviewing alternatives while we continue to serve our customers.
On March 22, 2011, we completed the sale of our marine business to an affiliate of H.I.G. Capital, LLC for $123.1 million, consisting of $100.9 million in cash, net of $1.5 million of cash included in the marine business as part of the net assets sold, plus a subordinated promissory note in the amount of $4.5 million and the assumption by the buyer of approximately $15.5 million in liabilities related to the marine business. We realized a gain of $57.0 million, net of tax benefits, in connection with the sale. The marine business consisted of our businesses that were engaged in the design, manufacture and distribution of steering and throttle controls and engine and drive assemblies for the recreational marine market, heaters for commercial vehicles and burner units for military field feeding appliances.
29
On December 31, 2010, we completed the sale of the Actuation business of our subsidiary Telair International Incorporated to TransDigm Group, Incorporated for approximately $94 million and realized a gain of $51.0 million, net of tax, from the sale of the business.
On June 25, 2010, we completed the sale of our rigging products and services business (Heavy Lift) to Houston Wire & Cable Company for $50 million and realized a gain of $17.0 million, net of tax, from the sale of the business.
On March 2, 2010, we completed the sale of our SSI Surgical Services Inc. business (SSI), a reporting unit within our Medical Segment, to a privately-owned healthcare company for approximately $25 million. We realized a gain of $2.2 million, net of tax, on this transaction.
The prior period financial statements have been revised to present the marine business and the cargo container business as discontinued operations. See Note 15 to our condensed consolidated financial statements included in this report for discussion of discontinued operations.
Health Care Reform
On March 23, 2010 the Patient Protection and Affordable Care Act was signed into law. This legislation will have a significant impact on our business. For medical device companies such as Teleflex, the expansion of medical insurance coverage should lead to greater utilization of the products we manufacture, but this legislation also contains provisions designed to contain the cost of healthcare, which could negatively affect pricing of our products. In addition, commencing in 2013, the legislation imposes a 2.3% excise tax on sales of medical devices. As this new law is implemented over the next 2-3 years, we will be in a better position to ascertain its impact on our business. We currently estimate the impact of the medical device excise tax will be approximately $15 million annually, beginning in 2013. Also in the first quarter of 2010, we evaluated the change in the tax regulations related to the Medicare Part D subsidy as currently outlined in the new legislation and determined that it did not have a significant impact on our financial position or results of operations.
Results of Operations
Revenues
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 constant currency revenue growth. Constant currency revenue growth excludes the impact of translating the results of international subsidiaries at different currency exchange rates from period to period and the comparable activity of businesses divested within the most recent twelve-month period.
The following tables present the net revenues by product group for the three and six months ended June 26, 2011 and June 27, 2010:
Three Months Ended | % Increase/ (Decrease) | |||||||||||||||||||
June 26, 2011 | June 27, 2010 | Constant Currency |
Currency Impact |
Total Change |
||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Critical Care |
$ | 253.6 | $ | 233.7 | 3.2 | % | 5.3 | % | 8.5 | % | ||||||||||
Surgical Care |
72.9 | 66.2 | 4.3 | % | 5.8 | % | 10.1 | % | ||||||||||||
Cardiac Care |
22.1 | 18.8 | 10.5 | % | 7.1 | % | 17.6 | % | ||||||||||||
OEM |
42.4 | 39.0 | 6.8 | % | 1.9 | % | 8.7 | % | ||||||||||||
Other |
0.3 | 0.7 | (62.5 | %) | 5.4 | % | (57.1 | %) | ||||||||||||
Total net revenues |
$ | 391.3 | $ | 358.4 | 4.0 | % | 5.2 | % | 9.2 | % | ||||||||||
30
Six Months Ended | % Increase/ (Decrease) | |||||||||||||||||||
June 26, 2011 | June 27, 2010 | Constant Currency |
Currency Impact |
Total Change |
||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Critical Care |
$ | 490.8 | $ | 459.6 | 4.0 | % | 2.8 | % | 6.8 | % | ||||||||||
Surgical Care |
137.9 | 129.3 | 3.5 | % | 3.2 | % | 6.7 | % | ||||||||||||
Cardiac Care |
39.8 | 37.1 | 3.4 | % | 3.9 | % | 7.3 | % | ||||||||||||
OEM |
76.2 | 74.3 | 1.7 | % | 0.9 | % | 2.6 | % | ||||||||||||
Other |
0.6 | 1.7 | (66.7 | %) | 2.0 | % | (64.7 | %) | ||||||||||||
Total net revenues |
$ | 745.3 | $ | 702.0 | 3.5 | % | 2.7 | % | 6.2 | % | ||||||||||
All product lines within the Critical Care product group achieved constant currency revenue growth in the second quarter and first six months of 2011 as compared to the same periods of 2010. The increase in the second quarter of 2011 was led principally by higher sales of vascular access products in Europe and Asia/Latin America, respiratory products in North America, Europe and Asia and of urology products in Europe and Latin America. The increase in the first six months of 2011 was primarily a result of higher sales of vascular and respiratory products in each of our regions and of urology products in Europe and Latin America.
The Surgical Care product group experienced constant currency revenue growth of 4.3% in the second quarter of 2011 compared with 2010, primarily due to higher sales of ligation products in Europe, Asia and Latin America. For the first six months of 2011, Surgical Cares revenues grew 3.5% on a constant currency basis due to higher sales of ligation products in Europe, Asia and Latin America and of chest drainage products in Europe and Latin America.
During the second quarter and first six months of 2011, the Cardiac Care product group experienced constant currency revenue growth of 10.5% and 3.4%, respectively, compared with the same periods of 2010. The increase was largely attributable to higher sales of intra aortic balloon pumps and catheters in each of our regions.
During the second quarter and first six months of 2011, the OEM product group revenues grew 6.8% and 1.7%, respectively, on a constant currency basis compared with the same periods of 2010, due to higher sales of specialty suture, catheter fabrication and orthopedic implant products.
Gross profit
Three Months Ended | Six Months Ended | |||||||||||||||
June
26, 2011 |
June
27, 2010 |
June
26, 2011 |
June
27, 2010 |
|||||||||||||
(Dollars in millions) | ||||||||||||||||
Gross profit |
$ | 184.0 | $ | 174.3 | $ | 348.5 | $ | 345.1 | ||||||||
Percentage of sales |
47.0 | % | 48.6 | % | 46.8 | % | 49.2 | % |
The principal factors contributing to the decrease in gross profit as a percent of sales during the period were higher manufacturing, raw material and fuel-related freight costs ($3.9 million during the second quarter and $6.9 million during the six months end June 26, 2011), provisions for the diminution in the net realizable value of inventory that has been phased out or whose shelf life has expired ($3.1 million during the second quarter and $4.0 million during the six months ended June 26, 2011) and overall erosion of selling prices totaling $2.0 million during the six months ended June 26, 2011, despite favorable pricing actions in the second quarter of 2011, particularly in Asia and Latin America. Our ability to increase prices to offset the impact of higher commodity costs has been mixed, as price increases in Asia and Latin America are more than offset by price erosion in Europe and to a lesser extent in North America during the six months ended June 26, 2011.
Selling, general and administrative
Three Months Ended | Six Months Ended | |||||||||||||||
June
26, 2011 |
June
27, 2010 |
June
26, 2011 |
June
27, 2010 |
|||||||||||||
(Dollars in millions) | ||||||||||||||||
Selling, general and administrative |
$ | 111.8 | $ | 99.8 | $ | 215.1 | $ | 195.4 | ||||||||
Percentage of sales |
28.6 | % | 27.8 | % | 28.9 | % | 27.8 | % |
31
Selling, general and administrative expenses as a percentage of revenues for the three months ended June 26, 2011 increased to 28.6% from 27.8% during the same period in 2010 and increased to 28.9% from 27.8% during the six months ended June 26, 2011 compared to the same period in 2010. The increases in selling, general and administrative costs during the three and six months ended June 26, 2011 were partially attributable to increased spending related to sales, marketing, and clinical education initiatives of $8.5 million and $13.4 million, respectively, and increases in the valuation allowance against its zero coupon Greece government bonds of $1.0 million and $1.2 million, respectively. In addition, increases in litigation reserves were recorded in the second quarter of 2011 which affected the three and six months ended June 26, 2011 by approximately $1.7 million.
Selling, general and administrative expenses for the six months ended June 26, 2011 also include approximately $2 million of net separation costs for our former CEO (comprised of $5 million of payments under his employment agreement, less approximately $3 million of stock option and restricted share forfeitures).
The overall increase in selling, general and administrative expenses for the three and six months ended June 26, 2011 also included $2.2 million and $4.0 million, respectively, of costs related to VasoNova, a company that was acquired in January 2011.
Research and development
Three Months Ended | Six Months Ended | |||||||||||||||
June
26, 2011 |
June
27, 2010 |
June
26, 2011 |
June
27, 2010 |
|||||||||||||
(Dollars in millions) | ||||||||||||||||
Research and development |
$ | 12.5 | $ | 10.3 | $ | 23.5 | $ | 19.6 | ||||||||
Percentage of sales |
3.2 | % | 2.9 | % | 3.2 | % | 2.8 | % |
The increase in research and development expenses during the three and six months ended June 26, 2011 compared to the same periods in 2010 reflect increased investments related to antimicrobial and catheter tip positioning technologies.
Restructuring and other impairment charges
Three Months Ended | Six Months Ended | |||||||||||||||
June
26, 2011 |
June
27, 2010 |
June
26, 2011 |
June
27, 2010 |
|||||||||||||
(Dollars in millions) | ||||||||||||||||
Restructuring and other impairment charges |
$ | 3.2 | $ | 0.1 | $ | 3.8 | $ | 0.5 |
Restructuring and other impairment charges increased to $3.2 million and $3.8 million for the three and six months ended June 26, 2011, respectively. The increase was primarily due to impairment charges of $3.1 million related to the decline in value of certain investments in affiliates that are considered to be other than temporary recorded in the second quarter of 2011. The determination that the declines in value of these investments were other than temporary resulted from our determination that the operating losses of the investees demonstrated an inability to recover the carrying value of the investments. The impairment charges reduce the net carrying amount of our investments to the expected recovery amount negotiated with the remaining partners to the investment.
Restructuring and other impairment charges for the six months ended June 26, 2011 and June 27, 2010 also include approximately $0.6 million and $0.5 million, respectively, of integration costs associated with Arrow and our other 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 affected employees and facilities of Arrow have been included in the allocation of the purchase price of Arrow. As of June 26, 2011, we expect future charges that we will incur in connection with the Arrow integration plan, if any, will be nominal.
32
Interest expense
Three Months Ended | Six Months Ended | |||||||||||||||
June
26, 2011 |
June
27, 2010 |
June
26, 2011 |
June
27, 2010 |
|||||||||||||
(Dollars in millions) | ||||||||||||||||
Interest expense |
$ | 15.8 | $ | 19.5 | $ | 31.9 | $ | 38.5 | ||||||||
Average interest rate on debt |
5.0 | % | 5.7 | % | 5.1 | % | 5.7 | % |
Interest expense decreased in the second quarter of 2011 compared to the same period of 2010 due to a reduction of approximately $218 million in average outstanding debt. For the first six months of 2011, average outstanding debt was approximately $214 million lower compared to the corresponding period of 2010.
Loss on extinguishments of debt
During the six months ended June 26, 2011, we recorded losses on the extinguishment of debt of $15.4 million as a result of the prepayment of our Senior Notes issued in 2004 (the 2004 Notes) in the first quarter of 2011 and $125 million repayment of the term loan borrowing under our senior credit facility in the second quarter of 2011. In connection with the prepayment of our 2004 Notes, we recognized debt extinguishment costs of approximately $14.6 million relating to the prepayment make-whole amount of $13.9 million payable to the holders of the 2004 Notes and the write-off of $0.7 million of unamortized debt issuance costs incurred prior to the prepayment of the 2004 Notes. During the second quarter of 2011, we recorded a $0.8 million write-off of unamortized debt issuance costs as a loss on extinguishment of debt in connection with the $125 million repayment of the term loan borrowing. See Note 7 to the condensed consolidated financial statements included in this report for further information.
Taxes on income from continuing operations
Three Months Ended | Six Months Ended | |||||||||||||||
June
26, 2011 |
June
27, 2010 |
June
26, 2011 |
June
27, 2010 |
|||||||||||||
Effective income tax rate |
21.6 | % | 27.8 | % | 22.9 | % | 28.8 | % |
The effective income tax rate for the three and six months ended June 26, 2011 were 21.6% and 22.9%, respectively, compared to 27.8% and 28.8% for the three and six months ended June 27, 2010, respectively. The decrease in the effective tax rate for each of the three and six months ended June 26, 2011 is primarily attributable to the realization of net tax benefits resulting from resolution (including the expiration of statutes of limitation) of various U.S. federal, state and foreign tax matters relating to prior tax years.
Liquidity and Capital Resources
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.
During the first six months of 2011, we completed a series of transactions that significantly restructured our debt obligations and borrowing capacity. These transactions, which are summarized below, are described in detail in Note 7 to the condensed consolidated financial statements included in this report. As a result of these transactions, we repaid certain obligations, incurred borrowings (some of which, incurred under our senior credit facilities, subsequently were repaid, as noted below) and obtained lender agreements to extend maturities of certain obligations, as described below.
| Prepayment of 2004 Notes. We prepaid the entire outstanding $165.8 million principal amount of our senior notes issued in 2004 (2004 Notes), and, in connection with this prepayment, paid the holders of the 2004 Notes a $13.9 million prepayment make-whole amount, together with accrued and unpaid interest of $1.7 million. We used $150.0 million of borrowings under our revolving credit facility and $15.8 million of available cash to make the prepayment, make-whole and interest payments. |
| Revolving Credit Facility Borrowings and Repayment. We borrowed $165 million under our revolving credit facility to fund a portion of our repayment of the 2004 Notes and to fund the VasoNova acquisition. We repaid the $165 million using $80 million of the proceeds from an additional term loan borrowing under our senior credit facility, and $85 million in proceeds from our sale of the Marine business. |
| Term Loan Borrowings and Repayment; Extension of Maturities. |
¡ | We entered into an agreement with lenders under our senior credit facility that provided an additional principal amount of $100 million in term loan borrowings and used $80 million of the proceeds to repay a portion of the borrowings under our revolving credit facility described above. We subsequently repaid $125 million of term loan borrowings under our senior credit facility using a portion of the proceeds of the 6.875% Senior Subordinated Notes due 2019 that we issued in June 2011. |
¡ | We obtained lender agreements to extend the maturity of $36.1 million of term loans from October 1, 2012 to October 1, 2014 and to extend the termination of $33.7 million of revolving credit facility commitments from October 1, 2012 to October 1, 2014. |
| 6.875% Senior Subordinated Notes due 2019. On June 13, 2011, we issued $250.0 million of 6.875% Senior Subordinated Notes due 2019 (the Notes). We will pay interest on the Notes semi-annually on June 1 and December 1, commencing on December 1, 2011, at a rate of 6.875% per year. The Notes will mature on June 1, 2019, unless earlier redeemed. We incurred transaction fees of approximately $4.2 million, including underwriters discounts and commissions in connection with the public offering of the Notes. As noted above, we used $125 million of the net proceeds to repay term loan borrowings under our senior credit facility. We also recorded a $0.8 million write-off of unamortized debt issuance costs as a loss on extinguishment of debt during the second quarter of 2011. |
The following table provides a summary of our outstanding borrowings and remaining borrowing capacity under our lending arrangements, excluding fees, discounts and interest incurred, as of June 26, 2011 and December 31, 2010, reflecting all of the transactions described above.
33
June 26, 2011 |
December 31, 2010 |
|||||||
(Dollars in millions) | ||||||||
Senior credit facility: |
||||||||
Term loan |
$ | 375.0 | $ | 400.0 | ||||
Revolving credit |
| | ||||||
Letters of credit |
2.8 | 3.7 | ||||||
|
|
|
|
|||||
Outstanding |
$ | 377.8 | $ | 403.7 | ||||
Remaining borrowing capacity(a) |
$ | 397.2 | $ | 396.3 | ||||
2004 Notes |
| 165.8 | ||||||
3.875% Convertible Senior Subordinated Notes |
400.0 | 400.0 | ||||||
6.875% Senior Subordinated Notes |
250.0 | |
(a) | The remaining borrowing capacity under the senior credit agreement represents the amount that may be borrowed through the $400 million revolving credit facility and additional letters of credit. All revolving credit facility commitments terminate ion October 1, 2014. |
At June 26, 2011 interest on the term loan borrowings under the senior credit facility was 2.5625%, based on a LIBOR rate of 0.3125% and an applicable margin of 2.25%.
The remaining borrowing capacity under the senior credit agreement represents the amount that may be borrowed through the revolving credit facility and additional letters of credit.
Our senior credit facility and our 6.875% senior subordinated notes due 2019 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.
See Note 7 to the condensed consolidated financial statements included in this report for additional information regarding the terms and maturities of the credit facilities and debt securities described above.
Cash Flows
Net cash provided by operating activities from continuing operations totaled $39.6 million during the first six months of 2011 compared to $79.7 million during the first six months of 2010. The decrease is due to higher growth of accounts receivable in Europe of $31.1 million, primarily due to the termination of a factoring agreement in Italy ($19.2 million), and a slow down in payments particularly Italy, Spain and Greece resulting in another $11.9 million increase in accounts receivable. The decrease in cash flows during the first six months of 2011 was also due to a worldwide increase in inventory of approximately $11.8 million in order to improve overall service levels, which included a $3.6 million inventory increase in the Asia Pacific region related to stocking a new distribution facility in Singapore. We expect that we will continue to increase inventory levels during the second half of 2011 as the company strives to continue to improve service levels. These operating cash flow decreases were partially offset by the impact from $7.0 million of lower interest payments during the period compared to the same period of 2010. We are required to make minimum pension contributions totaling $6.4 million during 2011, of which $1.4 million were made during the six months ended June 26, 2011.
During the second quarter of 2011, we recognized an increase in litigation reserves of $8.7 million associated with retained liabilities related to businesses that have been divested that are expected to be paid in the second half of 2011.
We continue to monitor credit risk resulting from the recent economic and financial turmoil related to sovereign debt issues in certain countries in southern Europe. As a result of the continuing deterioration of
34
the macro-economic factors in these countries, particularly Greece, Italy and Spain, we may incur higher credit losses related to the public hospital systems in these countries, which may have a negative impact on our results of operations and cash flows in the third quarter of 2011 and beyond. As of June 26, 2011, our outstanding accounts receivables from publically funded hospitals in these countries is $59.3 million.
Net cash provided by investing activities from continuing operations totaled $55.1 million during the first six months of 2011 compared to $61.0 million during the first six months of 2010. Cash provided by investing activities from continuing operations during the first half of 2011 includes $100.9 million in proceeds, net of $1.5 million in cash included in net assets sold, from the sale of the marine business, partly offset by cash paid of $30.6 million for the acquisition of VasoNova and capital expenditures of $15.3 million. The $30.6 million paid for the acquisition of VasoNova includes the initial payment of $24.9 million plus a $6.0 million contingent payment made to the former VasoNova security holders upon receiving 510(k) clearance from the U.S. Food and Drug Administration less a hold back fee and cash in the business obtained in the acquisition.
Net cash provided by financing activities from continuing operations totaled $43.3 million during the first six months of 2011, which included proceeds from the issuance of additional borrowings of $515 million, including the issuance of $250.0 million of 6.875% Senior Subordinated Notes. This additional indebtedness was partially offset by repayments of outstanding debt totaling $455.8 million, including the prepayment of the 2004 Notes totaling $165.8 million and the repayment of $125.0 million under the Credit Agreement. We incurred debt extinguishment costs of $19.1 million associated with repayments of these amounts (including the related make whole amounts paid to the holders of the 2004 Notes and related fees). We also made dividend payments of $27.4 million and recognized proceeds of $30.6 million from the exercise of outstanding stock options issued under our stock compensation plans.
Stock Repurchase Program
In 2007, our Board of Directors authorized the repurchase of up to $300 million of our outstanding common stock. Repurchases of our 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 our 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, under our senior credit facility and our 6.875% senior subordinated notes due 2019, we are subject to certain restrictions relating to our ability to repurchase shares in the event our consolidated leverage ratio exceeds certain levels, which may limit our ability to repurchase shares under this Board authorization. Through June 26, 2011, no shares have been purchased under this Board authorization.
Net Debt to Total Capital Ratio
The following table provides our net debt to total capital ratio:
June 26, 2011 | December 31, 2010 | |||||||
(Dollars in millions) | ||||||||
Net debt includes: |
||||||||
Current borrowings |
$ | 29.7 | $ | 103.7 | ||||
Long-term borrowings |
949.9 | 813.4 | ||||||
Total debt |
979.6 | 917.1 | ||||||
Less: Cash and cash equivalents |
365.8 | 208.5 | ||||||
Net debt |
$ | 613.8 | $ | 708.6 | ||||
Total capital includes: |
||||||||
Net debt |
$ | 613.8 | $ | 708.6 | ||||
Total common shareholders equity |
1,945.6 | 1,783.4 | ||||||
Total capital |
$ | 2,559.4 | $ | 2,492.0 | ||||
Percent of net debt to total capital |
24 | % | 28 | % |
35
We believe that our cash flow from operations and our ability to access additional funds through credit facilities will enable us to fund our operating requirements and capital expenditures and meet debt obligations. Depending on conditions in the capital markets and other factors, we will from time to time consider other financing transactions, the proceeds of which could be used to refinance current indebtedness or for other purposes.
New Accounting Standards
Refer to Note 2 to our condensed consolidated financial statements included in this report for a discussion of new accounting standards.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in market risk for the quarter ended June 26, 2011. See the information set forth in Part II, Item 7A of the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Item 4. Controls and Procedures
(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 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) 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.
36
Item 1. | Legal Proceedings |
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 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 had been deficient.
The Company developed and implemented a comprehensive plan to correct the issues raised in the letter and further improve overall quality systems. From the end of 2009 to the beginning of 2010, the FDA reinspected the Arrow facilities covered by the corporate warning letter, and Arrow responded to the observations issued by the FDA as a result of those inspections. In the third quarter of 2010, the FDA removed the limitations previously imposed on Arrow with respect to certificates of foreign governments, or CFGs, and Arrow subsequently submitted and received FDA approval of all eligible CFG requests, and continues to receive such approvals. In June 2011, the Company received formal notification from the FDA that all issues raised by the corporate warning letter have been addressed.
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.
Item 1A. | Risk Factors |
In connection with the public offering of its 6.875% senior subordinated notes due 2019, the Company provided updated risk factors in the Prospectus Supplement, dated June 8, 2011, to the Prospectus, dated June 1, 2011 (the Prospectus Supplement). The updated risk factors were included on pages S-17 to S-29, S-30, S-31 and S-35 of the Prospectus Supplement. The text of the updated risk factors has been filed as Exhibit 99.1 to this report, and is incorporated herein by reference.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Not applicable.
Item 3. | Defaults Upon Senior Securities |
Not applicable.
Item 5. | Other Information |
Not applicable.
37
Item 6. | Exhibits |
The following exhibits are filed as part of this report:
Exhibit No. |
Description | |||
12.1 |
| Computation of ratio of earnings to fixed charges. | ||
31.1 |
| Certification of Chief Executive Officer, pursuant to Rule 13a14(a) under the Securities Exchange Act of 1934. | ||
31.2 |
| Certification of Chief Financial Officer, pursuant to Rule 13a14(a) under the Securities Exchange Act of 1934. | ||
32.1 |
| Certification of Chief Executive Officer, pursuant to Rule 13a14(b) under the Securities Exchange Act of 1934. | ||
32.2 |
| Certification of Chief Financial Officer, pursuant to Rule 13a14(b) under the Securities Exchange Act of 1934. | ||
99.1 |
| Pages S-17 to S-29, S-30, S-31 and S-35 of the Prospectus Supplement, dated June 8, 2011, to the Prospectus, dated June 1, 2011, collectively relating to the public offering of the Companys 6.875% senior subordinated notes due 2019, which pages are incorporated by reference in Part II, Item 1A of this report. | ||
101.1 |
| The following materials from the Companys Quarterly Report on Form 10-Q for the quarter ended June 26, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Income for the three and six months ended June 26, 2011 and June 27, 2010; (ii) the Condensed Consolidated Balance Sheets as of June 26, 2011 and December 31, 2010; (iii) the Condensed Consolidated Statements of Cash Flows for the six months ended June 26, 2011 and June 27, 2010; (iv) the Condensed Consolidated Statements of Changes in Equity for the six months ended June 26, 2011 and June 27, 2010; and (v) Notes to Condensed Consolidated Financial Statements. |
38
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TELEFLEX INCORPORATED | ||
By: | /S/ BENSON F. SMITH | |
Benson F. Smith Chairman, President and Chief Executive Officer (Principal Executive Officer) | ||
By: | /S/ RICHARD A. MEIER | |
Richard A. Meier Executive Vice President and Chief Financial Officer (Principal Financial Officer) | ||
By: | /S/ CHARLES E. WILLIAMS | |
Charles E. Williams Corporate Controller and Chief Accounting Officer (Principal Accounting Officer) |
Dated: July 27, 2011
39
Exhibit 12.1
TELEFLEX, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in thousands, except ratios)
Six Months Ended | Year Ended December 31, | |||||||||||||||||||||||||||
June 26, 2011 | June 27, 2010 | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Earnings: |
||||||||||||||||||||||||||||
Income from continuing operations before taxes before adjustment for income or loss from equity investees |
$ | 59,148 | $ | 91,458 | $ | 107,692 | $ | 163,565 | $ | 89,774 | $ | 23,533 | $ | 49,517 | ||||||||||||||
Amortization of capitalized interest |
| | | 9 | 35 | 35 | 35 | |||||||||||||||||||||
Distributed income of equity investees |
| | | | 310 | 134 | 255 | |||||||||||||||||||||
Non-controlling interest loss (income) |
(481 | ) | (431 | ) | (861 | ) | (632 | ) | (441 | ) | (127 | ) | 486 | |||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
$ | 58,667 | $ | 91,027 | $ | 106,831 | $ | 162,942 | $ | 89,678 | $ | 23,575 | $ | 50,293 | |||||||||||||||
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|
|
|||||||||||||||
Fixed charges: |
||||||||||||||||||||||||||||
Interest expense |
$ | 25,405 | $ | 36,729 | $ | 72,281 | $ | 83,952 | $ | 116,317 | $ | 67,930 | $ | 40,665 | ||||||||||||||
Amortization of debt expense |
6,642 | 1,890 | 7,750 | 5,511 | 5,330 | 6,946 | 1,332 | |||||||||||||||||||||
Interest factor in rents |
4,816 | 5,239 | 10,477 | 11,624 | 12,134 | 13,393 | 12,950 | |||||||||||||||||||||
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|
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|
|
|
|||||||||||||||
Total fixed charges |
36,863 | 43,858 | 90,508 | 101,087 | 133,781 | 88,269 | 54,947 | |||||||||||||||||||||
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|
|
|
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|
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|
|
|
|||||||||||||||
Earnings and fixed charges |
$ | 95,530 | $ | 134,885 | $ | 197,339 | $ | 264,029 | $ | 223,459 | $ | 111,844 | $ | 105,240 | ||||||||||||||
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|
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|
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|
|
|
|||||||||||||||
Ratio of earnings to fixed charges |
2.6 | 3.1 | 2.2 | 2.6 | 1.7 | 1.3 | 1.9 | |||||||||||||||||||||
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Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Benson F. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Teleflex Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c. evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: July 27, 2011 | /s/ Benson F. Smith | |||||
Benson F. Smith | ||||||
Chairman, President and Chief Executive | ||||||
Officer |
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Richard A. Meier, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Teleflex Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c. evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: July 27, 2011 | /s/ Richard A. Meier | |||||
Richard A. Meier | ||||||
Executive Vice President and Chief Financial | ||||||
Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
RULE 13a-14(b) UNDER THE
SECURITIES EXCHANGE ACT OF 1934
In connection with the Quarterly Report of Teleflex Incorporated (the Company) on Form 10-Q for the period ending June 26, 2011, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Benson F. Smith, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial position and results of operations of the Company.
Date: July 27, 2011 | /s/ Benson F. Smith | |||||
Benson F. Smith | ||||||
Chairman, President and Chief Executive | ||||||
Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO
RULE 13a-14(b) UNDER THE
SECURITIES EXCHANGE ACT OF 1934
In connection with the Quarterly Report of Teleflex Incorporated (the Company) on Form 10-Q for the period ending June 26, 2011, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Richard A. Meier, Executive Vice President and Chief Financial Officer, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial position and results of operations of the Company.
Date: July 27, 2011 | /s/ Richard A. Meier | |||||
Richard A. Meier | ||||||
Executive Vice President and Chief | ||||||
Financial Officer |
Exhibit 99.1
Except as noted below, the following risk factors were included on pages S-17 to S-29, S-30, S-31 and S-35 of the Companys Prospectus Supplement, dated August 8, 2011 (to the Prospectus dated August 1, 2011) relating to the Companys offering (referred to in the risk factors as the offering) of its 6.875% Senior Subordinated Notes due 2019 (referred to in the risk factors as the notes) and are incorporated by reference into Part II, Item 1A of the quarterly report on Form 10-Q to which this Exhibit 99.1 is filed as an exhibit. The risk factor entitled If we are unable to resolve issues raised in our FDA corporate warning letter, it could have a material adverse effect on our business, financial condition and results of operations, our relationship with the FDA and the perception of our products by hospitals, clinics and physicians. that appeared on page S-20 of the Prospectus Supplement and references thereto have not been included below in light of the fact that the Company received formal notification from the FDA in June 2011 that all issues raised by the corporate warning letter have been addressed. For additional information, see Part II, Item 1 of the quarterly report on Form 10-Q to which this Exhibit 99.1 is filed as an exhibit.
RISK FACTORS
An investment in our securities may involve various risks. Prior to making a decision about investing in our securities, and in consultation with your own financial and legal advisors, you should carefully consider, among other matters, the risks described below as well as other information and data included in, or incorporated by reference into, this prospectus supplement and accompanying prospectus. If any of the events described in the risk factors below occur, our business, financial condition, operating results and prospects could be materially adversely affected, which in turn could adversely affect our ability to repay the notes or the trading price of the notes.
Risks Related to Our Business
Our Medical Segment 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.
The products within our Medical Segment are classified as medical devices and are subject to extensive regulation in the United States by the FDA and by comparable government agencies in other countries. The regulations govern the development, design, approval, manufacturing, labeling, importing and exporting and sale and marketing of many of our medical products. These regulations are also subject to future change. 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 or suspension of required licenses, and prohibitions against exporting of products to, or importing products from, countries outside the United States. We could be required to expend significant financial and human resources to remediate failures to comply with applicable regulations and quality assurance guidelines. Any one or more of these events could have a material adverse effect on our business, financial condition and results of operations.
In the United States, before we can market a new medical device, or a new use of, or claim for, or significant modification to, an existing product, we must first receive either 510(k) clearance or approval of a premarket approval, or PMA, application from the FDA, unless an exemption applies. In the 510(k) clearance process, the FDA must determine that our proposed product is substantially equivalent to a device legally on the market, known as a predicate device, with respect to intended use, technology and safety and effectiveness, in order to clear the proposed device for marketing. The PMA pathway requires us to demonstrate the safety and effectiveness of the device based, in part, on data obtained in human
clinical trials. Similarly, most major markets for medical devices outside the United States also require clearance, approval or compliance with certain standards before a product can be commercially marketed. The process of obtaining regulatory clearances and approvals to market a medical device, particularly from the FDA and certain foreign governmental authorities, can be costly and time consuming, and clearances and approvals might not be granted for new products on a timely basis, if at all. In addition, once a device has been cleared or approved, a new clearance or approval may be required before the device may be modified or its labeling changed. Furthermore, the FDA is currently reviewing its 510(k) clearance process, and may make the process more rigorous, which could require us to generate additional clinical or other data, and expend more time and effort, in obtaining future 510(k) product clearance. The regulatory clearance and approval process may result in, among other things, delayed realization of product revenues, in substantial additional costs or in limitations on indicated uses of products, any one of which could have a material adverse effect on our financial condition and results of operations.
Even after a product has received marketing approval or clearance, such product approval or clearance by the FDA can be withdrawn or limited due to unforeseen problems with the device or integrity issues relating to the marketing application. Later discovery of violations of FDA requirements for medical devices could result in FDA enforcement actions, including warning letters, fines, delays or suspensions of regulatory clearances, product seizures or recalls, injunctions, advisories or other field actions and/or operating restrictions. Medical devices are cleared or approved for one or more specific intended uses. Promoting a device for an off-label use could result in an FDA enforcement action or a penalty under a state or federal false claims law.
Furthermore, 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 the Quality System Regulation which requires testing, complaint handling, periodic audits, design controls, quality control testing and documentation procedures. FDA may also inspect for compliance with Medical Device Reporting Regulation, which requires manufacturers to submit reports to FDA of certain adverse events or malfunctions, and whether the facilities have submitted notifications of product recalls or other corrective actions in accordance with FDA regulations. Issues identified during such periodic inspections may result in warning letters, manufacturing shutdowns, product shortages, product seizures or recalls, fines and delays in product manufacturing, and may require significant resources to resolve.
Customers in our Medical Segment depend on third party coverage and reimbursement and the failure of healthcare programs to provide coverage and reimbursement, or the reduction in levels of reimbursement, for our medical products could adversely affect our Medical Segment.
The ability of our customers to obtain coverage and reimbursements for our medical products is important to our Medical Segment. Demand for many of our existing and new medical products is, and will continue to be, 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. Even when we develop or acquire a promising new product, we may find limited demand for the product unless reimbursement approval is obtained from private and governmental third party payors. Internationally, healthcare 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 many of our medical products could be adversely affected.
We cannot be sure that third party payors will maintain the current level of coverage and reimbursement to our customers for use of our existing products. Adverse coverage determinations or any
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reduction in the amount of reimbursement could harm our business by altering the extent to which potential customers select our products and the prices they are willing to pay or otherwise. In addition, as a result of their purchasing power and continually rising healthcare costs, third party payors are implementing cost cutting measures such as discounts, price reductions, limitations on coverage and reimbursement for new medical technologies and procedures, or other incentives from medical products suppliers. These trends could lead to pressure to reduce prices for our existing products and potential new products and could cause a decrease in the size of the market or a potential increase in competition that could negatively affect our business, financial condition and results of operations.
We may incur material losses and costs as a result of product liability and warranty claims that may be brought against us and recalls, which may adversely affect our results of operations and financial condition. Furthermore, as a medical device company, we face an inherent risk of damage to our reputation if one or more of our products are, or are alleged to be, defective.
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. As a result, we face an inherent risk of damage to our reputation if one or more of our products are, or are alleged to be, defective. In addition, our products for the aerospace industry 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. The outcome of litigation, particularly any class-action lawsuits, is difficult to quantify. Plaintiffs often seek recovery of very large or indeterminate amounts, including punitive damages. The magnitude of the potential losses relating to these lawsuits may remain unknown for substantial periods of time and the cost to defend against any such litigation may be significant. 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 voluntarily participate, or be required by applicable regulators, to participate in a recall of that product if the defect or the alleged defect relates to safety. In the event of a recall, we may experience lost sales and be exposed to individual or class-action litigation claims and reputational risk. Product liability, warranty and recall costs may have a material adverse effect on our business, financial condition and results of operations.
We are subject to healthcare fraud and abuse laws, regulation and enforcement; our failure to comply with those laws could have a material adverse effect on our results of operations and financial conditions.
We are also subject to healthcare fraud and abuse regulation and enforcement by the federal government and the states and foreign governments in which we conduct our business. The laws that may affect our ability to operate include:
| the federal healthcare programs Anti-Kickback Law, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs; |
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| federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent; |
| the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), which created federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters; and |
| state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers. |
If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, the exclusion from participation in federal and state healthcare programs and imprisonment, any of which could adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations.
Further, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively, the Healthcare Reform Act), among other things, amends the intent requirement of the federal anti-kickback and criminal health care fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the Healthcare Reform Act provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our managements attention from the operation of our business.
The Healthcare Reform Act also imposes new reporting and disclosure requirements on device manufacturers for any transfer of value made or distributed to prescribers and other healthcare providers, effective March 30, 2013. Such information will be made publicly available in a searchable format beginning September 30, 2013. In addition, device manufacturers will also be required to report and disclose any investment interests held by physicians and their immediate family members during the preceding calendar year. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (and up to an aggregate of $1 million per year for knowing failures), for all payments, transfers of value or ownership or investment interests not reported in an annual submission.
In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians for marketing. Some states, such as California, Massachusetts and Vermont, mandate implementation of commercial compliance programs, along with the tracking and reporting of gifts, compensation and other remuneration to physicians. The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with multiple jurisdictions with different compliance and/or reporting requirements increases the possibility that a healthcare company may run afoul of one or more of the requirements.
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Health care reform, including the recently enacted legislation, may have a material adverse effect on our industry and our results of operations.
Political, economic and regulatory influences are subjecting the health care industry to fundamental changes. In March 2010, the Healthcare Reform Act was enacted. It substantially changes the way health care is financed by both governmental and private insurers, encourages improvements in the quality of health care items and services and significantly impacts the U.S. pharmaceutical and medical device industries. Among other things, the Healthcare Reform Act:
| establishes a 2.3% deductible excise tax on any entity that manufactures or imports certain medical devices offered for sale in the United States, beginning 2013; |
| establishes a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research; |
| implements payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain health care services through bundled payment models, beginning on or before January 1, 2013; and |
| creates an independent payment advisory board that will submit recommendations to reduce Medicare spending if projected Medicare spending exceeds a specified growth rate. |
We currently estimate the impact of the 2.3% deductible excise tax to be approximately $15.0 million annually, beginning 2013. However, we cannot predict at this time the full impact of the Healthcare Reform Act and/or other healthcare reform measures that may be adopted in the future on our financial condition, results of operations and cash flow.
An interruption in our manufacturing operations and/or our supply of raw materials may adversely affect our business.
Many of our key products across both 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, in the event of delays or cancellations in shipments of raw materials by our suppliers, it may not be possible to timely manufacture the affected products at previous levels or at all. Furthermore, with respect to our Medical Segment, in the event of a disruption in our supply of certain components or materials, 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 such 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 business, results of operations and financial condition.
We depend upon relationships with physicians and other health care professionals.
The research and development of some of our medical 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 medical products and the development of our medical 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 medical products may not be developed and
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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.
We face strong competition. Our failure to successfully develop and market new products could adversely affect our results.
The medical device industry across all of our different product lines, as well as in each geographic market in which our products are sold, is highly competitive. We compete with many medical device companies ranging from small start-up enterprises which might only sell a single or limited number of competitive products or which may participate only in a specific market segment, to companies that are larger and more established than us with access to significant financial and marketing resources.
In addition, the medical device industry is characterized by extensive product research and development and rapid technological advances. Also, while our products for the aerospace industry 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:
| identify viable new products; |
| obtain adequate intellectual property protection; |
| gain market acceptance of new products; or |
| successfully obtain regulatory approvals. |
Moreover, we may not otherwise be able to successfully develop and market new products or enhance existing products. In addition, our competitors may currently be developing, or may develop and market in the future, technologies that are more effective than those that we develop or which may render our products obsolete. 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 are subject to risks associated with our non-U.S. operations.
We have significant manufacturing and distribution facilities, research and development facilities, sales personnel and customer support operations outside the United States in countries such as Canada, Belgium, the Czech Republic, France, Germany, Ireland, Malaysia, Mexico and Singapore. As of December 31, 2010, approximately 43% of our net property, plant and equipment was located outside the United States. In addition, as of December 31, 2010, approximately 50% of our net revenues (based on business unit location) were derived from operations outside the United States. Approximately 71% of our full-time and temporary employees as of December 31, 2010 were employed in countries outside of the United States.
Our international operations are subject to varying degrees of risk inherent in doing business outside the United States, including:
| exchange controls, currency restrictions and fluctuations in currency values; |
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| trade protection measures; |
| potentially costly and burdensome import or export requirements; |
| laws and business practices that favor local companies; |
| changes in non-U.S. medical reimbursement policies and procedures; |
| subsidies or increased access to capital for firms who are currently or may emerge as competitors in countries in which we have operations; |
| scrutiny of foreign tax authorities which could result in significant fines, penalties and additional taxes being imposed on us; |
| potentially negative consequences from changes in tax laws; |
| restrictions and taxes related to the repatriation of foreign earnings; |
| differing labor regulations; |
| additional U.S. and foreign government controls or regulations; |
| difficulties in the protection of intellectual property; and |
| unsettled political and economic conditions and possible terrorist attacks against American interests. |
In addition, the U.S. Foreign Corrupt Practices Act (the FCPA) and similar worldwide anti-bribery laws in non-U.S. jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. The FCPA also imposes accounting standards and requirements on publicly traded U.S. corporations and their foreign affiliates, which are intended to prevent the diversion of corporate funds to the payment of bribes and other improper payments, and to prevent the establishment of off books slush funds from which such improper payments can be made. Because of the predominance of government-sponsored health care systems around the world, many of our customer relationships outside of the United States are with governmental entities and are therefore subject to such anti-bribery laws. Our policies mandate compliance with these anti-bribery laws. Despite our training and compliance programs, our internal control policies and procedures may not always protect us from reckless or criminal acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction and result in a material adverse effect on our business, financial condition and results of operations. We also could suffer severe penalties, including criminal and civil penalties, disgorgement and other remedial measures, including further changes or enhancements to our procedures, policies and controls, as well as potential personnel changes and disciplinary actions.
Furthermore, we are subject to the export controls and economic embargo rules and regulations of the United States, including, but not limited to, the Export Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control within the Department of the Treasury as well as the laws and regulations administered by the Department of Commerce. These regulations limit our ability to market, sell, distribute or otherwise transfer our products
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or technology to prohibited countries or persons. While we train our employees and contractually obligate our distributors to comply with these regulations, a determination that we have failed to comply, whether knowingly or inadvertently, may result in substantial penalties, including fines and enforcement actions and civil and/or criminal sanctions, the disgorgement of profits and the imposition of a court-appointed monitor, as well as the denial of export privileges, and debarment from participation in U.S. government contracts, and may have an adverse effect on our reputation.
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.
Further weakness in general domestic and global economic growth combined with a continuation of constrained 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 in recent periods, 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 duration or extent of any economic recovery or the extent to which our customers will return to more normalized spending behaviors. If the recessionary conditions return, 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.
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-
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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 plastic resin content. We also use quantities of other commodities, such as aluminum. Increases 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, particularly with respect to those products we sell pursuant to group purchase agreements, and this could have a material adverse effect on our results of operations and cash flows.
Increases in interest rates may adversely affect the financial health of our customers and suppliers and thus adversely affect their ability to buy our products and supply the components or raw materials we need, which could have a material adverse effect on our results of operations and cash flows.
Our strategic initiatives may not produce the intended growth in revenue and operating income.
Our 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. 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.
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 United States, we are subject to taxation in numerous countries, states and other jurisdictions. As a result, our effective tax rate is derived from a
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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 may, however, 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.
Our technology is important to our success, and our failure to protect our intellectual property rights could put us at a competitive disadvantage.
We rely on the patent, trademark, copyright and trade secret laws of the United States and other countries to protect our proprietary rights. Although we own numerous U.S. and foreign patents and have applied for numerous patent applications, we cannot assure you that any pending patent applications will issue, or that any patents, issued or pending, will provide us with any competitive advantage or will not be challenged, invalidated or circumvented by third parties. In addition, we rely on confidentiality and non- disclosure agreements with employees and take other measures to protect our know-how and trade secrets. The steps we have taken may not prevent unauthorized use of our technology by unauthorized parties or competitors who may copy or otherwise obtain and use these products or technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. There is no guarantee that current and former employees, contractors and other parties will not breach their confidentiality agreements with us, misappropriate proprietary information or copy or otherwise obtain and use our information and proprietary technology without authorization or otherwise infringe on our intellectual property rights. Moreover, there can be no assurance that others will not independently develop the know-how and trade secrets or develop better technology than our own, which could reduce or eliminate any competitive advantage we have developed. Our inability to protect our proprietary technology could result in competitive harm that could adversely affect our business.
Our products or processes may infringe the intellectual property rights of others, which may cause us to pay unexpected litigation costs or damages or prevent us from selling our products.
We cannot be certain that our products do not and will not infringe issued patents or other intellectual property rights of third parties. We may be subject to legal proceedings and claims in the ordinary course of our business, including claims of alleged infringement of the intellectual property rights of third parties. Any such claims, whether or not meritorious, could result in litigation and divert the efforts of our personnel. If we are found liable for infringement, we may be required to enter into licensing agreements (which may not be available on acceptable terms or at all) or to pay damages and to cease making or selling certain products. We may need to redesign some of our products or processes to avoid future infringement liability. Any of the foregoing could be detrimental to our business.
Other pending and future litigation may lead us to incur significant costs and have an adverse effect on our business.
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
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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.
Our operations expose us to the risk of material environmental liabilities, litigation and violations.
We are subject to numerous foreign, federal, state and local environmental protection and health and safety laws governing, among other things:
| the generation, storage, use and transportation of hazardous materials; |
| emissions or discharges of substances into the environment; and |
| the health and safety of our employees. |
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 Aerospace Segment is subject to government regulation, which may require us to incur expenses to ensure compliance. Our failure to comply with those regulations could have adverse effect on our results of operations.
The U.S. Federal Aviation Administration (the FAA) regulates the manufacture and sale of some of our aerospace products and licenses for the operation of our repair stations. Comparable agencies, such as the European Aviation Safety Agency in Europe (the EASA), regulate these matters in other countries. If we fail to qualify for or obtain a required license for one of our products or services or lose a qualification or license previously granted, the sale of the subject product or service would be prohibited by law until such license is obtained or renewed and our business, financial condition and results of operations could be materially adversely affected. In addition, designing new products to meet existing regulatory requirements and retrofitting installed products to comply with new regulatory requirements can be expensive and time consuming.
From time to time, the FAA, the EASA or comparable agencies propose new regulations or changes to existing regulations. These changes or new regulations generally increase the costs of compliance. To the extent the FAA, the EASA or comparable agencies implement regulatory changes, we may incur significant additional costs to achieve compliance.
If we fail to establish and maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our consolidated results, and our ability to operate our business and our stock price.
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Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States.
Any failure on our part to remedy any identified control deficiencies, or any delays or errors in our financial reporting, would have a material adverse effect on our business, results of operations, or financial condition.
Our workforce covered by collective bargaining and similar agreements could cause interruptions in our provision of products and services.
For the fiscal year ended December 31, 2010, approximately 11% of our net revenues were 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.
Risks Related to Our Indebtedness and This Offering
Our substantial indebtedness could adversely affect our business, financial condition or results of operations and prevent us from fulfilling our obligations under the notes.
We have and, after this offering, will continue to have a significant amount of indebtedness. As of March 27, 2011, we had total indebtedness of $931.2 million on an actual basis and would have had $1,056.2 million on an as adjusted basis after giving effect to this offering and the use of proceeds thereof, including the prepayment of $125 million of borrowings under our credit facilities.
Our substantial level of indebtedness increases the risk that we may be unable to generate cash sufficient to pay amounts due in respect of our indebtedness, including the notes. It could also have significant effects on our business. For example, it could:
| make it more difficult for us to satisfy our obligations with respect to the notes; |
| increase our vulnerability to general adverse economic and industry conditions; |
| require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes; |
| limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate; |
| restrict us from exploiting business opportunities; |
| place us at a competitive disadvantage compared to our competitors that have less indebtedness; and |
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| limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general corporate purposes. |
Despite current substantial indebtedness levels, we and our subsidiaries may still be able to incur substantially more indebtedness. This could further exacerbate the risks associated with our substantial leverage.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future, including secured indebtedness. For example, as of March 27, 2011, on an as adjusted basis after giving effect to this offering and the use of proceeds thereof, including the prepayment of $125 million of borrowings under our credit facilities, after taking into account the limitations under the covenants under our credit facilities, we would have had $417.0 million of borrowing capacity, including $394.9 million of borrowing capacity under our revolving credit facility and $22.1 million of borrowing capacity under our accounts receivable securitization facility. Adding new indebtedness to current debt levels could make it more difficult for us to satisfy our obligations with respect to the notes.
Our debt agreements impose restrictions on our business, which could prevent us from capitalizing on business opportunities and taking some corporate actions and may adversely affect our ability to respond to changes in our business and manage our operations.
The credit agreement governing our credit facilities and the indenture governing the notes contain covenants that, among other things, impose significant restrictions on our business. The restrictions that these covenants place on us and our restricted subsidiaries include limitations on our ability and the ability of our restricted subsidiaries to:
| incur additional indebtedness or issue disqualified stock or preferred stock; |
| create liens; |
| pay dividends, make investments or make other restricted payments; |
| sell assets; |
| merge, consolidate, sell or otherwise dispose of all or substantially of our assets; |
| enter into transactions with our affiliates; |
| permit layering of debt; |
| designate subsidiaries as unrestricted; and |
| use the proceeds of permitted sales of our assets. |
In addition, the credit agreement governing our credit facilities also contains financial covenants. A breach of any of the foregoing covenants under any or all of these debt agreements could result in a default, which if not cured or waived, could result in the acceleration of all our debts. In addition, any debt agreements we enter into in the future may further limit our ability to enter into certain types of transactions.
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We may not be able to generate sufficient cash to service all of our indebtedness, including the notes. Our ability to generate cash depends on many factors beyond our control. We may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make payments on, and to refinance, our indebtedness, including the notes, and to fund planned capital expenditures, research and development efforts, working capital, acquisitions and other general corporate purposes depends on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors, some of which are beyond our control. If we do not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to pay our indebtedness, including the notes, or to fund our liquidity needs, we may be forced to:
| refinance all or a portion of our indebtedness, including the notes, on or before the maturity thereof; |
| sell assets; |
| reduce or delay capital expenditures; or |
| seek to raise additional capital. |
In addition, we may not be able to affect any of these actions on commercially reasonable terms or at all. Our ability to refinance this indebtedness will depend on our financial condition at the time, the restrictions in the instruments governing our indebtedness and other factors, including market conditions.
Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would have an adverse effect, which could be material, on our business, financial condition and results of operations, as well as our ability to satisfy our obligations in respect of the notes.
We are a holding company. Substantially all of our business is conducted through our subsidiaries. Our ability to repay our debt, including the notes, depends on the performance of our subsidiaries and their ability to make distributions to us.
We are a holding company. Substantially all of our business is conducted through our subsidiaries, which are separate and distinct legal entities. Therefore, our ability to service our indebtedness, including the notes, is dependent on the earnings and the distribution of funds (whether by dividend, distribution or loan) from our subsidiaries. None of our non-guarantor subsidiaries are obligated to make funds available to us for payment on the notes. In addition, we cannot assure you that the agreements governing the existing and future indebtedness of our subsidiaries will permit our subsidiaries to provide us with sufficient dividends, distributions or loans to fund payments on the notes when due. In addition, any payment of dividends, distributions or loans to us by our subsidiaries could be subject to restrictions on dividends or repatriation of earnings under applicable local law and monetary transfer restrictions in the jurisdictions in which our subsidiaries operate. Furthermore, payments to us by our subsidiaries will be contingent upon our subsidiaries earnings.
The contingent conversion features of our Convertible Notes, if triggered, may adversely affect our financial condition.
In August 2010, we issued $400 million in aggregate principal amount of Convertible Notes. The Convertible Notes are convertible based on shares of our common stock at any time beginning on May 1,
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2017, and prior to May 1, 2017 during specified periods upon the satisfaction of certain conditions, as provided in the indenture governing the Convertible Notes. See Convertible Notes under Note 8 to our consolidated financial statements included in our Current Report on Form 8-K filed on June 1, 2011 for a further discussion regarding the conversion terms of the Convertible Notes. If the Convertible Notes become eligible for conversion and one or more holders elect to convert their Convertible Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than cash in lieu of any fractional shares), we would be required to settle a portion of or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Convertible Notes, if the method of settlement effective during the period reflected in the financial statements is cash settlement or combination settlement, we would be required under applicable accounting rules to reclassify all of the outstanding principal of the Convertible Notes as a current rather than long-term liability in such financial statements, which would result in a material reduction of our net working capital.
We are subject to counterparty risk with respect to the Convertible Note hedge transactions.
Each hedge counterparty is a financial institution or the affiliate of a financial institution, and we will be subject to the risk that one or more hedge counterparties may default under the Convertible Note hedge transactions. Our exposure to the credit risk of each hedge counterparty will not be secured by any collateral. Recent global economic conditions have resulted in the actual or perceived failure or financial difficulties of many financial institutions, including a bankruptcy filing by Lehman Brothers Holdings Inc. and its various affiliates. If a hedge counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under the Convertible Note hedge transaction with that hedge counterparty. Our exposure will depend on many factors but, generally, the increase in our exposure will be correlated to the increase in our stock market price and in volatility of our common stock. In addition, upon a default by a hedge counterparty, we may suffer adverse tax consequences and dilution with respect to our common stock. We can provide no assurances as to the financial stability or viability of the hedge counterparties.
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