1
EXHIBIT 13
TELEFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Year ended
- ------------------------------------------------------------------------------------------
DECEMBER 27, December 28, December 29,
1998 1997 1996
- ------------------------------------------------------------------------------------------
(Dollars in thousands, except per share)
REVENUES $1,437,578 $1,145,773 $ 931,183
- ------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Materials, labor and other product costs 1,029,658 794,780 640,187
Selling, engineering and administrative expenses 266,106 230,153 190,341
Interest expense, net 17,054 14,435 13,876
- ------------------------------------------------------------------------------------------
1,312,818 1,039,368 844,404
- ------------------------------------------------------------------------------------------
Income before taxes 124,760 106,405 86,779
Taxes on income 42,210 36,333 29,617
- ------------------------------------------------------------------------------------------
NET INCOME $ 82,550 $ 70,072 $ 57,162
- ------------------------------------------------------------------------------------------
EARNINGS PER SHARE
Basic $ 2.21 $ 1.91 $ 1.61
Diluted $ 2.15 $ 1.86 $ 1.58
- ------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
19
2
TELEFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 27, December 28,
1998 1997
(Dollars in thousands)
ASSETS
Current assets
Cash and cash equivalents $ 66,689 $ 30,702
Accounts receivable, less allowance for doubtful
accounts, 1998 - $4,577; 1997 - $5,668 295,369 260,187
Inventories 235,869 218,538
Prepaid expenses 19,015 21,182
Assets held for sale -- 35,868
- ---------------------------------------------------------------------------------------------
Total current assets 616,942 566,477
- ---------------------------------------------------------------------------------------------
Plant assets
Land and buildings 149,883 122,127
Machinery and equipment 539,594 471,233
- ---------------------------------------------------------------------------------------------
689,477 593,360
Less accumulated depreciation 257,721 229,347
- ---------------------------------------------------------------------------------------------
Net plant assets 431,756 364,013
Investments in affiliates 50,932 37,510
Intangibles and other assets 116,287 111,165
- ---------------------------------------------------------------------------------------------
$ 1,215,917 $ 1,079,165
- ---------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Demand loans $ 50,076 $ 87,414
Current portion of long-term borrowings 41,575 28,315
Accounts payable 99,207 80,437
Accrued expenses 95,318 77,949
Income taxes payable 25,303 20,792
- ---------------------------------------------------------------------------------------------
Total current liabilities 311,479 294,907
Long-term borrowings 275,581 237,562
Deferred income taxes and other 94,407 82,943
- ---------------------------------------------------------------------------------------------
Total liabilities 681,467 615,412
- ---------------------------------------------------------------------------------------------
Shareholders' equity
Common shares, $1 par value
Issued: 1998 - 37,614,823 shares; 1997 - 37,118,146 shares 37,615 37,118
Additional paid-in capital 72,080 63,158
Retained earnings 439,389 373,467
Cumulative translation adjustment (14,634) (9,990)
- ---------------------------------------------------------------------------------------------
Total shareholders' equity 534,450 463,753
- ---------------------------------------------------------------------------------------------
$ 1,215,917 $ 1,079,165
- ---------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
20
3
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended
- ------------------------------------------------------------------------------------------------
DECEMBER 27, December 28, December 29,
1998 1997 1996
- ------------------------------------------------------------------------------------------------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 82,550 $ 70,072 $ 57,162
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 60,105 47,940 38,751
Deferred income taxes 2,702 1,530 (711)
(Increase) in accounts receivable (24,745) (38,886) (9,131)
(Increase) in inventories (8,626) (13,920) (3,964)
Decrease (increase) in prepaid expenses 2,676 (3,477) (2,191)
Increase (decrease) in accounts payable
and accrued expenses 12,777 13,896 (5,056)
Increase (decrease) in income taxes payable 4,188 3,635 (1,198)
Gain on disposition of product lines -- -- (2,055)
- ------------------------------------------------------------------------------------------------
131,627 80,790 71,607
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from new borrowings 42,868 85,259 30,824
Reduction in long-term borrowings (19,670) (43,488) (39,114)
(Decrease) increase in current borrowings and
demand loans (39,029) 36,948 (3,671)
Proceeds from stock compensation plans 5,918 4,362 5,523
Dividends (16,628) (14,258) (12,056)
- ------------------------------------------------------------------------------------------------
(26,541) 68,823 (18,494)
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for plant assets (69,063) (74,622) (40,500)
Payments for businesses acquired (22,026) (99,802) (26,599)
Proceeds from disposition of product lines and assets 35,868 -- 32,140
Investments in affiliates (15,691) (11,466) (2,568)
Other 1,813 (1,639) (2,622)
- ------------------------------------------------------------------------------------------------
(69,099) (187,529) (40,149)
- ------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 35,987 (37,916) 12,964
Cash and cash equivalents at the beginning of the year 30,702 68,618 55,654
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the year $ 66,689 $ 30,702 $ 68,618
- ------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
21
4
TELEFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Year ended
- ---------------------------------------------------------------------------------
DECEMBER 27, December 28, December 29,
1998 1997 1996
- ---------------------------------------------------------------------------------
(Dollars in thousands, except per share)
COMMON SHARES
Balance, beginning of year $ 37,118 $ 18,111 $ 17,537
Shares issued under compensation plans 497 235 174
Common stock dividend -- 18,520 --
Shares issued in acquisitions -- 252 400
- ---------------------------------------------------------------------------------
Balance, end of year 37,615 37,118 18,111
- ---------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year 63,158 58,941 49,999
Shares issued under compensation plans 8,922 4,127 5,349
Shares issued in acquisitions -- 90 3,593
- ---------------------------------------------------------------------------------
Balance, end of year 72,080 63,158 58,941
- ---------------------------------------------------------------------------------
RETAINED EARNINGS
Balance, beginning of year 373,467 336,173 291,067
Net income 82,550 70,072 57,162
Cash dividends (16,628) (14,258) (12,056)
Common stock dividend -- (18,520) --
- ---------------------------------------------------------------------------------
Balance, end of year 439,389 373,467 336,173
- ---------------------------------------------------------------------------------
CUMULATIVE TRANSLATION ADJUSTMENT
Balance, end of year (14,634) (9,990) (4,049)
- ---------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $ 534,450 $ 463,753 $ 409,176
- ---------------------------------------------------------------------------------
CASH DIVIDENDS PER SHARE $ .45 $ .39 $ .34
- ---------------------------------------------------------------------------------
COMPREHENSIVE INCOME
Net income $ 82,550 $ 70,072 $ 57,162
Cumulative translation adjustment (4,644) (5,941) (810)
- ---------------------------------------------------------------------------------
Total comprehensive income $ 77,906 $ 64,131 $ 56,352
- ---------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
22
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
DESCRIPTION OF BUSINESS
Teleflex Incorporated designs, manufactures and distributes engineered products
and services for the automotive, marine, industrial, medical and aerospace
markets worldwide.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Teleflex
Incorporated and its subsidiaries. These consolidated financial statements have
been prepared in conformity with generally accepted accounting principles, and
include management's estimates and assumptions that affect the recorded amounts.
Cash and cash equivalents include funds invested in a variety of liquid
short-term investments with an original maturity of three months or less.
Inventories are stated principally at the lower of average cost or market
and consisted of the following:
1998 1997
- --------------------------------------------------------------------------------
Raw materials $ 80,891 $ 72,806
Work-in-process 41,646 40,368
Finished goods 113,332 105,364
- --------------------------------------------------------------------------------
$235,869 $218,538
- --------------------------------------------------------------------------------
Plant assets include the cost of additions and those improvements which
increase the capacity or lengthen the useful lives of the assets. Repairs and
maintenance costs are expensed as incurred. With minor exceptions, straight-line
composite lives for depreciation of plant assets are as follows: buildings 20 to
40 years; machinery and equipment 8 to 12 years.
Intangible assets, principally the excess purchase price of acquisitions
over the fair value of net tangible assets acquired, are being amortized over
periods not exceeding 30 years. The company periodically reviews the carrying
value of intangible assets primarily based on an analysis of cash flows.
Assets and liabilities of foreign subsidiaries are translated at the rates
of exchange at the balance sheet date; income and expenses are translated at the
average rates of exchange prevailing during the year. The related translation
adjustments are accumulated in shareholders' equity.
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed in the same manner except that the weighted
average number of common shares is increased for dilutive securities. The
difference between basic and diluted weighted average common shares results from
the assumption that dilutive stock options were exercised.
ACQUISITIONS AND DISPOSITIONS
During 1998 the company acquired various smaller businesses across several
markets for $22,026 in cash.
In December 1997 the company acquired a European company with two
businesses, Driver Control Systems and Truck Systems and Components, for $87
million in cash. In February 1998 the Truck Systems and Components business was
sold for $36 million in cash and is presented in the balance sheet at December
28, 1997 as assets held for sale.The net cash paid of $51 million for Driver
Control Systems was allocated to the assets acquired and liabilities assumed. A
total of $17 million representing the excess of acquisition cost over the fair
value of Driver Control Systems' net tangible assets, was allocated to
intangible assets and is being amortized over 20 years. Revenues would have
increased approximately $115 million and net income would not have been
significantly different in 1997 and 1996 had the acquisition of Driver Control
Systems occurred at the beginning of 1996. Also during 1997, the company paid
$12,788 to purchase the assets of various businesses and issued 504,800 shares
of common stock for all of the outstanding shares of an automotive components
manufacturer in an acquisition accounted for as a pooling of interests.
For 1998 and 1997 liabilities of $29,422 and $82,896 were assumed in
connection with the acquisitions. The assets, liabilities and operating results
of these businesses are included in the company's financial statements from
their dates of acquisition. With the exception of Driver Control Systems as
described above, financial position and results of operations would not have
been materially different had the acquisitions occurred as of the beginning of
the years acquired.
23
6
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
BORROWINGS AND LEASES
1998 1997
- --------------------------------------------------------------------------------
Senior Notes at an average fixed
rate of 6.9%, due in installments
through 2008 $ 68,500 $ 76,000
Term loan notes, primarily Euro,
at an average fixed rate of 5.4%,
with an average maturity of four years 166,066 151,086
Other debt, mortgage notes and capital
lease obligations, at interest rates
ranging from 3% to 9% 82,590 38,791
- --------------------------------------------------------------------------------
317,156 265,877
Current portion of borrowings (41,575) (28,315)
- --------------------------------------------------------------------------------
$ 275,581 $ 237,562
- --------------------------------------------------------------------------------
The various senior note agreements provide for the maintenance of minimum
working capital amounts and ratios and limit the repurchase of the company's
stock and payment of cash dividends. Under the most restrictive of these
provisions, $113,000 of retained earnings was available for dividends at
December 27, 1998.
The weighted average interest rate on the $50,076 of demand loans was 5.0%
at December 27, 1998. In addition, the company has approximately $200,000
available under several interest rate alternatives in unused lines of credit.
Interest expense in 1998, 1997 and 1996 did not differ materially from
interest paid, nor did the carrying value of year end long-term borrowings
differ materially from fair value.
The aggregate amounts of debt, including capital leases, maturing in each
of the four years after 1999 are as follows: 2000 - $29,446; 2001 - $29,899;
2002 - $94,161; 2003 - $23,068.
The company has entered into certain operating leases which require
minimum annual payments as follows: 1999 - $23,668; 2000 - $23,248; 2001 -
$16,811; 2002 - $13,000; 2003 - $11,577. The total rental expense for all
operating leases was $22,467, $15,311 and $13,288 in 1998, 1997 and 1996,
respectively.
SHAREHOLDERS' EQUITY AND STOCK COMPENSATION PLANS
The authorized capital of the company is comprised of 100,000,000 common shares,
$1 par value, and 500,000 preference shares. No preference shares were
outstanding during the last three years.
Options to purchase common stock are awarded at market price on the date
of grant and expire no later than 10 years after that date. No compensation
expense has been recognized for stock option plans. Diluted earnings per share
would have been reduced $.02 or less in 1998, 1997 and 1996 had compensation
expense for stock options been determined based on the fair value at the grant
date. The fair value of options granted during 1998, 1997 and 1996 of $13.64,
$10.38 and $6.51, respectively, was estimated using the Black-Scholes
option-pricing model. Officers and key employees held options for the purchase
of 1,907,520 shares of common stock at prices ranging from $10.17 to $43.75 per
share with an average exercise price of $20.22 per share and an average
remaining contractual life of 6 years. Such options are presently exercisable
with respect to 1,186,580 shares at an average exercise price of $16.89. Options
to purchase 47,000, 421,175 and 40,000 shares of common stock were granted at
average exercise prices of $40.59, $30.39 and $24.63, in 1998, 1997 and 1996,
respectively. Options exercised were 390,195, 457,752 and 251,330 at average
exercise prices of $14.84, $13.05 and $13.49 in 1998, 1997 and 1996,
respectively.
INCOME TAXES
The provision for income taxes consisted of the following:
1998 1997 1996
- --------------------------------------------------------------------------------
Current
Federal $ 32,278 $ 24,557 $ 22,534
State 3,239 2,622 2,438
Foreign 3,991 7,624 5,356
Deferred 2,702 1,530 (711)
- --------------------------------------------------------------------------------
$ 42,210 $ 36,333 $ 29,617
- --------------------------------------------------------------------------------
The deferred income taxes provided and the balance sheet amounts of
$38,896 in 1998 and $34,273 in 1997 related substantially to the methods of
accounting for depreciation. Income taxes paid were $31,028, $29,581 and $28,210
in 1998, 1997 and 1996, respectively.
24
7
A reconciliation of the company's effective tax rate to the U.S. statutory
rate is as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
Tax at U.S. statutory rate 35.0% 35.0% 35.0%
State income taxes 1.7 1.7 1.8
Foreign income taxes (1.3) (.7) (.5)
Export sales benefit (1.5) (1.6) (1.7)
Other (.1) (.3) (.5)
- --------------------------------------------------------------------------------
Effective income tax rate 33.8% 34.1% 34.1%
- --------------------------------------------------------------------------------
BUSINESS SEGMENTS AND OTHER INFORMATION
The company adopted the provisions of FAS 131, "Disclosures about Segments of an
Enterprise and Related Information" during the fourth quarter of 1998. The
company has determined that its reportable segments are Commercial, Medical and
Aerospace. This assessment reflects the aggregation of businesses which have
similar products and services, manufacturing processes, customers and
distribution channels, and is consistent with both internal management reporting
and resource and budgetary allocations. Reference is made to pages 28 through 31
for a summary of operations by business segment.
A summary of revenues, identifiable assets and operating profit relating
to the company's foreign operations, substantially European, is as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
Revenues $571,587 $373,437 $314,141
Identifiable assets $551,440 $458,880 $326,993
Operating profit $ 38,537 $ 35,077 $ 28,408
- --------------------------------------------------------------------------------
Export sales from the United States to unaffiliated customers approximated
$151,500, $130,600 and $98,500 in 1998, 1997 and 1996, respectively.
PENSION AND OTHER POSTRETIREMENT BENEFITS
The company provides defined benefit pension and postretirement benefit plans to
eligible employees. Assumptions used in determining pension expense and benefit
obligations reflect a weighted average discount rate of 7.3% in 1998 and 7.7% in
1997, an investment rate of 9% and a salary increase of 5%. Assumptions used in
determining other postretirement expense and benefit obligations include a
weighted average discount rate of 7.3% in 1998 and 7.7% in 1997 and an initial
health care cost trend rate of 10%, declining to 6% over a period of 5 years.
Increasing the trend rate by 1% would increase the benefit obligation by $1,435
and would increase the 1998 benefit expense by $150. Decreasing the trend rate
by 1% would decrease the benefit obligation by $1,182 and would decrease the
1998 benefit expense by $120.
The following table provides the components of net benefit cost for the plans:
Pension Other Benefits
- --------------------------------------------------------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------
Service cost $ 3,074 $ 2,769 $ 216 $ 212
Interest cost 5,168 4,249 826 886
Actual return on
plan assets (9,471) (12,065) -- --
Net amortization
and deferral 2,047 6,779 98 209
Foreign plans 1,666 328 -- --
- --------------------------------------------------------------------------------
Net benefit cost $ 2,484 $ 2,060 $ 1,140 $ 1,307
- --------------------------------------------------------------------------------
The following provides a reconciliation of benefit obligations, plan
assets, and funded status of the plans:
Pension Other Benefits
- --------------------------------------------------------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------
Benefit obligation,
beginning of year $ 78,918 $ 66,681 $ 12,546 $ 13,305
Service cost 3,074 2,769 216 212
Interest cost 5,168 4,249 826 886
Amendments 447 (699) -- --
Actuarial loss (gain) 2,584 (334) 473 (1,050)
Acquisitions 1,008 9,412 -- --
Currency translation 1,206 (573) -- --
Benefits paid (4,001) (2,915 (524) (807)
Foreign plans 1,666 328 -- --
- --------------------------------------------------------------------------------
Benefit obligation,
end of year 90,070 78,918 13,537 12,546
- --------------------------------------------------------------------------------
Fair value of plan
assets, beginning
of year 69,300 58,530 -- --
Actual return on
plan assets 9,471 12,065 -- --
Acquisitions 950 -- -- --
Contributions 875 1,200 -- --
Benefits paid (3,093) (2,495) -- --
- --------------------------------------------------------------------------------
Fair value of plan
assets, end of year 77,503 69,300 -- --
- --------------------------------------------------------------------------------
Funded status (12,567) (9,618) (13,537) (12,546)
Unrecognized transition
(asset) obligation (688) (792) 5,860 6,279
Unrecognized net
actuarial gain (13,858) (12,842) (2,900) (3,602)
Unrecognized prior
service cost 1,645 (97) (392) (484)
- --------------------------------------------------------------------------------
Accrued benefit cost $(25,468) $(23,349) $(10,969) $(10,353)
- --------------------------------------------------------------------------------
25
8
TELEFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
QUARTERLY DATA (unaudited)
- ------------------------------------------------------------------------------------------
1998 FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------------------------------------
Revenues $345,760 $ 363,011 $ 342,962 $385,845
Gross profit 100,025 103,177 96,167 108,551
Net income 19,858 21,244 16,177 25,271
Per share
Basic earnings .53 .57 .43 .68
Diluted earnings .52 .55 .42 .66
Dividends .100 .115 .115 .115
Market price
High 44 5/8 46 3/8 41 3/8 45 5/8
Low 33 3/4 37 1/8 29 5/8 31 3/4
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
1997 First Second Third Fourth
- ------------------------------------------------------------------------------------------
Revenues $269,344 $ 280,263 $ 281,757 $314,409
Gross profit 83,205 86,321 84,692 96,775
Net income 16,677 18,349 13,828 21,218
Per share
Basic earnings .46 .50 .38 .57
Diluted earnings .45 .49 .36 .56
Dividends .088 .100 .100 .100
Market price
High 27 33 1/4 35 3/4 39 3/4
Low 23 1/4 25 3/4 30 1/2 34 5/8
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
1996 First Second Third Fourth
- ------------------------------------------------------------------------------------------
Revenues $234,448 $ 238,394 $ 215,144 $243,197
Gross profit 73,338 75,104 66,371 76,183
Net income 14,852 15,137 10,049 17,124
Per share
Basic earnings .42 .43 .29 .47
Diluted earnings .42 .42 .28 .46
Dividends .078 .088 .088 .088
Market price
High 23 3/8 24 3/8 25 26
Low 19 3/4 21 1/4 22 23 3/8
- ------------------------------------------------------------------------------------------
26
9
REPORT OF INDEPENDENT ACCOUNTANTS
[PricewaterhouseCoopers Logo]
To the Board of Directors and Shareholders
Teleflex Incorporated
In our opinion, the consolidated financial statements appearing on pages 19
through 31 of this Annual Report present fairly, in all material respects, the
financial position of Teleflex Incorporated and its subsidiaries at December 27,
1998 and December 28, 1997 and the results of their operations and cash flows
for each of the three years in the period ended December 27, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 10, 1999
27
10
TELEFLEX INCORPORATED AND SUBSIDIARIES
SELECTED FINANCIAL AND BUSINESS SEGMENT DATA
1998 1997 1996
- ------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Revenues
Commercial $ 649,644 $ 497,366 $ 422,443
Medical 338,305 323,114 307,555
Aerospace 449,629 325,293 201,185
- ------------------------------------------------------------------------------------------
Net sales 1,437,578 1,145,773 931,183
Other income(a) -- -- --
- ------------------------------------------------------------------------------------------
Total revenues $1,437,578 $1,145,773 $ 931,183
- ------------------------------------------------------------------------------------------
Operating profit
Commercial $ 62,010 $ 61,562 $ 57,849
Medical 41,879 35,466 34,630
Aerospace 55,163 38,787 21,007
- ------------------------------------------------------------------------------------------
159,052 135,815 113,486
Less:
Interest expense, net 17,054 14,435 13,876
Corporate expenses, net of other income 17,238 14,975 12,831
- ------------------------------------------------------------------------------------------
Income before taxes 124,760 106,405 86,779
Taxes on income 42,210 36,333 29,617
- ------------------------------------------------------------------------------------------
Net income $ 82,550 $ 70,072 $ 57,162
- ------------------------------------------------------------------------------------------
Earnings per share
Basic $ 2.21 $ 1.91 $ 1.61
Diluted $ 2.15 $ 1.86 $ 1.58
Cash dividends per share $ .45 $ .39 $ .34
Net income as a percent of revenues 5.7% 6.1% 6.1%
Percent of net sales
Commercial 45% 44% 45%
Medical 24% 28% 33%
Aerospace 31% 28% 22%
Average number of common and common equivalent
shares outstanding
Basic 37,347 36,759 35,482
Diluted 38,425 37,661 36,197
Average number of employees 12,603 10,830 9,373
- ------------------------------------------------------------------------------------------
[BAR CHART]
Sales by Business Segment
(in millions)
Commercial Medical Aerospace Total
---------- ------- --------- -------
1988 153.2 38.0 132.4 323.6
1989 174.0 42.4 139.2 355.6
1990 162.6 115.8 162.7 441.1
1991 168.6 130.5 180.4 479.5
1992 210.4 179.4 177.3 567.1
1993 284.1 180.6 202.1 666.8
1994 356.7 253.0 203.0 812.7
1995 403.6 293.4 215.7 912.7
1996 422.4 307.6 201.2 931.2
1997 497.4 323.1 325.3 1,145.8
1998 649.7 338.3 449.6 1,437.6
28
11
1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share and employee data)
$403,637 $356,708 $284,106 $210,464 $168,598 $162,646 $173,957 $153,144
293,341 253,020 180,623 179,376 130,540 115,756 42,406 38,032
215,711 202,944 202,067 177,292 180,399 162,731 139,262 132,413
- ------------------------------------------------------------------------------------------------------
912,689 812,672 666,796 567,132 479,537 441,133 355,625 323,589
-- -- -- 3,206 3,472 3,080 4,441 4,634
- ------------------------------------------------------------------------------------------------------
$912,689 $812,672 $666,796 $570,338 $483,009 $444,213 $360,066 $328,223
- ------------------------------------------------------------------------------------------------------
$ 59,719 $ 53,324 $ 37,794 $ 25,754 $ 19,996 $ 22,224 $ 22,025 $ 26,794
30,237 32,386 21,486 25,463 19,900 16,183 5,782 3,755
12,683 5,367 14,906 16,100 21,722 20,781 20,711 16,548
- ------------------------------------------------------------------------------------------------------
102,639 91,077 74,186 67,317 61,618 59,188 48,518 47,097
18,632 18,361 14,466 15,482 13,765 12,401 6,886 6,225
10,407 9,725 7,410 3,185 2,519 3,880 2,395 4,493
- ------------------------------------------------------------------------------------------------------
73,600 62,991 52,310 48,650 45,334 42,907 39,237 36,379
24,730 21,795 18,624 16,638 15,527 14,340 12,440 12,370
- ------------------------------------------------------------------------------------------------------
$ 48,870 $ 41,196 $ 33,686 $ 32,012(b) $ 29,807 $ 28,567 $ 26,797 $ 24,009
- ------------------------------------------------------------------------------------------------------
$ 1.40 $ 1.20 $ .99 $ .95(b) $ .90 $ .87 $ .83 $ .75
$ 1.37 $ 1.17 $ .98 $ .93(b) $ .88 $ .87 $ .82 $ .74
$ .30 $ .26 $ .23 $ .21 $ .20 $ .18 $ .16 $ .13
5.4% 5.1% 5.1% 5.6% 6.2% 6.4% 7.4% 7.3%
44% 44% 43% 37% 35% 37% 49% 47%
32% 31% 27% 32% 27% 26% 12% 12%
24% 25% 30% 31% 38% 37% 39% 41%
34,885 34,373 33,958 33,557 33,062 32,667 32,321 31,986
35,574 35,061 34,533 34,264 33,701 32,952 32,805 32,487
9,553 8,740 7,920 6,920 6,160 5,860 5,080 4,350
- ------------------------------------------------------------------------------------------------------
(a) Beginning in 1993, other income, which was insignificant, has been
reclassified as an offset to interest expense and corporate expenses.
(b) Excludes an increase in net income of $860, or $.03 per share as a result
of a change in accounting for income taxes.
[BAR CHART]
Operating Profit by Business Segment
(in millions)
Commercial Medical Aerospace Total
---------- ------- --------- -------
1988 26.8 3.8 16.5 47.1
1989 22.0 5.8 20.7 48.5
1990 22.2 16.2 20.8 59.2
1991 20.0 19.9 21.7 61.6
1992 25.7 25.5 16.1 67.3
1993 37.8 21.5 14.9 74.2
1994 53.3 32.4 5.4 91.1
1995 59.7 30.2 12.7 102.6
1996 57.9 34.6 21.0 113.5
1997 61.6 35.5 38.8 135.8
1998 62.0 41.9 55.2 159.1
29
12
TELEFLEX INCORPORATED AND SUBSIDIARIES
SELECTED FINANCIAL AND BUSINESS SEGMENT DATA (CONTINUED)
1998 1997 1996
- ------------------------------------------------------------------------------------
FINANCIAL POSITION
Identifiable assets
Commercial $ 405,347 $ 351,345 $ 227,594
Medical 361,282 333,698 320,699
Aerospace 324,532 276,708 194,305
Corporate 124,756 117,414 115,256
- ------------------------------------------------------------------------------------
Total assets $1,215,917 $1,079,165 $ 857,854
- ------------------------------------------------------------------------------------
Capital expenditures
Commercial $ 26,243 $ 22,570 $ 12,821
Medical $ 13,943 $ 10,611 $ 10,421
Aerospace $ 28,561 $ 40,992 $ 16,767
Depreciation and amortization
Commercial $ 23,353 $ 14,335 $ 11,907
Medical $ 18,044 $ 18,459 $ 16,267
Aerospace $ 17,852 $ 14,440 $ 9,827
Long-term borrowings $ 275,581 $ 237,562 $ 195,945
Shareholders' equity $ 534,450 $ 463,753 $ 409,176
Working capital $ 305,463 $ 271,570 $ 269,355
Current ratio 2.0 1.9 2.4
Book value per share $ 14.21 $ 12.49 $ 11.30
Return on average shareholders' equity 16.5% 16.1% 15.0%
- ------------------------------------------------------------------------------------
[BAR CHART]
Stock Price
Low High
--- ----
1988 7.13 10.21
1989 9.38 12.92
1990 8.33 12.08
1991 9.81 17.19
1992 12.50 19.75
1993 13.88 19.13
1994 15.88 20.13
1995 19.00 22.88
1996 19.75 26.00
1997 23.25 39.75
1998 29.63 46.38
30
13
1995 1994 1993 1992 1991 1990 1989 1988
- ----------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share)
$201,808 $184,971 $158,206 $142,041 $101,187 $ 84,678 $ 90,557 $ 83,601
331,349 311,547 266,239 206,562 194,609 147,954 125,635 34,819
183,636 188,348 202,130 142,523 141,104 143,419 130,762 107,524
68,378 25,923 14,001 43,805 40,793 49,049 19,708 38,172
- ----------------------------------------------------------------------------------------------------
$785,171 $710,789 $640,576 $534,931 $477,693 $425,100 $366,662 $264,116
- ----------------------------------------------------------------------------------------------------
$ 15,445 $ 13,489 $ 7,967 $ 7,386 $ 7,505 $ 5,581 $ 5,507 $ 8,880
$ 12,107 $ 7,029 $ 7,361 $ 5,316 $ 7,138 $ 4,236 $ 2,373 $ 960
$ 2,794 $ 4,538 $ 8,865 $ 6,384 $ 5,585 $ 7,166 $ 10,701 $ 5,228
$ 11,446 $ 9,930 $ 9,251 $ 6,262 $ 5,633 $ 5,369 $ 4,715 $ 3,675
$ 15,087 $ 11,694 $ 8,030 $ 6,505 $ 4,725 $ 3,999 $ 1,693 $ 1,455
$ 10,471 $ 10,771 $ 10,176 $ 8,002 $ 7,366 $ 7,024 $ 5,777 $ 5,556
$196,844 $190,499 $183,504 $134,600 $119,370 $112,941 $106,128 $ 57,104
$355,364 $309,024 $269,790 $240,467 $211,702 $187,875 $160,038 $136,328
$252,651 $220,544 $171,397 $166,803 $131,589 $133,840 $112,325 $ 98,217
2.3 2.3 2.1 2.4 2.1 2.3 2.4 2.6
$ 10.13 $ 8.94 $ 7.90 $ 7.12 $ 6.37 $ 5.72 $ 4.94 $ 4.25
14.7% 14.2% 13.2% 14.2% 14.9% 16.4% 18.1% 19.1%
- ----------------------------------------------------------------------------------------------------
[BAR CHART]
Domestic/Foreign Sales
(in millions)
Foreign Domestic Total
------- -------- -----
1988 52,733 270,856 323,589
1989 62,932 292,693 355,625
1990 131,805 309,328 441,133
1991 153,532 326,005 479,537
1992 172,618 394,514 567,132
1993 187,259 479,537 666,796
1994 221,145 591,527 812,672
1995 283,892 628,797 912,689
1996 314,141 617,042 931,183
1997 373,437 772,336 1,145,773
1998 571,587 865,991 1,437,578
31
14
TELEFLEX INCORPORATED AND SUBSIDIARIES
1998 FINANCIAL REVIEW
OVERVIEW
The company's major financial objectives are to achieve a 15% to 20% annual
growth rate in revenues and net income, to generate a 20% return on average
shareholders' equity and to pay dividends of 20% of trailing twelve months
earnings. Results for 1998 exceeded these growth goals as revenues and net
income grew by 25% and 18%, respectively. Over the last five years revenues have
grown by a compounded rate of 17% and net income by 20%. The 1998 return on
average shareholders' equity was 17% and has improved in each of the last five
years. Finally, the company has paid dividends of 20% or more of trailing twelve
months earnings since the first cash dividend payment was made in 1977.
The company is committed to maintaining a balance among its three
segments: Commercial, Medical, and Aerospace. Balance among the three segments
reduces the company's risk from changes in the business cycle of any one segment
thus assisting the company in consistently achieving its growth objectives. It
also gives the company the ability to invest funds at the bottom of a segment's
operating cycle and provides a broader base of markets in which to grow. Balance
is also maintained within the individual operating segments through either
geographical, customer or market diversification. As a result, despite cyclical
downturns in each of the segments the company's total operating profit has
increased in each of the last five years.
The company intends to achieve its growth objectives internally through
both development of new products and new markets for existing products and
externally, primarily through acquisitions. It is expected that over time,
approximately half the growth will be achieved through expansion of core product
lines and half will be derived externally. Over the past five years the
company's internal growth has accounted for one-half of its overall growth.
During the same time the company has invested approximately $370 million for
acquisitions which have accounted for the other half of the revenue increase.
During 1997 and 1998, the company purchased businesses with annualized sales of
approximately $260 million, $170 million of which is included in 1998 revenues.
These acquisitions fit strategically with the company's businesses and bring new
technologies, capabilities and market opportunities that will supplement future
growth.
Acquisitions, while adding initially to revenues, generally do not
contribute proportionately to earnings in the early years. In these years,
earnings are generally reduced by up-front costs such as interest, depreciation
and amortization, and, in many instances, the expenses of integrating a newly
acquired business into an existing operation. Additionally, many of the
acquisitions include new technologies and products which require incremental
investment to enhance their future growth prospects.
[BAR CHART]
Revenues
(in millions)
-------------
1994 812.7
1995 912.7
1996 931.2
1997 1,145.8
1998 1,437.6
The company has maintained a conservative capital structure with long-term
debt ranging from 30% to 40% of total capitalization. This provides the
flexibility to increase borrowings should growth opportunities arise. Under
these circumstances it is conceivable that debt may increase to as much as 50%
of capitalization for a period of time. The use of debt financing enables the
company to maintain a lower cost of capital thus further enhancing value for
shareholders. The company finances foreign operations and acquisitions primarily
in their local currencies, thus reducing exposure to exchange rate fluctuations.
As a result of these natural hedges, approximately 70% of the company's total
borrowings are denominated in currencies other than the U.S. dollar. The
introduction of the Euro reduces the number of currencies to which the company
is exposed which could add volatility to reported financial results.
Historically, operations have generated sufficient cash flow to finance
the company's operating requirements while borrowings have been incurred largely
to finance acquisitions. Over the past five years cash flow from operations has
totaled over $400 million. This operating cash flow is reinvested in the
company's core businesses, provides for the payment of dividends and enables the
company to continue to upgrade and expand its plant and equipment. The company,
while not particularly capital intensive, spends approximately 4% of sales
annually on plant and equipment.
32
15
RESULTS OF OPERATIONS
1998 VS. 1997
Revenues gained 25% in 1998 to $1,437.6 million from $1,145.8 million in 1997
resulting from increases at each of the company's three segments. Acquisitions
accounted for 60% of the company's increase in revenue. For 1998 the Commercial,
Medical and Aerospace segments accounted for 45%, 24% and 31% of the company's
net sales, respectively. Foreign operations comprised 40% of the company's
revenues, increased 53% over 1997 and were not significantly affected by changes
in foreign currency exchange rates. The increase in foreign sales resulted
primarily from the acquisition of a manufacturer of automotive driver control
systems.
Gross profit margin declined in 1998 to 28.4% from 30.6% in 1997 despite
increases in the Medical and Aerospace segments. A reduction in the proportion
of sales from the Medical Segment, which has a higher gross margin compared with
the other segments; and, a lower contribution to gross margin from recent
acquisitions in the Commercial Segment contributed to the decrease. Operating
expenses as a percentage of sales improved to 18.5% from 20.1% in 1997 resulting
from reductions in the Commercial and Medical segments. In addition, a decline
in the proportion of sales from the Medical Segment contributed to lowering the
operating expense percentage.
Operating profit increased 17% in 1998 to $159.1 million from $135.8
million in 1997 while operating profit as a percentage of sales (operating
margin) declined to 11.1% from 11.9%. For 1998 the Commercial, Medical and
Aerospace segments represented 39%, 26% and 35% of the company's operating
profit, respectively. All three segments reported increases in operating profit
with Aerospace contributing the largest gain. The decrease in operating margin
resulted from the decline in the Commercial Segment which offset the increases
in Medical and Aerospace.
Net income in 1998 increased 18% to $82.6 million and diluted earnings per
share increased 16% to $2.15. Basic earnings per share increased 16% to $2.21.
1997 VS. 1996
Revenues increased 23% in 1997 to $1,145.8 million from $931.2 million in 1996.
The increase was attributable to gains in each of the company's three segments.
Acquisitions accounted for approximately 40% of the growth. For 1997 the
Commercial, Medical and Aerospace segments comprised 44%, 28% and 28% of the
company's net sales, respectively. Foreign operations represented 33% of the
company's revenues, increased 19% over 1996 and were affected slightly by
declines in foreign currency exchange rates.
Both gross profit margin and selling, engineering and administrative
expenses as a percent of sales decreased slightly in 1997. This was caused by
the lower contribution of sales from the Medical Segment which has higher gross
margin and higher selling expenses relative to the other two segments.
Operating profit increased 20% in 1997 to $135.8 million from $113.5
million in 1996. All three segments reported gains with the largest coming from
Aerospace. For 1997 the Commercial, Medical and Aerospace segments represented
45%, 26% and 29% of the company's operating profit, respectively. Operating
margin remained unchanged at approximately 12% as an increase in the Aerospace
Segment offset declines in Commercial and to a lesser extent, Medical.
Net income in 1997 increased 23% to $70.1 million while diluted earnings
per share increased 18% to $1.86. Basic earnings per share increased 19% to
$1.91.
INTEREST EXPENSE AND INCOME TAX EXPENSE
Interest expense increased in 1998 as a result of additional borrowings incurred
at the end of 1997 to finance acquisitions which offset the effect of lower
interest rates. In 1997 interest expense increased as reduced interest rates
were offset by the effect of lower invested cash balances. Interest expense as a
percent of sales decreased in 1998 to 1.2% from 1.3% in 1997. The effective
income tax rate declined to 33.8% in 1998, compared with 34.1% in both 1997 and
1996. The mix of the company's foreign taxable income was comparable in 1997 and
1996 while in 1998 a higher proportion of income was earned in countries with
relatively lower income tax rates.
[BAR CHART]
Net Income
(in millions)
-------------
1994 41.2
1995 48.9
1996 57.2
1997 70.1
1998 82.6
33
16
TELEFLEX INCORPORATED AND SUBSIDIARIES
1998 FINANCIAL REVIEW (CONTINUED)
COMMERCIAL SEGMENT
The Commercial Segment designs and manufactures proprietary mechanical and
electrical controls for the automotive market; mechanical, electrical and
hydraulic controls, and electronic products for the pleasure marine market; and
proprietary products for the fluid transfer and outdoor power equipment markets.
Products in the Commercial Segment generally are less complex and are
produced in higher unit volume than those of the company's other two segments.
They are manufactured both for general distribution as well as custom fabricated
to meet individual customer needs. Consumer spending patterns generally
influence the market trends for these products.
1998 VS. 1997
Sales in the Commercial Segment increased 31% in 1998 from $497.4 million to
$649.6 million resulting from increases in all three product lines, Automotive,
Marine and Industrial. The increase in the Automotive product line was primarily
due to acquisitions including a manufacturer of automotive driver control
systems. The North American sales growth rate was slower from the effects of the
General Motors strike. Within the Marine product line, increases in sales of
non-marine products offset a decline in sales of marine electronics products.
Additional sales of light duty cable and flexible fluoroplastic hose resulted in
the Industrial product line gain.
Operating profit increased 1% while operating margin declined to 10% in
1998 from 12% in 1997. Increases in operating profit and margin in the
Industrial product line were offset by declines in Automotive while Marine
remained unchanged from the prior year. The declines in Automotive were due to
lower margins of acquisitions, expenses related to new products such as the
adjustable pedal and costs associated with the General Motors strike. The strike
reduced operating profit by approximately $3.4 million, or 5 cents per share.
Within the Marine product line, higher operating profits and margins stemming
from increased volume of non-marine products were offset by declines from marine
electronics products. The Industrial product line increases resulted primarily
from the additional volume of flexible fluoroplastic hose.
Assets increased in 1998 due primarily to acquisitions in the Automotive
product line. Return on average assets declined from 21% in 1997 to 16% in 1998
resulting from the combination of increased assets and lower operating returns
from acquisitions.
[BAR CHART]
Operating Profit
(in millions)
1994 91.1
1995 102.6
1996 113.5
1997 135.8
1998 159.1
1997 VS. 1996
Sales in the Commercial Segment increased 18% in 1997 to $497.4 million from
$422.4 million in 1996. All three product lines, Automotive, Marine, and
Industrial, reported sales gains with the largest increase coming from the
Automotive product line. Acquisitions in the Automotive product line accounted
for one-third of the increase in Commercial Segment sales and approximately
two-thirds of the Automotive sales growth. The remainder of the gain in the
Automotive product line resulted from increased penetration of the North
American market, primarily in light duty trucks. Within the Marine product line,
sales of marine steering systems and increased sales to non-marine customers,
such as off-road manufacturers, resulted in the increase. Sales in the
Industrial product line benefited from a strong outdoor power equipment market
and from new applications for the automotive market.
Operating profit rose 6% in 1997 to $61.6 million from $57.8 million in
1996 as increases in both the Automotive and Industrial product lines offset a
decline in Marine. The increases in Automotive and Industrial were primarily
related to volume gains while the decline in Marine stemmed from lower margin
sales to non-marine markets and costs associated with the relocation of an
electrical instrumentation facility. Operating margin decreased from 14% in 1996
to 12% in 1997 as a result of declines in Marine and Automotive. The margin was
higher in the Industrial product line as two customer-focused manufacturing
facilities, initiated in 1996, came on stream. Marine operating margins
34
17
declined as a result of the plant relocation and increased engineering and
development expenses related to the new non-marine products. Automotive
operating margins declined due to lower margins realized at newly-acquired
businesses, increased selling expenses to accelerate expansion into the European
market and higher engineering expenses for the development of new products.
Investment in total assets in this segment grew by over $100 million in
1997 primarily as a result of the United Parts acquisition. Return on average
assets declined in 1997 to 21% from 27% in 1996 as a result of the acquisition
of United Parts in December 1997.
MEDICAL SEGMENT
The Medical Segment manufactures and distributes a broad range of invasive
disposable and reusable devices for the urology, gastroenterology,
anesthesiology and respiratory care markets worldwide. It also designs and
manufactures a variety of surgical devices, closure systems and provides
instrument management services.
Products in the Medical Segment generally are required to meet exacting
standards of performance and have relatively longer product life cycles.
External economic influences on sales relate primarily to spending patterns in
the worldwide medical devices and supplies market. The Hospital Supply product
line conducts its business primarily outside the United States and accordingly,
its sales and profits are subject to changes from foreign exchange rate
movements. The Surgical Devices product line operates mostly within the United
States.
1998 VS. 1997
In 1998 Medical Segment sales increased 5% to $338.3 million from $323.1 million
resulting primarily from gains in the Surgical Devices product line which offset
a decline in Hospital Supply due to weaker foreign currencies. The increase in
Surgical Devices resulted from additional European sales and from growth of
instrument management services aided by an acquisition.
Operating profit increased 18% in 1998 to $41.9 million from $35.5 million
in 1997 and operating margin improved to 12% from 11%. The increases in
operating profit and operating margin are the result of gains in both Hospital
Supply and Surgical Devices. The 1998 increases in Surgical Devices are due to
unusually high expenses in the prior year from realigning sales and
manufacturing by product line. The increases in Hospital Supply are the result
of increased sales of higher margin products.
Assets increased due to investment in instrument management services
including an acquisition and increases in accounts receivable and inventory
related to volume. Return on average assets improved from 11% to 12% resulting
from the increase in operating profit which more than offset the increase in
assets.
1997 VS. 1996
In 1997 the Medical Segment sales increased by 5% to $323.1 million from $307.6
million in 1996. The sales growth was equally split between the Hospital Supply
and Surgical Devices product lines. New products contributed to the growth in
the Hospital Supply product line while a first quarter acquisition of a small
ligation clip manufacturer was the primary cause of the increase in Surgical
Devices. The growth rate for sales in Hospital Supply, which is European based,
was reduced by weaker foreign currencies.
Operating profit rose 2% in 1997 to $35.5 million from $34.6 million in
1996 while operating margin remained relatively constant. The gain in
profitability in Hospital Supply due to volume increases, was offset by a
decline in the Surgical Devices product line. The decline in Surgical Devices
operating profit and margin is the result of costs associated with the
realignment of the manufacturing facilities and sales forces into three market
units; instruments, closure, and service.
Assets increased in 1997 as a result of the acquisition which offset the
effects of weaker foreign currencies. Return on average assets in 1997 remained
unchanged at 11% resulting from an operating profit and an average asset base
which remained relatively unchanged.
[BAR CHART]
Capital Expenditures
(in millions)
Commercial Medical Aerospace Total
---------- ------- --------- -----
1994 13.5 7.1 4.5 25.1
1995 15.4 12.1 2.8 30.3
1996 12.8 10.4 16.8 40.0
1997 22.6 10.6 41.0 74.2
1998 26.3 13.9 28.6 68.8
35
18
TELEFLEX INCORPORATED AND SUBSIDIARIES
1998 FINANCIAL REVIEW (CONTINUED)
AEROSPACE SEGMENT
The Aerospace Segment serves the commercial aerospace and turbine engine
markets. Its businesses design and manufacture precision controls and cargo
systems for aviation; provide coatings, repair services and manufactured
components for users of both flight and ground-based turbine engines. Sales are
both to original equipment manufacturers and the aftermarket.
These products and services, many of which are proprietary, require a high
degree of engineering sophistication, and often are custom-designed. External
economic influences on these products and services relate primarily to spending
patterns in the worldwide aerospace industry.
1998 VS. 1997
Sales in the Aerospace Segment increased 38% in 1998 to $449.6 million from
$325.3 million. Each of the Segment's product lines, cargo systems, coatings,
repair services and manufactured turbine components, gained. The largest
contribution to the increase came from manufactured turbine components which
gained from the continued strength of the aerospace market. In addition, growth
in repair services from the newly completed Singapore plant and in coatings from
increased sales to the industrial gas turbine market contributed to the gain.
Operating profit in 1998 increased 42% to $55.2 million from $38.8 million
and operating margin improved slightly to 12.3% from 11.9%. The operating profit
gain was primarily the result of additional volume in manufactured turbine
components. The volume gain also contributed to the improved operating margin.
The increase in operating margin in this Segment, however, was diluted by higher
sales of repair services which distributes approximately half of its profits to
a joint venture partner.
The increase in assets in 1998 was due to additional plant and equipment
and working capital investments made to accommodate the continued growth in this
segment during the year. Return on average assets increased from 16% to 18% as
the increase in operating profit outpaced the increase in assets during the
year.
1997 VS. 1996
Sales in the Aerospace Segment grew an exceptional 62% in 1997 to $325.3 million
from $201.2 million the prior year. Approximately one-third of the Segment's
growth was the result of acquisitions while the remainder came from existing
products which benefited from the robust aerospace market. All product lines
contributed. The majority of the growth came from turbine components, including
the results of an acquisition and the internal growth in the repairs product
line. During 1997 Aerospace made two small acquisitions. The first extended the
cargo systems product line to narrow-body aircraft while the second helped
further diversify the coatings product line into the ground turbine repairs
market.
Operating profit grew from $21.0 million in 1996 to $38.8 million in 1997,
an increase of 85%. Operating margin improved from a little over 10% in 1996 to
nearly 12% in 1997. The increase in both profit and margin was principally the
result of volume increases in the turbine component and repair services product
lines.
Including acquisitions, assets increased in 1997 by more than $80 million.
Capital expenditures increased substantially in order to support the higher
level of expected business activity, including construction of a repair facility
in Singapore. Return on average assets improved from 11% in 1996 to 16% in 1997
due to the significant growth in operating profit during 1997.
[BAR CHART]
Cash Flow from Operations
(in millions)
1994 57.7
1995 70.8
1996 71.6
1997 80.8
1998 131.6
36
19
LIQUIDITY, MARKET RISK AND CAPITAL RESOURCES
The company continued to generate high levels of cash from operations. In 1998
cash flows from operating activities grew to $131.6 million compared to $80.8
million in 1997 and $71.6 million in 1996. The increase in 1998 resulted from
higher net income and non-cash depreciation and amortization and, from
improvements in working capital. The increase in 1997 was due to higher net
income and depreciation and amortization offset by working capital requirements
related to incremental sales volume. In addition to the cash generated from
operations the company has approximately $200 million in committed and
uncommitted unused lines of credit available which provide the ability to pursue
strategic growth opportunities. Total borrowings for the company increased $14
million in 1998 while long-term debt to total capitalization was 34% in both
1997 and 1998. The increase in long-term debt resulted from borrowings incurred
to complete construction of the Singapore facility, foreign acquisition
financing and foreign currency exchange rate changes which were offset by
repayments. The most significant investment of cash for 1997 was payments for
businesses acquired. Cash payments in 1997 of nearly $100 million related
primarily to the acquisition of Driver Control Systems which was financed
principally with new borrowings. During the first quarter of 1998 certain
acquired non-strategic assets were sold for $36 million in cash and the related
borrowings reduced. Approximately 70% of the company's total borrowings of $367
million are denominated in currencies other than the US dollar, principally
Euro, providing a natural hedge against fluctuations in the value of assets
denominated in foreign currencies.
In addition to the natural hedge positions for translation risk, the
company occasionally uses forward rate contracts to manage foreign currency
transaction exposure and interest rate caps and swaps for exposure to interest
rate changes. The company does not enter into these arrangements for trading
purposes, but rather to limit the impact of movements in financial markets on
its cash flows. The use of these derivative instruments, which are contracted
only with financial institutions having high investment grade credit ratings,
were not significant at December 27, 1998.
[BAR CHART]
Dividends per Share
1994 0.26
1995 0.30
1996 0.34
1997 0.39
1998 0.45
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" which will be effective for the company in the year
2000. Under the provisions of this statement all derivative financial
instruments will be recorded on the balance sheet at fair market value.
Subsequent changes in value will be recognized in the statement of income or as
part of comprehensive income. Based on the company's current use of derivative
instruments and hedging activities, the new statement is not expected to have a
material effect on the company's consolidated balance sheet or statement of
income.
The company's financial condition remains strong. The company believes
that cash flows from operations and access to additional funds through available
credit facilities provide adequate resources to fund operating requirements,
capital expenditures and additional acquisition opportunities to meet its
strategic and financial goals.
37
20
TELEFLEX INCORPORATED AND SUBSIDIARIES
1998 FINANCIAL REVIEW (CONTINUED)
[BAR CHART]
Capitalization
(in millions)
Equity LTD Total
------ --- -----
1994 309.0 190.5 499.5
1995 355.4 196.8 552.2
1996 409.2 195.9 605.1
1997 463.8 237.6 701.4
1998 534.5 275.6 810.1
SHAREHOLDERS' EQUITY
Shareholders' Equity increased to $534.5 million at the end of 1998 from $463.8
million at the end of 1997. Book value per share increased to $14.21 at December
27, 1998 compared to $12.49 at December 28, 1997. During 1998 the dividend per
share was increased 15% to $.45 per share from $.39 per share in 1997. Return on
shareholders' equity increased in 1998 to 17% from 16% in 1997.
OTHER MATTERS
ENVIRONMENTAL
The company is subject to numerous federal, state and local environmental laws
and regulations including the Resource Conservation and Recovery Act,
Comprehensive Environmental Response, Compensation and Liability Act, the Clean
Air Act and, the Clean Water Act. Environmental programs are in place throughout
the company which include training, auditing and monitoring to ensure compliance
with such laws and regulations. In addition, the company has been named as a
Potentially Responsible Party by the Environmental Protection Agency at various
sites throughout the country. Environmental costs, including liabilities
associated with such sites, and the costs of complying with existing
environmental regulations are not expected to result in a liability material to
the company's consolidated financial position or results of operations.
YEAR 2000
Background
The "year 2000 issue" refers to computer programs written using two digits
rather than four to define the year. This could result in computer systems being
unable to distinguish between the year 1900 and the year 2000. The remediation
of non-compliant computer systems before the year 2000 by the company, and its
suppliers and customers is necessary to minimize the possibility of systems
failures causing disruptions in business operations.
Project
The company began its year 2000 remediation project in 1997 comprising seven
phases: (1) awareness, (2) inventory, (3) assessment, (4) analysis, (5)
conversion, (6) implementation and (7) post implementation. Each of the
company's more than eighty business units is responsible for carrying out its
own remediation plan with assistance and monitoring by a full time "year 2000
project office." These remediation plans include requirements to develop and
test contingency procedures in the event of unforeseen system failures due to
year 2000 issues. These contingency plans may include identifying alternate
suppliers for the company's significant production materials and supplies,
adjusting factory production schedules and other measures considered appropriate
by management. The company's goal is to achieve compliance in all of its
internal business information systems by the third quarter of 1999. At December
27, 1998 approximately two-thirds of the activities, including replacements,
upgrades and modifications in the normal course of business, necessary for
company-wide compliance have been completed. The project also encompasses
remediation of non-information systems such as embedded chips within the
company's production processes and infrastructure; and, customer and supplier
readiness. As part of its overall business risk assessment, the company has sent
year 2000 readiness surveys to its significant customers and suppliers. The
surveys are being continuously updated and, where necessary, will be
supplemented with on-site inspection of significant customers and suppliers.
38
21
Costs
The aggregate effort directed towards year 2000 remediation is estimated to be
approximately $10 to $12 million including the capitalized cost of certain
computer hardware and software systems and the redirected effort of the
company's existing resources. Approximately $7 million has been spent as of
December 27, 1998 and has been funded by cash flows from operations.
Risks
Failure to correct a significant year 2000 issue could result in a disruption of
normal business operations. Due to the general uncertainty inherent in the year
2000 issue, especially as it relates to the readiness of customers and
suppliers, a risk of a material adverse effect on the company's future results
of operations, liquidity and financial condition does exist. The company
believes that completion of its year 2000 project including scheduled business
system implementations will reduce the risk of significant disruption of normal
business operations. The company's operations are diversified among over eighty
separate business units. This diversified environment combined with multiple
customer and supplier relationships further reduces the risk of a significant
disruption to the company's operations.
39