SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

 

Commission file number 1-5353

 

TELEFLEX INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (610) 948-5100

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

NONE

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ     No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o     No þ

 

The aggregate market value of the Common Stock of the registrant held by non-affiliates of the registrant (37,416,803 shares) on June 27, 2008 (the last business day of the registrant’s most recently completed fiscal second quarter) was $2,090,476,784⁽¹⁾. The aggregate market value was computed by reference to the closing price of the Common Stock on such date.

 

The registrant had 39,543,393 Common Shares outstanding as of February 17, 2009.

 

Document Incorporated By Reference: certain provisions of the registrant’s definitive proxy statement in connection with its 2009 Annual Meeting of Shareholders, to be filed within 120 days of the close of the registrant’s fiscal year are incorporated by reference in Part III hereof.

 

 

 

 

TELEFLEX INCORPORATED
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008

 

TABLE OF CONTENTS

 

 

Information Concerning Forward-Looking Statements

 

All statements made in this Annual Report on Form 10-K, other than statements of historical fact, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “will,” “would,” “should,” “guidance,” “potential,” “continue,” “project,” “forecast,” “confident,” “prospects” and similar expressions typically are used to identify forward-looking statements. Forward-looking statements are based on the then-current expectations, beliefs, assumptions, estimates and forecasts about our business and the industry and markets in which we operate. These statements are not guarantees of future performance and involve 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, particularly Arrow International Inc., 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; global economic factors, including currency exchange rates and interest rates; difficulties entering new markets; and general economic conditions. For a further discussion of the risks that our business is subject to, see “Item 1A. Risk Factors” of this Annual Report on Form 10-K. We expressly disclaim any intent or obligation to update these forward-looking statements, except as otherwise specifically stated by us.

 

 

Overview

 

Teleflex Incorporated (referred to herein as “we,” “us,” “our,” “Teleflex” and the “Company”) is a diversified company specializing in the design, manufacture and distribution of quality engineered products and services. The Company serves a wide range of customers in segments of the medical, aerospace and commercial industries. The Company’s products include: medical devices used in critical care and anesthesia applications, surgical instruments and devices, cardiac assist devices for hospitals and healthcare providers and instruments and devices delivered to medical device manufacturers; aerospace engine repair products and services and cargo-handling systems and equipment used in commercial aircraft; and marine driver controls, engine assemblies and drive parts, power and fuel management systems and rigging products and services for commercial industries.

 

For more than 65 years, we have provided specialty-engineered products that help our customers meet their business requirements. We have grown through an active program of development of new products, introduction of products into new geographic or end-markets and through acquisitions of companies with related market, technology or industry expertise. We serve a diverse customer base in over 150 countries through our own operations and through local direct sales and distribution networks.

 

We are focused on achieving consistent and sustainable growth through our internal growth initiatives which include the development of new products, expansion of market share, moving existing products into new geographies, and through selected acquisitions which enhance or expedite our development initiatives and our ability to grow market share. We continually evaluate the composition of the portfolio of our businesses to ensure alignment with our overall objectives.

 

We strive to maintain a portfolio of businesses that provide consistency of performance, improved profitability and sustainable growth. To this end, in 2007 we significantly changed the composition of our portfolio through acquisitions in all three business segments and divestitures in both our Commercial and Aerospace segments. Specifically, in our Medical Segment, we completed the acquisition of Arrow International, a medical products company with annual net revenues of over $500 million, which significantly expanded the segment. We also completed the acquisition of a small orthopedic device manufacturer to expand our capability to serve medical device manufacturers. In our Commercial Segment, we acquired a rigging services business with annual net revenues of approximately $25 million. At the end of 2007, we completed the divestiture of our automotive and industrial businesses (“GMS”) with 2007 net revenues of over $860 million, significantly reducing the size of our Commercial Segment. In our Aerospace Segment, we acquired a cargo equipment business with annual net revenues of approximately $55 million and divested a precision — machined components business with approximately $130 million in annual net revenues. These measures were taken to improve margins, reduce cyclicality and focus our resources on the development of our core businesses. We continually evaluate the composition of the portfolio of our businesses to ensure alignment with our overall objectives.

 

Our Business Segments

 

We organize our business into three business segments — Medical, Aerospace and Commercial. For 2008, the percentages of our consolidated net revenues represented by our segments were as follows: Medical — 62 percent, Aerospace — 21 percent and Commercial — 17 percent.

 

Further detail and additional information regarding our segments and geographic areas is presented in Note 16 to our consolidated financial statements included in this Annual Report on Form 10-K.

Discontinued Operations

 

At the end of 2007, we completed the sale of our business units that design and manufacture automotive and industrial driver controls, motion systems and fluid handling systems to Kongsberg Automotive Holding ASA for $560 million in cash. On June 29, 2007, we completed the sale of a precision-machined components business in our Aerospace Segment for approximately $134 million in cash and in 2006, we sold a small medical business.

 

These businesses met the criteria for reporting discontinued operations under Statement of Financial Accounting Standards (“SFAS”) No. 144. “Accounting for the Impairment or Disposal of Long-Lived Assets.” In compliance with SFAS No. 144, the Company has reported results of operations, cash flows and gains (losses) on the disposition of these businesses as discontinued operations for all periods presented. See Note 17 to our consolidated financial statements included in this Annual Report on Form 10-K for further information regarding divestiture activity and accounting for discontinued operations.

 

The following business segment and product category information reflects businesses in continuing operations as of December 31, 2008.

 

Business Segment Overview

 

 Medical

 

The businesses in our Medical Segment design, manufacture and distribute medical products primarily used in critical care, surgical applications and cardiac care. Additionally, we design, manufacture and supply devices and instruments for medical device manufacturers. We are focused on providing disposable or single use medical products for critical care and surgery that enhance patient outcomes by providing products that are less invasive, reduce infection and improve patient safety.

 

Our 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. Major manufacturing operations are located in Czech Republic, Germany, Malaysia, Mexico and the United States. Approximately 50 percent of our segment net revenues are derived from customers outside the United States.

 

In the fourth quarter of 2007, we acquired Arrow International, a leading global supplier of catheter-based medical technology products used for vascular access and cardiac care. This acquisition significantly expanded our disposable medical product offerings for critical care, enhanced our global footprint and added to our research and development capabilities.

 

Disposable Medical Products for Critical Care:  This is the largest product category in the Medical Segment, representing 64 percent of segment net revenues in 2008. Disposable medical products are used in a wide range of critical care procedures for vascular access, respiratory care, anesthesia and airway management, treatment of urologic conditions, as well as other specialty procedures. Disposable medical products for critical care are generally marketed under the brand names of Arrow, Rüsch, HudsonRCI, Gibeck and Sheridan. The large majority of sales for disposable medical products are made to the hospital/healthcare provider market, with a smaller percentage sold to alternate sites.

 

Vascular Access Products:  Our vascular access products are generally catheter-based products used in a variety of clinical procedures to facilitate multiple critical care therapies including the administration of intravenous medications, other therapies, and the measurement of blood pressure and taking of blood samples through a single puncture site.

 

Vascular access catheters and related devices consist principally of central venous access catheters (“CVC”) such as the following: the Arrow-Howe’s^tm Multi-Lumen Catheter, a catheter equipped with three or four channels, or lumens; double-and single-lumen catheters, which are designed for use in a variety of clinical

procedures; the Arrow Pressure Injectable CVC, which gives clinicians who perform CT scans the option of using an indwelling pressure injectable Arrow CVC without having to insert another catheter for their scan; and percutaneous sheath introducers, which are used as a means for inserting cardiovascular and other catheterization devices into the vascular system during critical care procedures.

 

We also provide a range of peripherally inserted central catheters, which are soft, flexible catheters inserted in the upper arm and advanced into the superior vena cava and are accessed for various types of intravenous medications and therapies, and radial artery catheters, which are used for measuring arterial blood pressure and taking blood samples. Our offerings include a pressure injectable peripherally inserted catheter which addresses the therapeutic need for a catheter that can withstand the higher pressures required by the injection of contrast media for CT scans.

 

Our vascular access products also include specialty catheters and related products used in a range of other procedures and include percutaneous thrombolytic devices, which are designed for clearance of thrombosed hemodialysis grafts in chronic hemodialysis patients; and hemodialysis access catheters, including the Cannon^® Catheter, which is used to facilitate dialysis treatment.

 

Many of our vascular access catheters are treated with the ARROWg+ard^®, or ARROWg+ard Blue Plus^®, antiseptic surface treatments to reduce the risk of catheter related infection. ARROWg+ard Blue Plus, is a newer, longer lasting formulation of ARROWg+ard and provides antimicrobial treatment of the interior lumens and hubs of each catheter.

 

As part of our ongoing efforts to meet physicians’ needs for safety and management of risk of infection in the hospital setting, we sell a Maximal Barrier Precautions central venous access kit, which includes a full body drape, a catheter treated with the ARROWg+ard antimicrobial technology, and other accessories. The features of this kit were created to address recent guidelines for reducing catheter-related bloodstream infections that were set by a variety of health regulatory agencies, such as the Centers for Disease Control and Prevention and the Joint Commission on the Accreditation of Healthcare Organizations, among others.

 

Related products include custom tubing sets used to connect central venous catheters to blood pressure monitoring devices and drug infusion systems, and the Arrow InView portable ultrasound machine designed to support placement and administration of vascular access products.

 

Respiratory Care:  Respiratory care products principally consist of devices used in aerosol and medication delivery, oxygen therapy and ventilation management. We offer an extensive range of aerosol therapy products, including the Micromist^® Nebulizer, the Neb-U-Mask^® System and the Opti-Neb Pro^tm Compressor. We are also a global provider of oxygen supplies, offering a broad range of products to deliver oxygen therapy safely and comfortably. These include masks, cannulas, tubing and humidifiers. The full range of these products are used in a variety of clinical settings including hospitals, long-term care facilities, rehabilitation centers and patients’ homes to treat respiratory ailments such as chronic lung disease, pneumonia, cystic fibrosis and asthma.

 

Our ventilation management solutions promote patient safety and maximize clinician efficiency. These products include ventilator circuits with an extended life to support clinical practice guidelines, high efficiency particulate air (HEPA) filters with 99.9999% efficiency against the transmission of bacteria and viruses, heat and moisture exchangers that reduce circuit manipulation and cross-contamination risk, and heated humidifiers that promote patient compliance to non-invasive respiratory strategies, like Non-Invasive Ventilation (“NIV”) and High Flow Oxygen Therapy.

 

The ConchaTherm^® Neptune^® is a heated humidification solution. It is designed to allow the caregiver to customize patient treatment to meet specific clinical goals. This results in advanced patient outcomes without sacrificing clinician efficiency.

 

Anesthesia and Airway Management:  Anesthesiologists depend on our highly recognized brands of Hudson, Sheridan and Rüsch products that include endotracheal tubes, laryngeal masks, airways and face

masks to deliver anesthetic agents and oxygen. To assist in the placement of endotracheal tubes, we provide a comprehensive and unique line of laryngoscope blades and handles, including standard halogen and fiber optic light sources. Fiber optic light sources offer a high intensity, cool white light without generating the same level of heat that comes from standard halogen bulbs.

 

Regional anesthesia products include epidural and peripheral nerve block catheters. Nerve blocks provide pain relief after surgical procedures and help clinicians better manage each patient’s pain. We offer the first stimulating continuous nerve block catheter, the Arrow StimuCath, which confirms the positive placement of the catheter next to the nerve. The Flex Tip Plus continuous epidural catheter features a soft, flexible tip that helps reduce the incidence of complications, such as transient paresthesia and inadvertent cannulation of blood vessels or the dura, while improving the clinician’s ability to thread the catheter into the epidural space. Our Arrow TheraCath^® epidural catheter, with high compression strength for direction-ability and enhanced radiopacity, was designed for pain management procedures where increased steer-ability is important. Additional integral components create a range of standard and custom procedural kits.

 

Urology:  Our line of urology products provides bladder management products for patients in the hospital and home care markets. Our product portfolio consists principally of catheters (including Foley, intermittent, external and suprapubic), urine collectors, catheterization accessories and products for operative endurology. Teleflex Medical today has significant market share in Foley catheters in the EMEA markets (Europe, the Middle East and Africa). The intermittent catheter market for home care is growing quickly, and Medical Service, our specialist in intermittent catheterization, has a leading share of the German healthcare market with Liquick Base and mobile catheters. Teleflex Medical in Italy has also significantly increased its sales of intermittent catheters in the year 2008.

 

We also design our urine collectors, catheterization accessories and kits with Teleflex Medical’s overall infection prevention strategy in mind. For example, the Rüsch MMG Closed System intermittent catheter is used in the treatment of spinal cord injury patients. Our Teleflex Medical Team in North America successfully introduced a new version of the MMG H2O to the market in 2008.

 

Surgical Instruments and Medical Devices:  Products in this category represented 20 percent of Medical Segment net revenues in 2008. Our surgical instrument and medical device products include: ligation and closure products including appliers, clips, and sutures used in a variety of surgical procedures, hand-held instruments for general and specialty surgical procedures, access ports used in minimally invasive surgical procedures including robotic surgery, and fluid management products used for chest drainage. In addition, we provide instrument management services. We market surgical instruments and medical devices under the Deknatel, Pleur-evac, Pilling, Taut and Weck brand names.

 

Hem-o-lok is the world’s only patented locking polymer ligation clip, and is a growing part of the Weck portfolio. Hem-o-lok clips have special applications in robotic, laparoscopic, and cardiovascular surgery, and provide surgeons with a unique level of security and performance.

 

In 2009, we plan to introduce the Taut^® Universal Seal designed for use with the ADAPt^tm line of bladeless laparoscopic access devices. The new Taut seal eclipses other options by providing surgeons the ability to perform laparoscopic procedures without flimsy diaphragm seals, lubricants that can smudge cameras, or the need for reducer caps. Coupled with the new universal seal, Taut provides a complete line of ports from 3mm to 15mm, including balloon ports and bariatric and pediatric versions. Taut ports were designed around the patented ADAPt asymmetrical dilating access tip that dilates through tissue without metal or plastic blades. The ADAPt tip has been shown to produce a fascial defect 58 percent smaller than typical bladed trocars and avoids exposing any anatomical structures to a blade of any kind.

 

Devices for Original Equipment Manufacturers (“OEM”):  Customized medical instruments, implants and components sold to medical device manufacturers represented 10 percent of Medical Segment revenues in 2008. Under the well-regarded brand names of Beere Medical^®, KMedic^®, Specialized Medical Devices^tm, Deknatel^® and TFX OEM^® we provide specialized product development services, which include design

engineering, prototyping and testing, manufacturing, assembly and packaging. Our OEM product development and manufacturing facilities are located in Germany, Ireland, Mexico and the United States.

 

The OEM category includes custom extrusion, catheter fabrication, introducer systems, sheath/dilator sets, specialty sutures, resins and performance fibers. We also provide machined and forged instrumentation for general and specialty procedures, Ortho-Grip^® instrument handles and fixation devices used primarily for orthopedic procedures.

 

Cardiac Care Devices:  Cardiac care products accounted for approximately 5 percent of revenues in fiscal 2008. Products in this category range from diagnostic catheters, such as thermodilution and wedge pressure catheters, specialized angiographic catheters, such as Berman and Reverse Berman catheters, therapeutic delivery catheters, such as temporary pacing catheters and intra-aortic balloon (IAB) catheters to capital equipment, such as intra-aortic balloon pump (IABP) consoles. IABP products are used to augment oxygen delivery to the cardiac muscle and reduce the oxygen demand after cardiac surgery, serious heart attack or interventional procedures. The IAB and IABP product lines feature the AutoCAT 2 WAVE^® console and the FiberOptix^tm catheter, which together utilize fiber optic technology for arterial pressure signal acquisition and allow the patented WAVE^® timing algorithm to support the broadest range of patient heart rhythms, including severely arrhythmic patients.

 

The following table sets forth net revenues for 2008, 2007 and 2006 by product category for the Medical Segment.

 

 

The following table sets forth the percentage of net revenues by end market for the Medical Segment.

 

 

Markets for these products are influenced by a number of factors including demographics, utilization and reimbursement patterns in the worldwide healthcare markets. Our products are sold through direct sales or distribution in over 140 countries. The following table sets forth the percentage of net revenues for 2008 derived from the major geographic areas we serve.

 

 

Sales and Marketing:  Medical products are sold directly to hospitals, healthcare providers, distributors and to original equipment manufacturers of medical devices through our own sales forces and through independent representatives and independent distributor networks.

 

Backlog:  Most of our medical products are sold to hospitals or healthcare providers on orders calling for delivery within a few days or weeks with a longer order time for products sold to medical device manufacturers. Therefore, the backlog of such orders is not indicative of probable revenues in any future 12-month period.

 Aerospace

 

Our Aerospace Segment businesses provide engine repair products and services for flight turbine engines, cargo handling systems and equipment for wide body and narrow body aircraft, cargo containment devices for air cargo and passenger baggage, and actuators for applications in commercial and military aircraft. Engine repair products and services are provided for all major engine suppliers and we serve most of the world’s leading commercial airlines. Our market leading brand names, Airfoil Technologies International, Telair International, and Nordisk are well known and respected on a global basis.

 

Sales to customers in commercial aviation markets represent 99 percent of revenues in this segment. Markets for these products are influenced by the level of general economic activity, investment patterns in new aircraft, both passenger and cargo, cargo market trends, flight hours, and age and type of engines in use. Major locations for manufacturing and service are located in Singapore, Germany, Norway, the United States, the United Kingdom, and Sweden.

 

Engine Repair Products and Services:  The largest single product category in the Aerospace Segment, repair products and services represented 50 percent of Aerospace Segment revenues in 2008. This category includes engine repair technologies and services primarily for critical components of flight turbines, including fan blades, compressors and airfoils. We utilize advanced reprofiling and adaptive-machining techniques to improve efficiency of aircraft engine performance and reduce turnaround time for maintenance and repairs. Our repair products and services business is conducted through a consolidated, fifty-one percent owned venture with GE Aircraft Engines, called Airfoil Technologies International (ATI). In 2007, ATI signed a joint venture and management agreement with Snecma Services to expand the range of repair services provided to our customers.

 

Cargo-handling Systems and Equipment:  Products in this category represented 50 percent of Aerospace Segment revenues in 2008. Our cargo-handling systems include on-board cargo-loading systems for wide-body aircraft, baggage-handling systems for narrow body aircraft, aftermarket spare parts and repair services. Marketed under the Telair International brand name, our wide-body cargo-handling systems are sold to aircraft original equipment manufacturers or to airlines and air freight carriers as “seller and/or buyer furnished equipment” for original installations or as retrofits for existing equipment. Cargo-handling systems require a high degree of engineering sophistication and are often custom-designed.

 

In addition to the design and manufacture of cargo systems, we provide customers with aftermarket spare parts and repair services for their Telair systems. We also design, manufacture and repair cargo containers. In November 2007, we acquired Nordisk Aviation Products, expanding our customer base and global manufacturing and service capacity for cargo equipment. All of our cargo containers and pallets are now marketed to commercial airlines and freight companies under the Nordisk name.

 

We also manufacture and repair components for our systems and other related aircraft controls, including canopy and door actuators, cargo winches and flight controls.

 

The following table sets forth net revenues for 2008, 2007 and 2006 by product category for the Aerospace Segment.

 

 

The following table sets forth the percentage of net revenues by end market for the Aerospace Segment.

 

Backlog:  As of December 31, 2008, our backlog of firm orders for our Aerospace Segment was $78 million, of which we expect approximately 91 percent to be filled in 2009. Our backlog for our Aerospace Segment on December 31, 2007 was $141 million.

 

Sales and Marketing:  Products sold to the aerospace market are sold through our own field representatives and distributors.

 

 Commercial

 

Our Commercial Segment businesses principally design, manufacture and distribute driver controls and engine and drive assemblies for the marine market, power and fuel systems for truck, rail, automotive and industrial vehicles and rigging products and services. Our products are used in a range of markets including: recreational marine, heavy truck, bus, industrial vehicles, rail, oil and gas, marine transportation and industrial. Major manufacturing operations are located in Canada, Europe, Singapore and the United States.

 

Marine Driver Controls and Engine Assemblies and Drive Parts:  This is the largest single product category in the Commercial Segment, representing 48 percent of the Commercial Segment revenues in 2008. Products in this category include: shift and throttle cables, mechanical and hydraulic steering systems, throttle controls, instrumentation and engine drive parts.

 

We are a leading global provider of both mechanical and hydraulic steering systems for recreational powerboats. We are also a leading distributor of engine assemblies and drive parts. Our marine products are sold to original equipment manufacturers (OEMs) and to the aftermarket through distributors, dealers and retail outlets. Our major product brands include Teleflex Marine, TFXtreme, SeaStar, BayStar, Sierra and Proheat.

 

Power and Fuel Systems:  Products in this category represented 27 percent of Commercial Segment revenues in 2008. Our major products in this category include auxiliary power units used for power in heavy-duty trucks and locomotives, climate control systems used in trucks, buses and other industrial vehicles and components and systems for the use of alternative fuels in industrial vehicles and passenger cars. These products generally address the need for greater fuel efficiency, reduced emissions and access to mobile power. Our major product brands in this category are ComfortPro and Teleflex GFI.

 

Rigging Products and Services:  Products in this category represented 25 percent of Commercial Segment revenues in 2008. Products include heavy-duty cables and hoisting and rigging equipment used in oil drilling, marine transportation and other industrial markets. We also help our customers meet new legislation and safety regulations for moorings. In 2007, Teleflex Commercial enhanced its offerings when it acquired Southern Wire Corporation, a prominent wholesale provider of rigging services.

 

The following table sets forth net revenues for 2008, 2007 and 2006 by product category for the Commercial Segment.

 

 

The following table sets forth the percentage of net revenues by end market for the Commercial Segment.

 

Backlog:  Standard Commercial segment products are typically shipped between a few days and three months after receipt of order. Therefore, the backlog of such orders is not indicative of probable revenues in any future 12-month period.

 

Sales and Marketing:  The majority of our Commercial Segment products are sold through a direct sales force of field representatives and technical specialists. Marine driver controls and engine and drive parts are sold directly to boat builders and engine manufacturers as well as through distributors, dealers and retail outlets to reach recreational boaters.

 

Auxiliary power units are primarily sold in the North American truck market through an agreement with a distributor and to the rail market using a direct sales force and distributors. Fuel systems and components include custom applications sold globally directly to industrial equipment manufacturers and to the automotive aftermarket principally in Europe and Latin America. Rigging products and services includes both a retail business and a wholesale business, both of which sell through a direct sales force.

 

Government Regulation

 

Government agencies in a number of countries regulate our products and the products sold by our customers utilizing our products. The U.S. Food and Drug Administration and government agencies in other countries regulate the approval, manufacturing, and sale and marketing of many of our healthcare products. The U.S. Federal Aviation Administration and the European Aviation Safety Agency regulate the manufacture and sale of some of our aerospace products and license the operation of our repair stations. For more information, see ITEM 1A. “Risk Factors”.

 

Competition

 

Given the range and diversity of our products and markets, no one competitor offers competitive products for all the markets and customers that we serve. In general, all of our segments and product lines face significant competition from competitors of varying sizes, although the number of competitors in each market tends to be limited. We believe that our competitive position depends on the technical competence and creative ability of our engineering personnel, the know-how and skill of our manufacturing personnel, and the strength and scope of our sales, service and distribution networks.

 

Patents and Trademarks

 

We own a portfolio of patents, patents pending and trademarks. We also license various patents and trademarks. Patents for individual products extend for varying periods according to the date of patent filing or grant and the legal term of patents in the various countries where patent protection is obtained. Trademark rights may potentially extend for longer periods of time and are dependent upon national laws and use of the marks. All capitalized product names throughout this document are trademarks owned by, or licensed to, us or our subsidiaries. Although these have been of value and are expected to continue to be of value in the future, we do not consider any single patent or trademark, except for the Teleflex brand and the Arrow brand, to be essential to the operation of our business.

 

Suppliers and Materials

 

Materials used in the manufacture of our products are purchased from a large number of suppliers in diverse geographic locations. We are not dependent on any single supplier for a substantial amount of the materials used or components supplied for our overall operations. Most of the materials and components we use are available from multiple sources, and where practical, we attempt to identify alternative suppliers. Volatility in commodity markets, particularly steel and plastic resins, can have a significant impact on the cost of producing certain of our products. We cannot be assured of successfully passing these cost increases through to all of our customers, particularly original equipment manufacturers.

Seasonality

 

Portions of our revenues, particularly in the Commercial and Medical segments, are subject to seasonal fluctuations. Revenues in the marine aftermarket generally increase in the second quarter as boat owners prepare their watercraft for the upcoming season. Incidence of flu and other disease patterns as well as the frequency of elective medical procedures affect revenues related to disposable medical products.

 

Employees

 

We employed approximately 14,200 full-time and temporary employees at December 31, 2008. Of these employees, approximately 4,100 were employed in the United States and 10,100 in countries outside of the United States. Less than 8 percent of our employees in the United States were covered by union contracts. We have government-mandated collective-bargaining arrangements or union contracts that cover employees in other countries. We believe we have good relationships with our employees.

 

Investor Information

 

We are subject to the informational requirements of the Securities Exchange Act of 1934. Therefore, we file reports, proxy statements and other information with the Securities and Exchange Commission (SEC). Such reports, proxy and information statements, and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

 

You can access financial and other information in the Investors section of our website. The address is www.teleflex.com. We make available through our website, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished under Section 13(a) or 15(d) of the Securities Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. The information on our website is not part of this annual report on Form 10-K. The reference to our website address is intended to be an inactive textual reference only.

 

We are a Delaware corporation organized in 1943. Our executive offices are located at 155 South Limerick Road, Limerick, PA 19468. Our telephone number is (610) 948-5100.

 

EXECUTIVE OFFICERS

 

The names and ages of all of our executive officers as of February 24, 2009 and the positions and offices held by each such officer are as follows:

 

Mr. Black has been Chairman since May 2006, Chief Executive Officer since May 2002 and President since December 2000. He has been a Director since November 2002. Mr. Black was President of the Teleflex Industrial Group from July 2000 to December 2000 and President of Teleflex Fluid Systems from January 1999 to July 2000.

 

Mr. Gordon has been Executive Vice President and Chief Financial Officer since March 2007. From June 2005 until March 2007, he was Senior Vice President — Corporate Development. From December 2000 to June 2005, Mr. Gordon was Vice President — Corporate Development. Prior to December 2000, Mr. Gordon was Director of Business Development.

 

Mr. Miller has been Executive Vice President, General Counsel and Secretary since February 2008. From November 2004 to February 2008, Mr. Miller was Senior Vice President, General Counsel and Secretary. From November 2001 until November 2004, he was Senior Vice President and Associate General Counsel for the Food & Support Services division of Aramark Corporation, a diversified management services company providing food, refreshment, facility and other support services for a variety of organizations. From June 1994 until November 2001, Mr. Miller was Senior Vice President and General Counsel for Aramark Uniform Services.

 

Mr. Waaser has been the President of Teleflex Medical since October 2006. Prior to joining Teleflex, Mr. Waaser served as President and Chief Executive Officer of Hill-Rom, Inc., a manufacturer and provider of products and services for the healthcare industry, including patient room equipment, therapeutic wound and pulmonary care products, biomedical equipment services and communications systems, from 2001 to 2005. Prior to 2001, Mr. Waaser served as Senior Vice President of AGFA Corporation, a producer of analog and digital imaging products for medical, industrial, graphics and consumer applications.

 

Mr. Suddarth has been the President of Teleflex Aerospace since July 2004. From 2003 to 2004, Mr. Suddarth was the President of Techsonic Industries Inc., a former subsidiary of Teleflex that manufactured underwater sonar and video viewing equipment which was divested in 2004. Mr. Suddarth was the Chief Operating Officer of AMF Bowling Products, Inc., a bowling equipment manufacturer, from 2001 to 2003. Prior to 2001, Mr. Suddarth was President of Morse Controls, a manufacturer of performance and control systems and aftermarket parts for marine and industrial applications, which was acquired by Teleflex in 2001.

 

Mr. Northfield has been the Executive Vice President for Global Operations, Teleflex Medical since September 2008. From 2005 to 2008, Mr. Northfield was the President of Teleflex Commercial. From 2004 to 2005, Mr. Northfield was the President of Teleflex Automotive and the Vice President of Strategic Development. Mr. Northfield held the position of Vice President of Strategic Development from 2001 to 2004. Prior to 2001, Mr. Northfield was Vice President and General Manager of North American operations of Morse Controls, a manufacturer of performance and control systems and aftermarket parts for marine and industrial applications, which was acquired by Teleflex in 2001.

 

Mr. Gaboriault has been Senior Vice President and Chief Information Officer since February 2008. From 2005 to 2008, he was Chief Information and Strategic Development Officer. From 2004 to 2005, he was Chief Information Officer. From 1998 to 2004, Mr. Gaboriault was the Director of Information Technology.

 

Our officers are elected annually by the Board of Directors. Each officer serves at the pleasure of the Board until their respective successors have been elected.

 

We are subject to certain risks that could adversely affect our business, financial condition and results of operations. These risks include, but are not limited to the following:

 

Our inability to resolve issues related to the FDA corporate warning letter issued to Arrow could have an adverse impact on our business, financial condition and results of operations.

 

On October 11, 2007, Arrow received a corporate warning letter from the U.S. Food and Drug Administration (“FDA”), which expresses concerns with Arrow’s quality systems, including complaint handling, corrective and preventive action, process and design validation and inspection and training procedures. While we are working with the FDA to resolve these issues, this work has required and will continue to require the dedication of significant internal and external resources. There can be no assurances regarding the length of time or cost it will take us to resolve these issues to the satisfaction of the FDA. In addition, if our remedial actions are not satisfactory to the FDA, we may need to devote additional financial and human resources to our efforts, and the FDA may take further regulatory actions against us. These actions may include seizing our product inventory, obtaining a court injunction against further marketing of our products, assessing civil monetary penalties or imposing a consent decree on us, which could in turn have a material adverse effect on our business, financial condition and results of operations.

 

A prolonged global economic recession combined with a continuation of volatile global credit markets could adversely impact our operating results, financial condition and liquidity.

 

Current global economic and financial market conditions, including severe disruptions in the credit markets and the potential for a significant and prolonged global economic recession, may materially and adversely affect our results of operations and financial condition. This could include future charges to recognize impairment in the carrying value of our goodwill and other intangible assets. 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. These economic conditions may also materially impact our customers, suppliers and other parties with which we do business. Economic and financial market conditions that adversely affect our customers may cause them to terminate existing purchase orders or to reduce the volume of products or services they purchase from us in the future. The impact of the difficult economic environment was felt mostly in our Commercial segment during 2008, as the markets served by our marine and auxiliary power unit products were adversely impacted. We expect the marine market to remain weak for most, if not all, of 2009. In addition, hospitals in some regions of the United States have seen a decline in admissions and a reduction in elective procedures and have limited their capital spending. More than 80 percent of our Medical revenues come from disposable products used in critical care and surgical applications and our sales volume could be negatively impacted by declines in admission. 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. Changes of this type 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.

 

We may not be able to successfully complete the integration of Arrow or to achieve the anticipated benefits of the Arrow acquisition.

 

The integration of Arrow into our Medical Segment involves a number of risks and presents financial, managerial and operational challenges. In particular, we may have difficulty with, and may incur unanticipated expenses related to:

 

 

The success of the Arrow acquisition will depend, in part, on our ability to realize the anticipated benefits and cost savings from successfully combining the businesses of Arrow and of Teleflex Medical in the time frame we anticipate. If we are not able to achieve these objectives, the anticipated benefits, synergies and cost savings of the business combination may not be realized fully or at all or may take longer to realize than expected.

 

Failure to successfully complete the integration of Arrow or achieve the anticipated benefits of the acquisition of Arrow may have a material adverse effect on our business, financial condition and results of operations.

 

We have substantial debt obligations that could adversely impact our business, results of operations and financial condition.

 

We incurred significant indebtedness to fund a portion of the consideration for our acquisition of Arrow. As of December 31, 2008, our outstanding indebtedness was approximately $1.5 billion. We will be required to use a significant portion of our operating cash flow to reduce our indebtedness over the next few years, resulting in a reduction of the cash flow available to fund working capital, capital expenditures, acquisitions, investments and dividends. Our indebtedness may also subject us to greater vulnerability to general adverse economic and industry conditions and increase our vulnerability to increases in interest rates because a portion of our indebtedness bears interest at floating rates.

 

Our senior credit facility and agreements with the holders of our senior notes, which we refer to as our senior debt facilities, impose certain operating and financial covenants that limit our ability to, among other things:

 

 

In addition, the terms of our senior credit facilities require us to satisfy and maintain specified financial ratios. Our ability to meet those financial ratios can be affected by events beyond our control, and in the event of a significant deterioration of our economic performance, we cannot assure that we will be able to satisfy those ratios. A breach of any of these covenants could result in a default under our senior credit facilities. If we fail to maintain compliance with these covenants and cannot obtain a waiver from the lenders under the senior credit facilities, the lenders could elect to declare all amounts outstanding under the senior secured credit facilities to be immediately due and payable and terminate all commitments to extend further credit under such facilities. If the lenders under the senior credit facilities accelerate the repayment of borrowings and we are not able to obtain financing to satisfy this obligation, we likely would have to liquidate significant assets which nevertheless may not be sufficient to repay our borrowings.

We may incur material losses and costs as a result of product liability, warranty and recall claims that may be brought against us.

 

Our businesses expose us to potential product liability risks that are inherent in the design, manufacture and marketing of our products. In particular, our medical device products are often used in surgical and intensive care settings with seriously ill patients. Many of these products are designed to be implanted in the human body for varying periods of time, and component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks with respect to these or other products we manufacture or sell could result in an unsafe condition or injury to, or death of, the patient. Although the Company carries product liability insurance we may be exposed to product liability and warranty claims in the event that our products actually or allegedly fail to perform as expected or the use of our products results, or is alleged to result, in bodily injury and/or property damage. Accordingly, we could experience material warranty or product liability losses in the future and incur significant costs to defend these claims. In addition, if any of our products are, or are alleged to be, defective, we may be required to participate in a recall of that product if the defect or the alleged defect relates to safety and experience lost sales, and be exposed to legal and reputational risk. Product liability, warranty and recall costs may have a material adverse effect on our financial condition and results of operations.

 

We are subject to risks associated with our non-U.S. operations.

 

Although no material concentration of our manufacturing operations exists in any single country, we have significant manufacturing operations outside the United States, including operations conducted through entities that are not wholly-owned and other alliances. As of, and for the year ended, December 31, 2008, approximately 44% of our total fixed assets and 53% of our total net revenues were attributable to products directly distributed from our operations outside the U.S. Our international operations are subject to varying degrees of risk inherent in doing business outside the U.S., including:

 

 

These and other factors may have a material adverse effect on our international operations or on our business, results of operations and financial condition generally.

 

Customers in our Medical Segment depend on third party reimbursement and the failure of healthcare programs to provide reimbursement or the reduction in levels of reimbursement for our medical products could adversely affect our Medical Segment.

 

Demand for some of our medical products is impacted by the reimbursement to our customers of patients’ medical expenses by government healthcare programs and private health insurers in the countries where we do business. Internationally, medical reimbursement systems vary significantly, with medical centers in some countries having fixed budgets, regardless of the level of patient treatment. Other countries require application for, and approval of, government or third party reimbursement. Without both favorable coverage

determinations by, and the financial support of, government and third party insurers, the market for some of our medical products could be adversely impacted.

 

We cannot be sure that third party payors will maintain the current level of reimbursement to our customers for use of our existing products. Adverse coverage determinations or any reduction in the amount of this reimbursement could harm our business. In addition, as a result of their purchasing power, these payors often seek discounts, price reductions or other incentives from medical products suppliers. Our provision of such pricing concessions could negatively impact our revenues and product margins.

 

Uncertainties regarding future healthcare policy, legislation and regulations, as well as private market practices, could affect our ability to sell our products in acceptable quantities at profitable prices.

 

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 in order to reduce the effects of this fluctuation, changes in the relative values of currencies may, in some instances, have a significant effect on our results of operations.

 

Many of our products have significant steel and plastic resin content. We also use quantities of other commodities, including copper and zinc. Although we monitor our exposure to these commodity price increases as an integral part of our overall risk management program, volatility in the prices of these commodities could increase the costs of our products and services. We may not be able to pass on these costs to our customers and this could have a material adverse effect on our results of operations and cash flows.

 

Our failure to successfully develop new products could adversely affect our results.

 

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, particularly in the medical device industry, which is characterized by rapid product development and technological advances. This product development may require substantial investment by us. There can be no assurance that unforeseen problems will not occur with respect to the development, performance or market acceptance of new technologies or products, such as the inability to:

 

 

Moreover, we may not otherwise be able to successfully develop and market new products. Our failure to successfully develop and market new products could reduce our revenues and margins, which would have an adverse effect on our business, financial condition and results of operations.

 

Our technology is important to our success, and our failure to protect this technology could put us at a competitive disadvantage.

 

Because many of our products rely on proprietary technology, we believe that the development and protection of these intellectual property rights is important, though not essential, to the future success of our business. In addition to relying on our patents, trademarks and copyrights, we rely on confidentiality

agreements with employees and other measures to protect our know-how and trade secrets. Despite our efforts to protect proprietary rights, unauthorized parties or competitors may copy or otherwise obtain and use these products or technology. The steps we have taken may not prevent unauthorized use of this technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the U.S. Moreover, there can be no assurance that others will not independently develop the know-how and trade secrets or develop better technology than ours or that current and former employees, contractors and other parties will not breach confidentiality agreements, misappropriate proprietary information and copy or otherwise obtain and use our information and proprietary technology without authorization or otherwise infringe on our intellectual property rights. Our inability to protect our proprietary technology could result in competitive harm that could adversely affect our business.

 

We depend upon relationships with physicians and other health care professionals.

 

The research and development of some of our products is dependent on our maintaining strong working relationships with physicians and other health care professionals. We rely on these professionals to provide us with considerable knowledge and experience regarding our products and the development of our products. Physicians assist us as researchers, product consultants, inventors and as public speakers. If we fail to maintain our working relationships with physicians and receive the benefits of their knowledge, advice and input, our products may not be developed and marketed in line with the needs and expectations of the professionals who use and support our products, which could have a material adverse effect on our business, financial condition and results of operations.

 

In the course of our business, we are subject to a variety of litigation that could have a material adverse effect on our results of operations and financial condition.

 

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, contracts, intellectual property, import and export regulations, employment and environmental matters. The defense of these lawsuits may divert our management’s attention, and we may incur significant expenses in defending these lawsuits. In addition, we may be required to pay damage awards or settlements, or become subject to injunctions or other equitable remedies, that could have a material adverse effect on our financial condition and results of operations.

 

While we do not believe that any litigation in which we are currently engaged would have such an adverse effect, the outcome of these legal proceedings may differ from our expectations because the outcomes of litigation, including regulatory matters, are often difficult to reliably 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 and results of operations.

 

Much of our business is subject to extensive government regulation, and our failure to comply with those regulations could have a material adverse effect on our results of operations and financial condition and we may incur significant expenses to comply with these regulations.

 

Numerous national and local government agencies in a number of countries regulate our products. The FDA and government agencies in other countries regulate the approval, manufacturing and sale and marketing of many of our medical products. The U.S. Federal Aviation Administration and the European Aviation Safety Agency regulate the manufacture and sale of some of our aerospace products and licenses the operation of our repair stations.

 

Failure to comply with applicable regulations and quality assurance guidelines could lead to manufacturing shutdowns, product shortages, delays in product manufacturing, product seizures, recalls, operating restrictions, withdrawal of required licenses, prohibitions against exporting of products to countries outside the United States, importing products from manufacturing facilities outside the U.S., and civil and criminal penalties, including exclusion under Medicaid or Medicare, any one or more of which could have a material adverse effect on our business, financial condition and results of operations.

The process of obtaining regulatory approvals to market a medical device, particularly from the FDA and certain foreign governmental authorities, can be costly and time consuming, and approvals might not be granted for future products on a timely basis, if at all, resulting in delayed realization of product revenues or in substantial additional costs, which could have material adverse effects on our financial condition and results of operations. Our Medical Segment facilities are subject to periodic inspection by the FDA and numerous other federal, state and foreign governmental authorities, which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation procedures.

 

We are also subject to various federal and state laws pertaining to healthcare pricing and fraud and abuse, including anti-kickback and false claims laws. Violations of these laws may be punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in federal and state healthcare programs.

 

In addition, we are subject to numerous foreign, federal, state and local environmental protection and health and safety laws governing, among other things:

 

 

These laws and government regulations are complex, change frequently and have tended to become more stringent over time. We cannot provide assurance that our costs of complying with current or future environmental protection and health and safety laws, or our liabilities arising from past or future releases of, or exposures to, hazardous substances will not exceed our estimates or will not adversely affect our financial condition and results of operations. Moreover, we may be subject to additional environmental claims, which may include claims for personal injury or cleanup, in the future based on our past, present or future business activities, which could also adversely affect our financial condition and results of operations.

 

Our acquisitions and strategic alliances may not meet revenue or profit expectations.

 

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 management’s attention from other business concerns. Although our management will endeavor to evaluate the risks inherent in any particular transaction, there can be no assurance that we will properly ascertain all such risks. In addition, prior acquisitions have resulted, and future acquisitions could result, in the incurrence of substantial additional indebtedness and other expenses. Future acquisitions may also result in potentially dilutive issuances of equity securities. There can be no assurance that difficulties encountered with acquisitions will not have a material adverse effect on our business, financial condition and results of operations.

 

Our workforce covered by collective bargaining and similar agreements could cause interruptions in our provision of services.

 

Approximately 17% of our manufacturing net revenues are produced 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.

 

None.

 

 

Our operations have approximately 134 owned and leased properties consisting of plants, engineering and research centers, distribution warehouses, offices and other facilities. We believe that the properties are maintained in good operating condition and are suitable for their intended use. In general, our facilities meet current operating requirements for the activities currently conducted therein.

 

Our major facilities are as follows:

 

In addition to the properties listed above, we own or lease approximately 1.0 million square feet of warehousing, manufacturing and office space located in the United States, Canada, Mexico, South America, Europe, Australia, Asia and Africa. We also own or lease certain properties that are no longer being used in our operations. We are actively marketing these properties for sale or sublease. At December 31, 2008, the unused owned properties were classified as held for sale.

 

 

On October 11, 2007, the Company’s subsidiary, Arrow International, Inc. (“Arrow”), received a corporate warning letter from the U.S. Food and Drug Administration (FDA). The letter cites three site-specific warning letters issued by the FDA in 2005 and subsequent inspections performed from June 2005 to February 2007 at Arrow’s facilities in the United States. The letter expresses concerns with Arrow’s quality systems, including complaint handling, corrective and preventive action, process and design validation, inspection and training procedures. It also advises that Arrow’s corporate-wide program to evaluate, correct and prevent quality system issues has been deficient. Limitations on pre-market approvals and certificates of foreign goods had previously been imposed on Arrow based on prior inspections and the corporate warning letter does not impose additional sanctions that are expected to have a material financial impact on the Company.

 

In connection with its acquisition of Arrow, completed on October 1, 2007, the Company developed an integration plan that includes the commitment of significant resources to correct these previously-identified regulatory issues and further improve overall quality systems. Senior management officials from the Company have met with FDA representatives, and a comprehensive written corrective action plan was presented to FDA in late 2007. The Company has begun implementing its corrective action plan, which it expects to complete, for most facilities and procedures, by the end of March 2009.

 

While the Company believes it can remediate these issues, there can be no assurances regarding the length of time or expenditures required to resolve these issues to the satisfaction of the FDA. If the Company’s remedial actions are not satisfactory to the FDA, the Company may have to devote additional financial and human resources to its efforts, and the FDA may take further regulatory actions against the Company, including, but not limited to, seizing its product inventory, obtaining a court injunction against further marketing of the Company’s products, assessing civil monetary penalties or imposing a consent decree on us.

 

In June 2008, HM Revenue and Customs (“HMRC”) assessed Airfoil Technologies International UK Limited (“ATI-UK”), a consolidated United Kingdom venture in which the Company has a 60% economic interest, approximately $10 million for customs duty for the period from July 1, 2005 through March 31, 2008. HMRC had previously assessed ATI-UK approximately $737,000 for customs duty for the first and second quarters of 2004. Additionally, for the above periods, ATI-UK was assessed a value added tax (“VAT”) of approximately $68 million, for which HMRC has advised ATI-UK that, to the extent it is due and payable, it has until March 2010 to fully recover such VAT. The assessments were imposed because HMRC concluded that ATI-UK did not provide the necessary documentation for which reliance on Inland Processing Relief status (duty and VAT) was claimed by ATI-UK.

 

ATI-UK has filed appeals and been granted hardship applications (to avoid payment of the assessment while the appeal is pending) regarding each of the assessments. ATI-UK provided certain documentation to HMRC with regard to the first quarter of 2004, and as a result, the HMRC reduced the assessment for customs duties for that quarter by 97%, from approximately $17,860 to $450, and reduced the assessment for VAT for that quarter by 99%, from approximately $117,540 to $1,650, which amounts have been paid and all VAT recovered. ATI-UK has provided essentially the same types of supporting documentation to HMRC for the remaining quarters for which it was assessed. Based on discussions between ATI-UK and the HMRC inspector with regard to the assessments for the remaining periods, ATI-UK is hopeful that it will obtain reductions in the assessments that are proportionately similar to those obtained for the first quarter of 2004. However, the Company cannot assure whether or the extent to which the HMRC will reduce its assessments for these periods. In the event ATI-UK is not

successful in a favorable resolution of the remaining assessments, such outcome would have a material adverse effect on the business of ATI-UK. The Company has a net investment in ATI-UK of approximately $11 million.

 

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, import and export regulations, 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.

 

 

No matters were submitted to a vote of our stockholders during the quarter ended December 31, 2008.

 

 

Our common stock is listed on the New York Stock Exchange, Inc. (symbol “TFX”). Our quarterly high and low stock prices and dividends for 2008 and 2007 are shown below.

 

Price Range and Dividends of Common Stock

 

 

 

Various senior and term note agreements provide for the maintenance of certain financial ratios and limit the repurchase of our stock and payment of cash dividends. Under the most restrictive of these provisions, on an annual basis $99 million of retained earnings was available for dividends and stock repurchases at December 31, 2008. On February 24, 2009, the Board of Directors declared a quarterly dividend of $0.34 per share on our common stock, which is payable on March 17, 2009 to holders of record on March 5, 2009. As of February 24, 2009, we had approximately 846 holders of record of our common stock.

 

On June 14, 2007, the Company’s Board of Directors authorized the repurchase of up to $300 million of outstanding Company common stock. Repurchases of Company stock under the program 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 Company’s 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 senior loan agreements entered into October 1, 2007, the Company is subject to certain restrictions relating to its ability to repurchase shares in the event the Company’s consolidated leverage ratio exceeds certain levels, which further limit the Company’s ability to repurchase shares under this program. Through December 31, 2008, no shares have been purchased under this plan.

 

On July 25, 2005, our Board of Directors authorized the repurchase of up to $140 million of outstanding Teleflex common stock over twelve months ended July 2006. In June 2006, our Board of Directors extended for an additional six months, until January 2007, its authorization for the repurchase of shares. Under the Board’s authorization, we repurchased a total of 2,317,347 shares on the open market during 2005 and 2006 for an aggregate purchase price of $140.0 million, and aggregate fees and commissions of $0.1 million.

The following graph provides a comparison of five year cumulative total stockholder returns of Teleflex common stock, the Standard & Poor (S&P) 500 Stock Index and the S&P MidCap 400 Index. We have selected the S&P MidCap 400 Index because, due to the diverse nature of our businesses, we do not believe that there exists a relevant published industry or line-of-business index and do not believe we can reasonably identify a peer group. The annual changes for the five-year period shown on the graph are based on the assumption that $100 had been invested in Teleflex common stock and each index on December 31, 2003 and that all dividends were reinvested.

 

MARKET PERFORMANCE
Comparison of Cumulative Five Year Total Return

 

The selected financial data in the following table includes the results of operations for acquired companies from the respective date of acquisition, including Arrow International from October 1, 2007. See note (2) below for a description of special charges included in the 2007 financial results.

 

 

 

 

 

 

 

 

 

 

Overview

 

Teleflex strives to maintain a portfolio of businesses that provide consistency of performance, improved profitability and sustainable growth. To this end, in 2007 we significantly changed the composition of our portfolio through acquisitions and divestitures to improve margins, reduce cyclicality and focus our resources on the development of our core businesses. We continually evaluate the composition of the portfolio of our businesses to ensure alignment with our overall objectives.

 

We are focused on achieving consistent and sustainable growth through our internal growth initiatives which include the development of new products, expansion of market share, moving existing products into new geographies, and through selected acquisitions which enhance or expedite our development initiatives and our ability to grow market share.

 

In 2007, the Company completed acquisitions in all three business segments and significant divestitures in both Commercial and Aerospace. These portfolio actions resulted in a significant expansion of our Medical Segment operations and a significant reduction in our Commercial Segment operations. The following bullet points summarize our more significant acquisitions and divestitures in 2007, and the results for the acquired businesses are included in the respective segments. See Notes 3 and 17 to our consolidated financial statements included in this Annual Report on Form 10-K for additional information regarding our significant acquisitions and divestitures.

 

 

 

 

 

 

 

We incurred significant indebtedness to fund a portion of the consideration for our October 2007 acquisition of Arrow. As of December 31, 2008, our outstanding indebtedness was approximately $1.5 billion,

down from $1.7 billion as of December 31, 2007. For additional information regarding our indebtedness, please see “Liquidity and Capital Resources” below and Note 8 to our consolidated financial statements included in this Annual Report on Form 10-K.

 

 

We operated in an increasingly challenging global economic environment in 2008. Recent unprecedented turbulence in the global financial and commodities markets and the downturn in the business cycle have had an adverse impact on market activities including, among other things, failure of financial institutions, falling asset values, diminished liquidity, and reduced demand for products and services, particularly in the fourth quarter of 2008. The impact of the difficult economic environment was felt mostly in the Commercial Segment during 2008 and we adjusted production levels and took new restructuring actions in response to the current environment. Although, on a consolidated basis, the economic conditions have not had a significant adverse impact to our financial position, results of operations or liquidity during 2008, the continuation of the broad economic trends could adversely affect our operations in the future, as described, below. The potential effect of these factors on our current and future liquidity is discussed in “Liquidity and Capital Resources” in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

Hospitals in some regions of the United States have seen a decline in admissions and a reduction in elective procedures and have limited their capital spending. More than 80 percent of our Medical revenues come from disposable products used in critical care and surgical applications and our sales volume could be negatively impacted by declines in admissions. In addition, a small percentage of our revenues could be impacted by changes in capital spending or a decline in elective procedures.

 

At the same time, future changes in government funding patterns or regulation could have an impact on our business. In the United States, a number of states have enacted or proposed reduced funding for Medicaid programs and higher rates of unemployment are increasing the percentage of uninsured patients who do not have the ability to pay for care. This could create further cost pressure on hospitals and consequently on our business. Our business could also be impacted by healthcare reform legislation enacted by Congress. Although the impact of the economic downturn on hospitals outside the United States has been less pronounced to date, funding to these healthcare institutions could be affected in the future as governments make further spending adjustments.

 

 

 

Results of Operations

 

Discussion of growth from acquisitions reflects the impact of a purchased company for up to twelve months beyond the date of acquisition. Activity beyond the initial twelve months is considered core growth. Core growth excludes the impact of translating the results of international subsidiaries at different currency exchange rates from year to year and the comparable activity of divested companies within the most recent twelve-month period.

 

The following comparisons exclude the impact of the operations of TAMG, the GMS Businesses, and a small medical business which have been presented in our consolidated financial results as discontinued operations (see Note 17 to our consolidated financial statements included in this Annual Report on Form 10-K for discussion of discontinued operations).

 

 

 

Net revenues increased approximately 25% to $2.42 billion from $1.93 billion in 2007. Businesses acquired in the past twelve months accounted for all of this increase in revenues as foreign currency translation contributed 1% to revenue growth, while revenues from core business declined 1% compared to 2007. Core revenue growth in the Medical Segment (2%) and Aerospace (2%) was offset by a 9% decline in core revenues in the Commercial Segment, which was primarily due to a significant decrease in sales of recreational marine products and auxiliary power units sold into the North American truck market due to softness in these markets caused by a weak economic environment during 2008.

 

Revenues increased 14% in 2007 to $1.93 billion from $1.69 billion in 2006, entirely due to acquisitions and foreign currency movements. Overall, there was no core revenue growth in 2007 as compared to 2006. Core growth in our Aerospace Segment was 7%, and our Medical and Commercial segments declined 1% and 5%, respectively year over year.

 

 

 

Gross profit as a percentage of revenues increased to 39.8% in 2008 from 35.2% in 2007. This trend is driven by increases in the Medical and Aerospace segments as the gross profit percentage in the Commercial Segment was unchanged from 2007. Improved margins in the Medical Segment were largely due to the inclusion of higher margin Arrow critical care product lines for the full year in 2008 compared to only the fourth quarter in 2007 and volume related manufacturing efficiencies in the Medical OEM product line. Improved

margins in the Aerospace Segment are principally due to a shift in sales favoring engine repair services and away from sales of lower margin replacement parts in the engine repairs business.

 

Gross profit as a percentage of revenues improved to 35.2% in 2007 from 34.6% in 2006, due primarily to cost and productivity improvements in our Medical Segment and the benefits of restructuring initiatives and other cost reduction efforts which offset the negative impact of a $29 million charge related to a fair value adjustment to inventory acquired in the Arrow acquisition, which was sold during 2007.

 

 

 

Selling, engineering and administrative expenses (operating expenses) as a percentage of revenues were 24.7% in 2008 compared to 23.0% in 2007, principally due to approximately $25 million higher amortization expense related to the Arrow acquisition and approximately $20 million higher expenses in the Medical Segment related to the remediation of FDA regulatory issues.

 

Selling, engineering and administrative expenses as a percentage of revenues increased to 23.0% in 2007 compared with 22.2% in 2006, due primarily to approximately $7 million higher amortization expense from the Arrow acquisition.

 

 

 

In 2007, during our annual test for goodwill impairment we determined $16.4 million of goodwill attributable to our businesses that manufacture and sell auxiliary power units in the North American heavy truck and rail markets, as well as components and systems for use of alternative fuels in industrial vehicles and passenger cars was impaired. Softness in certain of these markets at that time negatively impacted the valuation of goodwill resulting in the impairment charge. The remaining $2.5 million goodwill impairment is related to a write-down to the agreed selling price of one our variable interest entities in the Commercial Segment.

 

The $30.0 million write-off of in-process research and development costs is related to in-process R&D projects acquired in the Arrow acquisition which we determined had no alternative future use in their current state.

 

 

 

Interest expense increased significantly in 2008 compared to 2007 principally as a result of the full year impact of the debt incurred in connection with the Arrow acquisition in October 2007. Interest income decreased in 2008 compared to 2007 primarily due to lower amounts of invested funds combined with lower average interest rates.

Interest expense increased from $41.2 million to $74.9 million in 2007 principally as a result of higher debt levels since October 1, 2007 incurred in connection with the Arrow acquisition. Interest income increased in 2007 compared to 2006 primarily due to higher average cash balances during the first three quarters of 2007.

 

 

 

The effective tax rate in 2007 was 112.3% compared to 23.6% in 2008 and 21.6% in 2006. Taxes on income from continuing operations of $122.8 million in 2007 include discrete income tax charges incurred in connection with the Arrow acquisition. Specifically, in connection with funding the acquisition of Arrow, the Company (i) repatriated approximately $197.0 million of cash from foreign subsidiaries which had previously been deemed to be permanently reinvested in the respective foreign jurisdictions; and (ii) changed its position with respect to certain additional previously untaxed foreign earnings to treat these earnings as no longer permanently reinvested. These items resulted in a discrete income tax charge in 2007 of approximately $91.8 million. The Company did not incur similar charges in 2008 or 2006.

 

 

 

In December 2008, we began certain restructuring initiatives that affect the Commercial Segment. These initiatives involve the consolidation of operations and a related reduction in workforce at three of our facilities in Europe and North America. We determined to undertake these initiatives to improve operating performance and to better leverage our existing resources. These costs amounted to approximately $1.9 million during 2008. As of December 31, 2008, we estimate that the aggregate of future restructuring charges that we will incur in connection with this program are approximately $3.3 — $4.5 million in 2009. Of this amount, $2.8 — $3.1 million relates to employee termination costs, $0.2 — $1.0 million to facility closure costs and $0.3 — $0.4 million to contract termination costs, primarily relating to leases. We expect to have realized annual pre-tax savings of between $4 — $5 million in 2010 when these restructuring actions are complete.

 

In connection with the acquisition of Arrow during 2007, we formulated a plan related to the future integration of Arrow and our other Medical businesses. The integration plan focuses on the closure of Arrow corporate functions and the consolidation of manufacturing, sales, marketing, and distribution functions in North America, Europe and Asia. Costs related to actions that affect employees and facilities of Arrow have been included in the allocation of the purchase price of Arrow. Costs related to actions that affect employees and facilities of Teleflex are charged to earnings and included in restructuring and impairment charges within the consolidated statement of operations. These costs amounted to approximately $22.1 million during 2008. As of December 31, 2008, we estimate that the aggregate of future restructuring and impairment charges that we will incur in connection with the Arrow integration plan are approximately $18.0 — $21.0 million in 2009 and 2010. Of this amount, $7.5 — $8.5 million relates to employee termination costs, $1.2 — $1.7 million relates to facility closure costs, $9.2 — $10.5 million relates to contract termination costs associated with the termination of leases and certain distribution agreements and $0.1 — $0.3 million relates to other restructuring costs. We also have incurred restructuring related costs in the Medical Segment which do not qualify for

classification as restructuring costs. In 2008 these costs amounted to $7.0 million and are reported in the Medical Segment’s operating results in selling, engineering and administrative expenses. We expect to have realized annual pre-tax savings of between $70-75 million in 2010 when these integration and restructuring actions are complete.

 

In June 2006, we began certain restructuring initiatives that affected all three of our operating segments. These initiatives involved the consolidation of operations and a related reduction in workforce at several of our facilities in Europe and North America. We took these initiatives as a means to improving operating performance and to better leverage our existing resources and these activities are now complete.

 

During the fourth quarter of 2004, we commenced implementation of a restructuring and divestiture program designed to improve future operating performance and position us for future earnings growth. The actions included exiting or divesting non-core or low performing businesses, consolidating manufacturing operations and reorganizing administrative functions to enable businesses to share services and these activities are now complete.

 

For additional information regarding our restructuring programs, see Note 4 to our consolidated financial statements included in this Annual Report on Form 10-K.

 

Impairment charges in 2008 are composed of $2.7 million related to five of our minority held investments precipitated by the deteriorating economic conditions in the fourth quarter of 2008, $0.8 million impairment of an intangible asset in the Commercial Segment that was identified during the annual impairment testing process, and a $0.2 million reduction in the carrying value of a building held for sale. In 2007, we determined that two minority-held investments, certain intangible assets and a building held for sale were impaired and recorded an aggregate charge of $6.4 million. In 2006, we determined that three minority-held investments and a building held for sale were impaired and recorded an aggregate charge of $7.4 million.

 

Segment Review

 

 

The percentage increases or (decreases) in revenues during the years ended December 31, 2008 and 2007 compared to the respective prior years were due to the following factors:

 

The following is a discussion of our segment operating results. Additional information regarding our segments, including a reconciliation of segment operating profit to income from continuing operations before interest, taxes and minority interest, is presented in Note 16 to our consolidated financial statements included in this Annual Report on Form 10-K.

 

Medical

 

 

Medical Segment net revenues grew 44% in 2008 to $1,499.1 million, from $1,041.3 million in 2007. The acquisition of Arrow accounted for 40% of this increase in revenues. Of the remaining 4% increase in net revenues, 2% was due to foreign currency fluctuations and 2% was due to core revenue growth. Medical Segment core revenue growth in 2008 reflects higher sales volume for critical care and surgical products in Europe and Asia/Latin America of approximately $13 million and $8 million, respectively, and a $17 million increase in sales of specialty medical devices to OEMs, partially offset by $23 million lower sales volumes for critical care and surgical products in North America.

 

Net sales by product group are comprised of the following:

 

 

The following table sets forth the percentage of net revenues by end market for the Medical Segment.

 

 

Medical Segment’s net revenues are geographically comprised of the following:

 

 

The increase in critical care product sales during 2008 compared to 2007 was almost entirely due to the acquisition of Arrow in the fourth quarter of 2007, which expanded our vascular access and regional anesthesia product lines and contributed an incremental $360 million of sales to the critical care category in 2008 over 2007. Favorable currency fluctuations added $14 million to sales and higher sales of vascular access products in Europe contributed another $5 million in core revenue growth.

 

Surgical product sales were essentially flat in 2008 compared to 2007 as the benefit of favorable foreign currency movements in Europe ($6 million) and higher volume in European and Asia/Latin American markets ($6 million) was offset by $12 million lower volumes in North America. This decline in North America was primarily in the chest drainage and instrumentation product lines.

 

Cardiac care product sales increased as a result of the Arrow acquisition in the fourth quarter of 2007.

In 2008, sales to OEMs increased primarily as a result of higher sales of orthopedic instrumentation, specialty sutures and other devices of approximately $17 million and an acquisition in the orthopedic product line in early 2007 (approximately $3 million).

 

Operating profit in the Medical Segment increased 57% in 2008 to $286.3 million, from $182.6 million in 2007, principally due to the addition of higher margin Arrow critical care product lines. Other factors that contributed to the higher operating profit were improved cost and operational efficiencies in North America, higher volumes in Europe and Asia/Latin America, lower fair value adjustment to inventory acquired in the Arrow acquisition ($7 million in 2008 versus $29 million in 2007) and the favorable impact from the stronger Euro. The impact of these factors was partially offset by the impact of approximately $25 million higher amortization expense related to the Arrow acquisition and $20 million in higher costs incurred in 2008 in connection with a plan to remediate FDA regulatory issues.

 

 

Medical Segment net revenues increased 21% in 2007 to $1,041.3 million from $858.7 million in 2006, entirely due to acquisitions and currency movements. Revenues related to the acquisition of Arrow International contributed $133.8 million, or 16% of this increase. Increased sales of disposable medical products for airway management, respiratory care, urology, and surgical devices to European hospital markets and to Asian hospital markets, was more than offset by a decline in sales of orthopedic specialty devices sold to medical device manufacturers, the phase out of some product lines for medical device manufacturers and a decline in sales of products for alternate sites in North America.

 

Medical Segment operating profit increased 13% in 2007 to $182.6 million from $161.7 million in 2006 primarily due to the increase in volume from the Arrow acquisition, the positive impact from the full year effect of cost and productivity improvements that began in the second half of 2006 following completion of significant restructuring activities, and currency movements, which more than offset the negative impact from a $29 million charge in 2007 related to the fair value adjustment to inventory acquired in the Arrow acquisition, which was sold in 2007. During the first half of 2006, operating profit was negatively impacted by costs associated with operational inefficiencies and the consolidation of facilities and distribution centers.

 

Aerospace

 

 

Aerospace Segment net revenues grew 13% in 2008 to $511.2 million, from $451.8 million in 2007. The expansion of the cargo containers product line due to the acquisition of Nordisk Aviation Products accounted for 10% of this increase. The 2% increase in core growth is primarily attributable to increased sales of narrow body cargo loading systems and wide body and narrow body cargo spare components and repairs.

 

Segment operating profit increased 32% in 2008 to $61.8 million, from $47.0 million in 2007. The increase was principally due to the impact of the Nordisk acquisition and favorable product mix of repair versus replacement in the engine repair services business as a result of technology investments we have made. Consolidation of operations and phasing out of lower margin product lines in the engine repair services business during 2007 also had a positive impact on operating profit in 2008.

 

 

Aerospace Segment net revenues increased 11% in 2007 to $451.8 million from $405.4 million in 2006. This increase was due to increases of 7% from core growth, 3% from acquisitions and 1% from foreign currency movements. Core growth was primarily attributable to increased sales of wide body cargo handling systems and narrow body cargo loading systems, combined with steady increases in sales volume for aftermarket spares and repairs throughout the year.

Aerospace Segment operating profit increased 17% to $47.0 million from $40.2 million in 2006 as a result of higher volume, productivity improvements, and cost control efforts in both the cargo handling systems and engine repair businesses, as well as the positive impact of restructuring in engine repair services.

 

Commercial

 

 

Commercial Segment net revenues declined approximately 7% in 2008 to $410.6 million, from $441.2 million in 2007. Core revenue declined 9% as a result of a 16% decline in sales of marine products for the recreational boat market and a 22% decline in sales of auxiliary power units for the North American truck market which was partially offset by a 12% increase in sales of alternate fuel systems and an 11% increase in sales of rigging services products. Extreme volatility in fuel costs, accompanied by deterioration in the general state of the global economy in the second half of 2008 adversely impacted the markets served by our marine and auxiliary power unit products and we expect the marine market to remain weak for most, if not all, of 2009. As a result, we adjusted production levels and took new restructuring actions in response to the current environment. Conversely, high fuel prices in 2008 increased demand for alternate fuel systems and we successfully penetrated a large emerging compressed natural gas market in South America during the year.

 

In 2008, segment operating profit increased 19% to $27.5 million compared to $23.0 million in 2007. This increase was principally due to favorable product mix and an acquisition during 2007 in the rigging services business. Favorable currency impact of approximately $3 million, cost reductions and lower warranty expenses in the power systems business offset the lower operating profit in the marine business resulting from lower sales in 2008.

 

 

Commercial Segment revenues increased 3% in 2007 to $441.2 million from $426.8 million in 2006. The favorable impact of acquisitions and foreign currency movements and an increase in sales of products for marine markets offset a decline in core revenue attributable to a significant decline in sales of auxiliary power units in the North American heavy truck market and to lower sales of rigging services where unusually high demand as a result of U.S. Gulf Coast rebuilding activities due to severe weather during 2006 caused unfavorable comparisons in 2007.

 

Commercial Segment operating profit declined 25% in 2007 to $23.0 million from $30.5 million in 2006. Operating profit was negatively impacted by commodity price increases, lower volumes of auxiliary power units and from approximately $4 million in provisions for warranty and other costs related to prior generation auxiliary power units sold to the North American truck market, which more than offset the positive impact of cost and productivity improvements in the business serving the marine market. Operating profit as a percent of revenues declined to 5.2% in 2007 from 7.1% in 2006.

 

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.

 

The deterioration in global economic conditions and the severe disruptions in global credit markets that occurred during the fourth quarter of 2008 affected the operating results of our various businesses as described above in “Results of Operations.” In assessing the impact of these factors on our liquidity, we do not currently foresee any difficulties meeting our cash requirements or accessing credit as needed in the next twelve months. To date, we have not experienced an inordinate amount of payment default by our customers, and we have

sufficient lending commitments in place to enable us to fund additional operating needs. However, taking into consideration current economic conditions, we recognize the increased risk that our customers and suppliers may be unable to access liquidity. If current market conditions continue to deteriorate, we may experience delays in customer payments and reductions in our customers’ purchases from us, which could have a material adverse effect on our liquidity.

 

Recent deterioration in the securities markets has impacted the value of the assets included in our defined benefit pension plans. As a result of losses experienced in global equity markets, our domestic pension funds experienced approximately $76 million, or 29%, decline in value during 2008. While this will increase pension expense in 2009 compared to 2008, we do not expect this to cause a significant increase to our pension funding requirements for 2009 because amounts funded to the plans in prior years exceeded the minimum amounts required in those years. The volatility in the securities markets has not significantly affected the liquidity of our pension plans or counterparty exposure. Substantially all of our domestic pension plans are invested in mutual funds registered with the SEC under the Investment Company Act of 1940. Underlying holdings of the mutual funds are invested in publicly traded equity and fixed income securities.

 

We manage our worldwide cash requirements by considering available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. The repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences; however, those balances are generally available without legal restrictions to fund ordinary business operations. We have and will continue to transfer cash from those subsidiaries to us and to other international subsidiaries when it is cost effective to do so. Substantially all of our debt service requirements are United States based and we depend on foreign sources of cash to fund a portion of these requirements. We anticipate our domestic principal and interest payments for 2009 will be approximately $189 million and we expect to access approximately $95 million of cash from foreign subsidiaries in 2009 to help fund these debt service requirements. To the extent we cannot, or choose not to, repatriate cash from foreign subsidiaries in time to meet quarterly debt service requirements our revolving credit facility is utilized as a source of liquidity until such cash can be repatriated in a cost effective manner.

 

We believe our cash flow from operations, available cash and cash equivalents, borrowings under our revolving credit facility and additional sales of accounts receivable under our securitization program will enable us to fund our operating requirements, capital expenditures and debt obligations.

 

A summary of our cash flows for the last three years is as follows:

 

 

Cash Flow from Operating Activities

 

Higher tax payments of approximately $112 million (net of refunds of approximately $27 million) and higher interest payments of approximately $60 million were the principal factors in the year-on-year decrease in cash flows from operating activities in 2008 compared to 2007. The largest factor contributing to the higher tax payments is approximately $90 million of taxes paid in connection with businesses divested in 2007.

All together, changes in our operating assets and liabilities resulted in a decrease in cash from operations of approximately $110 million during 2008 which is principally attributable to the $90 million of tax payments mentioned previously. The cash flow impact from changes in other operating assets and liabilities offset one another; an inventory increase of approximately $21 million, increase in accounts payable and accrued expenses of $8 million, decrease in accounts receivable of $3 million, and a decrease in other operating assets of $6 million. The ramp up in production of cargo handling systems to meet the delivery schedules communicated earlier in the year from aircraft manufacturers and the late in the year delay of those delivery schedules into 2009 was the principal ($14 million) cause of the year-on-year increase in inventory. Nearly all of the increase in accounts payable and accrued expenses is due to a year-on-year increase in accounts payable in the Medical Segment that results from changes in payment patterns to suppliers of the Arrow operations during 2008 where early payment discounts were forgone in favor of longer payment terms. The $3 million decrease in accounts receivable reflects focused collection efforts in all segments and is in spite of higher sales during the fourth quarter of 2008 compared to the same period of a year ago, and a heavier mix of sales in our cargo handling systems business to aircraft manufacturers in 2008 which carry longer payment terms compared to the aftermarket side of that business. During 2008 we repatriated approximately $104 million of cash from our foreign subsidiaries.

 

Changes in our operating assets and liabilities during 2007 resulted in a net cash inflow of $76.9 million. The most significant change was a decrease in inventories of $62.4 million, $25 million of which is due to the resolution, in 2007, of operational inefficiencies experienced in the Medical Segment during the consolidation of facilities and distribution centers in 2005 and 2006 and focused inventory reduction initiatives in the Arrow operations post-acquisition, and $29 million is the impact from a fair value adjustment to inventory acquired in the Arrow acquisition which was sold during 2007. During 2007, we repatriated approximately $208 million of cash from our foreign subsidiaries, exclusive of proceeds from the sale of discontinued operations.

 

Cash Flow from Investing Activities

 

Our cash flows from investing activities from continuing operations in 2008 consisted primarily of capital expenditures of $39.3 million, $5.7 million of payments for businesses acquired that had been deferred at closing, which primarily pertained to our acquisitions of Nordisk ($4.7 million) and Southern Wire ($1.0 million), an additional investment of $2.2 million in our Propulsion Technologies joint venture, and proceeds of $8.5 million from the sale of assets and investments, principally $5.3 million related to post closing adjustments in connection with the sale of the GMS business, sale of investments in non-consolidated affiliates of $1.8 million and the sale of a held for sale building for $1.0 million.

 

Our cash flows from investing activities from continuing operations during 2007 consisted primarily of payments of $2.2 billion for businesses acquired, of which $2.1 billion pertained to the acquisition of Arrow International. During 2007, we received proceeds of approximately $702.3 million from the sale of the Commercial Segment’s automotive and industrial business and the Aerospace Segment’s precision machined components business.

 

Cash Flow from Financing Activities

 

Our cash flows from financing activities from continuing operations in 2008 consisted primarily of $133.9 million repayment of long-term debt, $92.8 million repayment of revolver borrowings, additional borrowings under the revolver of $92.9 million, payment of dividends of $53.0 million and payments to minority interest shareholders of $38.0 million which relate to the distribution of dividends from our ATI joint venture.

 

Our cash flows from financing activities from continuing operations during 2007 consisted primarily of new long-term borrowings of $1.6 billion in connection with the Arrow acquisition, the payment of fees of $21.6 million to obtain that debt, and the repayment of $463.4 million of debt. We repaid approximately

$54.0 million of debt in connection with the Arrow acquisition and repaid approximately $386.6 million of long-term debt with the proceeds from the disposal of the automotive and industrial businesses.

 

Cash flows used in discontinued operations of $5.6 million in 2008 reflects the settlement of a contingency related to the GMS businesses which were sold in 2007.

 

Financing Arrangements

 

The following table provides our net debt to total capital ratio:

 

 

In connection with the October 2007 acquisition of Arrow, we entered into a credit agreement (“the Senior Credit Facility”) that provides for a five-year term loan facility of $1.4 billion and a five-year revolving line of credit facility of $400 million, both of which carried initial interest rates of LIBOR plus a spread of 150 basis points. The spread is subject to adjustment based upon our leverage ratio. At December 31, 2008 the spread over LIBOR was 125 basis points. We executed an interest rate swap for $600 million of the term loan from a floating 3 month LIBOR rate to a fixed rate of 4.75%. The notional value of the interest rate swap amortizes down to $350 million at maturity in 2012. Our obligations under the Senior Credit Facility are guaranteed by substantially all of our material wholly-owned domestic subsidiaries, and are secured by a pledge of the shares of certain of our subsidiaries.

 

Also in connection with our acquisition of Arrow, on October 1, 2007, we issued $200 million in new senior notes (the “2007 Notes”) and amended certain terms of our outstanding notes issued on July 8, 2004 (the “2004 Notes”) and October 25, 2002 (the “2002 Notes,” and, together with the 2004 Notes, the “amended notes”). In addition, we repaid $10.5 million of outstanding notes issued on November 1, 1992 and December 15, 1993 (collectively, the “retired notes”). The retired notes consisted of the 7.40% Senior Notes due November 15, 2007 and the 6.80% Series B Senior Notes due December 15, 2008.

 

The 2007 notes and the amended notes, referred to collectively as the “senior notes”, rank pari passu in right of repayment with our obligations under the Senior Credit Facility (the “primary bank obligations”) and are secured and guaranteed in the same manner as the Senior Credit Facility. The senior notes have mandatory prepayment requirements upon the sale of certain assets and may be accelerated upon certain events of default, in each case, on the same basis as the Senior Credit facility.

 

The interest rates payable on the amended notes were also modified in connection with the foregoing transactions. Effective as of October 1, 2007:

 

 

 

Interest rates on the amended notes are subject to reduction based on positive performance relative to certain financial ratios.

 

Fixed rate borrowings, excluding the effect of derivative instruments, comprised 36% of total borrowings at December 31, 2008. Fixed rate borrowings, including the effect of derivative instruments, comprised 74% of total borrowings at December 31, 2008. Approximately 2% of our total borrowings of $1,546.4 million are denominated in currencies other than the U.S. dollar, principally the Euro.

 

The Senior Credit Facility and the senior note agreements contain covenants that, among other things, limit or restrict our ability, and the ability of our subsidiaries, to incur debt, create liens, consolidate, merge or dispose of certain assets, make certain investments, engage in acquisitions, pay dividends on, repurchase or make distributions in respect of capital stock and enter into swap agreements. These agreements also require us to maintain a consolidated leverage ratio (defined in the Senior Credit Facility as “Consolidated Leverage Ratio”) and an interest coverage ratio (defined in the Senior Credit Facility as “Consolidated Interest Coverage Ratio”) at the levels and as of the last day of any period of four consecutive fiscal quarters ending on or nearest to the dates set forth in the table below calculated pursuant to the definitions and methodology set forth in the Senior Credit Facility.

 

 

At December 31, 2008, we had $36.8 million of borrowings outstanding under our $400 million revolving line-of-credit facility. This facility is used principally for seasonal working capital needs. The availability of loans under this facility is dependent upon our ability to maintain our financial condition and our continued compliance with the covenants contained in the Senior Credit Facility and senior note agreements. Moreover, additional borrowings would be prohibited if a Material Adverse Effect (as defined in the Senior Credit Facility) were to occur. Notwithstanding these restrictions, we believe that this revolving credit facility provides us with significant flexibility to meet our foreseeable working capital needs. At our current level of EBITDA (as defined in the Senior Credit Facility) for the year ended December 31, 2008, we would have been permitted $334 million of additional debt beyond the levels outstanding at December 31, 2008. In addition, we believe that we will continue to have adequate borrowing availability under this facility after giving effect to the scheduled reduction in the leverage ratio covenant to 3.50:1 at September 30, 2009. Notwithstanding the borrowing capacity described above, additional capacity would be available if borrowed funds were used to acquire a business or businesses through the purchase of assets or controlling equity interests so long as the ratios set forth in the table above are met after giving proforma effect of the EBITDA (as defined in the Senior Credit Facility) of the business acquired.

As of December 31, 2008, we were in compliance with all other terms of the Senior Credit Facility and the senior notes, and we expect to continue to be in compliance with the terms of these agreements, including the leverage and interest coverage ratios, throughout 2009.

 

For additional information regarding our indebtedness, please see Note 8 to our consolidated financial statements included in this Annual Report on Form 10-K.

 

In addition, at December 31, 2008 the Company had an accounts receivable securitization program to sell a security interest in domestic accounts receivable for consideration of up to $125 million to a commercial paper conduit. This facility is utilized from time to time for increased flexibility in funding short term working capital requirements. The credit market volatility during 2008 did not have a material impact on the availability of the accounts receivable securitization program. For additional information regarding this facility, please refer to “Off Balance Sheet Arrangements” included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Stock Repurchase Programs

 

On June 14, 2007, the Company’s Board of Directors authorized the repurchase of up to $300 million of outstanding Company common stock. Repurchases of Company stock under the program 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 program has no expiration date, and the Company’s 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 senior loan agreements entered into October 1, 2007, the Company is subject to certain restrictions relating to its ability to repurchase shares in the event the Company’s consolidated leverage ratio exceeds certain levels, which further limit the Company’s ability to repurchase shares under this program. Through December 31, 2008, no shares have been purchased under this program.

 

On July 25, 2005, our Board of Directors authorized the repurchase of up to $140 million of our outstanding common stock over twelve months ended July 2006, which was subsequently extended by our Board to January 2007. Under this program, we repurchased a total of 2,317,347 shares on the open market during 2005 and 2006 for an aggregate purchase price of $140.0 million, and aggregate fees and commissions of $0.1 million.

 

Contractual Obligations

 

Contractual obligations at December 31, 2008 are as follows:

 

 

 

 

We also have obligations with respect to income tax uncertainties and our pension and other postretirement benefit plans. See Notes 12 and 13, respectively to our consolidated financial statements included in this Annual Report on Form 10-K for additional information.

 

Off Balance Sheet Arrangements

 

We have residual value guarantees under operating leases for certain equipment. The maximum potential amount of future payments we could be required to make under these guarantees is approximately $1.9 million.

 

We use an accounts receivable securitization program to gain access to enhanced credit markets and reduce financing costs. As currently structured, accounts receivable of certain domestic subsidiaries are sold on a non-recourse basis to a special purpose entity (“SPE”), which is a bankruptcy-remote subsidiary of Teleflex Incorporated that is consolidated in our financial statements. This SPE then sells undivided interests in those receivables to an asset backed commercial paper conduit. The conduit issues notes secured by those interests and other assets to third party investors.

 

To the extent that cash consideration is received for the sale of undivided interests in the receivables by the SPE to the conduit, it is accounted for as a sale in accordance with Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, as we have relinquished control of the receivables. Accordingly, undivided interests in accounts receivable sold to the commercial paper conduit under these transactions are excluded from accounts receivables, net in the accompanying consolidated balance sheets. The interests not represented by cash consideration from the conduit are retained by the SPE and remain in accounts receivable in the accompanying consolidated balance sheets.

 

The interests in receivables sold and the interest in receivables retained by the SPE are carried at face value, which is due to the short-term nature of our accounts receivable. The special purpose entity has received cash consideration of $39.7 million and $39.7 million for the interests in the accounts receivable it has sold to the commercial paper conduit at December 31, 2008 and December 31, 2007, respectively. No gain or loss is recorded upon sale as fee charges from the commercial paper conduit are based upon a floating yield rate and the period the undivided interests remain outstanding. Fee charges from the commercial paper conduit are accrued at the end of each month. Should we default under the accounts receivable securitization program, the commercial paper conduit is entitled to receive collections on receivables owned by the SPE in satisfaction of the amount of cash consideration paid to the SPE to the commercial paper conduit. The assets of the SPE are not available to satisfy the obligations of Teleflex or any of its other subsidiaries.

 

Information regarding the outstanding balances related to the SPE’s interests in accounts receivables sold or retained as of December 31, 2008 is as follows:

 

 

 

 

The delinquency ratio for the qualifying receivables represented 3.76% of the total qualifying receivables as of December 31, 2008.

 

The following table summarizes the activity related to our interests in accounts receivable sold for the year ended December 31, 2008:

 

 

 

 

Other fee charges related to the sale of receivables to the commercial paper conduit for the year ended December 31, 2008 were not material.

 

We continue servicing the receivables sold, pursuant to servicing agreements with the SPE. No servicing asset is recorded at the time of sale because we do not receive any servicing fees from third parties or other income related to the servicing of the receivables. We do not record any servicing liability at the time of the sale as the receivables collection period is relatively short and the costs of servicing the receivables sold over the servicing period are insignificant. Servicing costs are recognized as incurred over the servicing period.

 

See also Note 15 to our consolidated financial statements included in this Annual Report on Form 10-K for additional information.

 

Critical Accounting Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.

 

We have identified the following as critical accounting estimates, which are defined as those that are reflective of significant judgments and uncertainties, are the most pervasive and important to the presentation of our financial condition and results of operations and could potentially result in materially different results under different assumptions and conditions.

 

 

In the ordinary course of business, we grant non-interest bearing trade credit to our customers on normal credit terms. In an effort to reduce our credit risk, we (i) establish credit limits for all of our customer relationships, (ii) perform ongoing credit evaluations of our customers’ financial condition, (iii) monitor the payment history and aging of our customers’ receivables, and (iv) monitor open orders against an individual customer’s outstanding receivable balance.

 

An allowance for doubtful accounts is maintained for accounts receivable based on our historical collection experience and expected collectability of the accounts receivable, considering the period an account is outstanding, the financial position of the customer and information provided by credit rating services. The adequacy of this allowance is reviewed each reporting period and adjusted as necessary. Our allowance for doubtful accounts was $8.7 million at December 31, 2008 and $7.0 million at December 31, 2007 which was 2.6% and 2.1% of gross accounts receivable, at those respective dates. In light of the disruptions in global credit markets that occurred in the fourth quarter of 2008 we have taken this heightened risk of customer payment default into account when estimating the allowance for doubtful accounts at December 31, 2008 by engaging in a more robust customer-by-customer risk assessment. Although future results cannot always be predicted by extrapolating past results, management believes that it is reasonably likely that future results will be consistent with historical trends and experience. However, if the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, or if unexpected events or significant future changes in trends were to occur, additional allowances may be required.

 

 

Inventories are valued at the lower of cost or market. Accordingly, we maintain a reserve for excess and obsolete inventory to reduce the carrying value of our inventories for the diminution of value resulting from product obsolescence, damage or other issues affecting marketability equal to the difference between the cost of the inventory and its estimated market value. Factors utilized in the determination of estimated market value

include (i) current sales data and historical return rates, (ii) estimates of future demand, (iii) competitive pricing pressures, (iv) new product introductions, (v) product expiration dates, and (vi) component and packaging obsolescence.

 

The adequacy of this reserve is reviewed each reporting period and adjusted as necessary. We regularly compare inventory quantities on hand against historical usage or forecasts related to specific items in order to evaluate obsolescence and excessive quantities. In assessing historical usage, we also qualitatively assess business trends to evaluate the reasonableness of using historical information as an estimate of future usage.

 

Our excess and obsolete inventory reserve was $37.5 million at December 31, 2008 and $35.9 million at December 31, 2007 which was 8.1% and 7.9% of gross inventories, at those respective dates.

 

 

The ability to realize long-lived assets is evaluated periodically as events or circumstances indicate a possible inability to recover their carrying amount. Such evaluation is based on various analyses, including undiscounted cash flow projections. The analyses necessarily involve significant management judgment. Any impairment loss, if indicated, is measured as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.

 

 

Goodwill and intangible assets by reporting segment at December 31, 2008 are as follows:

 

 

Acquired intangible assets may represent indefinite-lived assets (e.g., certain trademarks or brands), determinable-lived intangibles (e.g., certain trademarks or brands, customer relationships, patents and technologies) or residual goodwill. Of these, only the costs of determinable-lived intangibles are amortized to expense over their estimated life. The value of the indefinite-lived intangible assets and residual goodwill is not amortized, but is tested at least annually for impairment. Our impairment testing for goodwill is performed separately from our impairment testing of indefinite-lived intangibles. Goodwill and indefinite-lived intangibles assets, primarily trademarks and brand names, are tested annually for impairment during the fourth quarter, using the first day of the quarter as the measurement date, or earlier upon the occurrence of certain events or substantive changes in circumstances that indicate the carrying value may not be recoverable. Such conditions may include an economic downturn in a geographic market or a change in the assessment of future operations.

 

Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows to measure fair value. Assumptions used in the Company’s impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with internal projections and operating plans. We believe such assumptions and estimates are also comparable to those that would be used by other marketplace participants.

 

Goodwill

 

Impairment assessments are performed at a reporting unit level. For purposes of this assessment, the Company’s reporting units are generally its businesses one level below the respective operating segment.

Goodwill impairment is determined using a two-step process. The first step of the process is to compare the fair value of a reporting unit with its carrying value, including goodwill. In performing the first step, the Company calculated fair values of the various reporting units using equal weighting of two methods; one which estimates the discounted cash flows (“DCF”) of each of the reporting units based on projected earnings in the future (the Income Approach) and one which is based on sales of similar assets in actual transactions (the Market Approach). If the fair value exceeds the carrying value, there is no impairment. If the reporting unit carrying amount exceeds the fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss, if any.

 

Determining fair value requires the exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates, operating margins, industry trends, regulatory environment, relevant comparable company selection, calculation of comparable company multiples and the amount and timing of expected future cash flows. The DCF analysis utilized in the fourth quarter 2008 impairment test was performed over a ten year time horizon for each reporting unit where the compound annual growth rates during this period for the Medical, Aerospace and Commercial segments range from approximately 4% to 7% for revenue and from approximately 8% to 13% for operating income. Discount rates range from 10.5% to 14.0%, and a perpetual growth rate of 2.5% was assumed for all reporting units.

 

The cash flows employed in the DCF analyses are based on internal budgets and business plans and various long-term growth assumptions beyond the business plan period. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting units along with various market based inputs.

 

In arriving at our estimate of the fair value of each reporting unit, we considered the results of both the DCF and the market comparable methods and concluded the fair value to be the average of the results yielded by the two methods for each reporting unit. Then, the current market capitalization of the Company was reconciled to the sum of the estimated fair values of the individual reporting units, plus a control premium, to ensure the fair value conclusions were reasonable in light of current market capitalization. The control premium implied by our analysis was approximately 35%, which was deemed to be within a reasonable range of observed average industry control premiums. No impairment in the carrying value of any of our reporting units was evident as a result of the assessment of their respective fair values as determined under the methodology described above. In light of market conditions in the fourth quarter we considered whether there were any triggering events which would have caused us to re-assess our goodwill impairment considerations as of the assessment date and we determined that there were no triggering events.

 

To illustrate the magnitude of potential impairment charges relative to future changes in projected operating income and discount rates, the following table shows the sensitivity to 1.0 and 1.5 percentage point increases in the discount rate or a 10% and 25% reduction in the compound annual growth rate of operating income:

 

 

None of these scenarios resulted in an indication of impairment in any of our reporting units. While we are not aware of any known trends, uncertainties or other factors that will result in, or that are reasonably likely to result in, a material impairment charge in the future, events could occur in the future which are currently unforeseen that could result in an impairment.

Intangible Assets

 

Intangible assets are assets acquired that lack physical substance and that meet the specified criteria for recognition apart from goodwill. Intangible assets acquired are comprised mainly of technology, customer relationships, and trade names. The fair value of acquired technology and trade names is estimated by the use of a relief from royalty method, which values an intangible asset by estimating the royalties saved through the ownership of an asset. The royalty, which is based on a reasonable rate applied against forecasted sales, is tax-effected and discounted to present value using a discount rate commensurate with the relative risk of achieving the cash flow. The fair value of acquired customer relationships is estimated by the use of an income approach known as the excess earnings method. The excess earnings method measures economic benefit indirectly by calculating residual profit attributable to an asset after appropriate returns are paid to complementary or contributory assets. The residual profit is tax-effected and discounted to present value at an appropriate discount rate that reflects the risk factors associated with the estimated income stream. Determining the useful life of an intangible asset requires judgment as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives.

 

Management tests indefinite-lived intangible assets on at least an annual basis, or more frequently if necessary. In connection with the analysis, management tests for impairment by comparing the carrying value of intangible assets to its estimated fair value. Since quoted market prices are seldom available for intangible assets, we utilize present value techniques to estimate fair value. Common among such approaches is the “relief from royalty” methodology. This methodology estimates the direct cash flows associated with the intangible asset. Management must estimate the hypothetical royalty rate, discount rate, and residual growth rate to estimate the forecasted cash flows associated with the asset.

 

Discount rates and perpetual growth rates utilized in the impairment test of indefinite-lived assets during the fourth quarter of 2008 are comparable to the rates utilized in the impairment test of goodwill by segment. Compound annual growth rates in revenues projected to be generated from certain trade names in the Medical Segment ranged from 3.85% to 11.67% and a royalty rate of 4.0% was assumed. The compound annual growth rate in revenues projected to be generated from certain trade names in the Commercial Segment was 5.36% and a royalty rate of 2.0% was assumed. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows generated as a result of the respective intangible assets. Assumptions about royalty rates are based on the rates at which similar trademarks or technologies are being licensed in the marketplace.

 

This analysis indicated that certain trade names in the Commercial Segment were impaired by $0.8 million and this was charged to restructuring and other impairment charges during the fourth quarter of 2008. Had the fair value of each Company’s indefinite-lived assets been hypothetically lower than presently estimated by 10% as of September 29, 2008, certain trade names in the Commercial Segment would have been impaired by an additional $1.0 million and the Arrow trade name would have been impaired $8 million.

 

Long-lived assets, including finite-lived intangible assets (e.g., customer relationships), do not require that an annual impairment test be performed; instead, long-lived assets are tested for impairment upon the occurrence of a triggering event. Triggering events include the likely (i.e., more likely than not) disposal of a portion of such assets or the occurrence of an adverse change in the market involving the business employing the related assets. Significant judgments in this area involve determining whether a triggering event has occurred and re-assessing the reasonableness of the remaining useful lives of finite-lived assets by, among other things, validating customer attrition rates.

 

 

In connection with the acquisition of Arrow International, the Company recorded a $30 million charge to operations during 2007, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations”, for in-process research and development (“IPR&D”) assets acquired that the

Company determined had no alternative future use in their current state. The Company continues to evaluate certain of these projects for their feasibility and alignment with the Company’s core strategic objectives.

 

As part of the preliminary purchase price allocation for Arrow, approximately $30 million of the purchase price was allocated to acquire in-process research and development projects. The amount allocated to the acquired in-process research and development represents the estimated value based on risk-adjusted cash flows related to in-process projects that had not yet reached technological feasibility and had no alternative future uses as of the date of the acquisition. The primary basis for determining the technological feasibility of these projects is obtaining regulatory approval to market the underlying products. If the projects are not successful or completed in a timely manner, the Company may not realize the financial benefits expected for these projects.

 

The value assigned to the acquired in-process technology was determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to their present value. The revenue projections used to value the acquired in-process research and development were based on estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by us and our competitors. The resulting net cash flows from such projects were based on our estimates of cost of sales, operating expenses, and income taxes from such projects.

 

The rate of 14 percent utilized to discount the net cash flows to their present value was based on estimated cost of capital calculations and the implied rate of return from the Company’s acquisition model plus a risk premium. Due to the nature of the forecasts and the risks associated with the developmental projects, appropriate risk-adjusted discount rates were used for the in-process research and development projects. The discount rates are based on the stage of completion and uncertainties surrounding the successful development of the purchased in-process technology projects.

 

The purchased in-process technology of Arrow relates to research and development projects in the following product families: Central Venus Access Catheters (“CVC”) and Specialty Care Catheters (“Specialty Care”).

 

The most significant purchased set of in-process technologies relates to the CVC Product Family for which the Company estimated a value of $25 million. The projects included in this product family’s in-process technology include the Hi-C Project, PICC Triple Lumen, Antimicrobial PICC, and certain Catheter Tip Positioning Technology.

 

The remaining purchased set of in-process technologies relates to the Specialty Care Product Family for which the Company has estimated a value of $5 million. The projects included in this product family’s in-process technology include the Ethanol Lock Program and Antimicrobial CHDC.

 

The successful development of new products and product enhancements is subject to numerous risks and uncertainties, both known and unknown, including unanticipated delays, access to capital, budget overruns, technical problems and other difficulties that could result in the abandonment or substantial change in the design, development and commercialization of these new products and enhancements, including, for example, changes requested by the FDA in connection with pre-market approval applications for products or 510(k) notification. Given the uncertainties inherent with product development and introduction, there can be no assurance that any of the Company’s product development efforts will be successful on a timely basis or within budget, if at all. The failure of the Company to develop new products and product enhancements on a timely basis or within budget could harm the Company’s results of operations and financial condition. For additional risks that may affect the Company’s business and prospects following completion of the merger, see “Risk Factors” commencing on page 13 of this Annual Report on Form 10-K.

 

We provide a range of benefits to eligible employees and retired employees, including pensions and postretirement healthcare. Several statistical and other factors which are designed to project future events are used in calculating the expense and liability related to these plans. These factors include actuarial assumptions about discount rates, expected rates of return on plan assets, compensation increases, turnover rates and healthcare cost trend rates. We review the actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when appropriate.

 

The weighted average assumptions for U.S. and foreign plans used in determining net benefit cost were as follows:

 

 

Significant differences in our actual experience or significant changes in our assumptions may materially affect our pension and other postretirement obligations and our future expense. The following table shows the sensitivity to changes in the weighted average assumptions: