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, or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).

 

 

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 (36,554,671 shares) on June 25, 2006 (the last business day of the registrant’s most recently completed fiscal second quarter) was $1,940,687,483⁽¹⁾. The aggregate market value was computed by reference to the closing price of the Common Stock on such date.

 

The registrant had 39,118,349 Common Shares outstanding as of February 15, 2007.

 

Document Incorporated By Reference: certain provisions of the registrant’s definitive proxy statement in connection with its 2007 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, 2006

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, 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 is a diversified industrial company specializing in the design, manufacture and distribution of specialty-engineered products. We serve a wide range of customers in niche segments of the commercial, medical and aerospace industries. Our products include: driver controls, motion controls, power and vehicle management systems and fluid management systems for commercial industries; disposable medical products, surgical instruments, medical devices and specialty devices for hospitals and healthcare providers; and repair products and services, precision-machined components and cargo-handling systems for commercial and military aviation as well as other industrial markets.

 

For more than 60 years, we have provided 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 through operations in 23 countries and local direct sales and distribution networks. In 2006, products directly distributed from our operations in the United States accounted for 43 percent of revenues, and products directly distributed from our operations in other countries represented 57 percent of revenues.

 

Our Business Segments

 

We organize our business into three business segments — Commercial, Medical and Aerospace. For 2006, the percentages of our consolidated net revenues represented by our segments were as follows: Commercial — 47%; Medical — 33%; and Aerospace — 20%. Additional information regarding our segments and geographic areas is presented in Note 15 to our consolidated financial statements included in this Annual Report on Form 10-K.

 

 Commercial

 

Our Commercial Segment businesses principally design, manufacture and distribute driver control, motion control, power and vehicle management and fluid management products and systems. Our products are used by a wide range of markets including the passenger car and light truck, marine, recreational, mobile power equipment, military, agricultural and construction vehicle, truck and bus and various other industrial equipment sectors. Major manufacturing operations are located in North America, Europe and Asia.

 

Driver Controls:  This is the largest single product category in the Commercial Segment, representing 44 percent of Commercial Segment revenues in 2006. Products in this category include: full manual and automatic gearshift systems, transmission guide controls, park-lock cables, control cables, mechanical and hydraulic steering, steering columns, throttle controls and industrial vehicle pedal systems. Our driver controls are used in a variety of vehicles, including passenger cars, boats, trucks, agricultural vehicles and recreational vehicles. We are a global supplier of manual and automatic gearshift systems and control cables for passenger cars and light trucks and a leading global provider of both mechanical and hydraulic steering systems for recreational boats.

 

Motion Controls:  Products in this category represented 25 percent of Commercial Segment revenues in 2006. Motion controls include: mechanical and electro-mechanical controls for seat-comfort, interior flexibility, movement and regulation of window, door, function and other safety controls and mobile power equipment controls and products for heavy-lift applications. While the largest portion of this category relates to seat and interior comfort and motion systems sold to automotive suppliers and industrial vehicle manufacturers, our motion systems also serve a wide range of other markets and applications. For example, we are a large supplier of safety cable and light-duty motion controls used in mobile power equipment, and our heavy-lift products,

which include heavy-duty cables, hoisting and rigging equipment, are used in oil drilling and other industrial markets.

 

Power and Vehicle Management Systems:  Products in this category represented 20 percent of Commercial Segment revenues in 2006. Power and vehicle management systems include: mobile auxiliary power systems, fuel management systems and components, industrial actuation products and components, instrumentation and electronic controls for engine and vehicle management, diagnostics and monitoring. These products generally address the need for greater fuel efficiency, reduced emissions, mobile power and improved connectivity of engine and vehicle systems. Our major products in this category include mobile auxiliary power units used for power and climate control in heavy duty trucks, industrial vehicles and locomotives, instrumentation and electronic products for marine and industrial vehicles and components and systems for the use of alternative fuels in military, industrial and automotive applications.

 

Fluid Management Systems:  Products in this category represented 11 percent of Commercial Segment revenues in 2006. Fluid management products include premium-branded, custom-manufactured and bulk hose and related assemblies that are generally custom-designed and manufactured to address specific requirements for vapor permeation, durability and flexibility. Our fluid management products can be found in automobiles, recreational boats, remote sensing devices, high-purity food processing, underground fuel transfer, compressed natural gas applications and in a number of other industrial product and equipment applications. The largest percentage of fluid management systems are sold to automotive and industrial customers.

 

The following table sets forth revenues for 2006, 2005 and 2004 by product category for the Commercial Segment.

 

 

The following table sets forth the percentage of revenues by end market for 2006 for the Commercial Segment.

 

 

Backlog:  As of December 31, 2006, our backlog of firm orders for our Commercial Segment was $247 million. This compares with $257 million as of December 25, 2005. Standard Commercial Segment products are typically shipped between two weeks 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.

 

Marketing:  The majority of our Commercial Segment products are sold to original equipment manufacturers, or OEMs, through a direct sales force of field representatives and technical specialists. We also market our marine products and mobile auxiliary power units through dealers, distributors and retail outlets serving owners of recreational boats. Fuel systems and components include custom applications sold directly to industrial equipment manufacturers and to the automotive aftermarket principally in Europe.

 

 Medical

 

Our Medical Segment businesses develop, manufacture and distribute disposable medical products, surgical instruments, medical devices and specialty devices for healthcare providers and medical equipment manufacturers. Our products are largely sold and distributed to hospitals and healthcare providers in a range of clinical settings. Major manufacturing operations are located in North America, Europe and Asia.

 

Markets for these products are influenced by a number of factors including demographics, utilization and reimbursement patterns in the worldwide healthcare market.

 

Disposable Medical Products:  This is the largest product category in the Medical Segment, representing 63 percent of segment revenues in 2006. Our disposable medical products are generally used in the clinical specialty areas of anesthesia, respiratory care and urology. Anesthesia and respiratory care products include those used in airway management, sleep therapy, oxygen administration and therapy, humidification and aerosol therapy. Urology products include: catheters and drain and irrigation supplies. Our products are marketed under the brand names of Rusch, 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 the home health market and medical device manufacturers.

 

Surgical Instruments and Medical Devices:  Products in this category represented 27 percent of Medical Segment revenues in 2006. Our surgical instrument and medical device products include: hand-held instruments for general and specialty surgical procedures, devices used in cardiovascular, orthopedic and general surgery and minimally-invasive diagnostic and therapeutic care. We also produce and market a range of ligation and closure products. In addition, we provide instrument management and sterilization services. We market surgical instruments and medical devices under the Deknatel, Pleur-evac, Pilling and Weck brand names.

 

Specialty Devices:  Specialty devices represented 10 percent of Medical Segment revenues in 2006. Products in this category include custom-designed and manufactured specialty instruments for cardiovascular and orthopedic procedures, specialty sutures, microcatheters, introducers and guidewires. We also design and manufacture specialty devices and instruments for industry leading medical device manufacturers and provide them with outsourcing services. Our brands include Beere, KMedic and Deknatel. Specialty devices are generally marketed to medical device manufacturers.

 

The following table sets forth revenues for 2006, 2005 and 2004 by product category for the Medical Segment.

 

 

The following table sets forth the percentage of revenues by end market for 2006 for the Medical Segment.

 

 

Backlog:  As of December 31, 2006, our backlog of firm orders for our Medical Segment was $65 million. This compares with $65 million as of December 25, 2005. We expect substantially all of the December 31, 2006 backlog to be filled in 2007. Most of our medical products are sold on orders calling for delivery within a few months. Therefore, the backlog of such orders is not indicative of probable revenues in any future 12-month period.

 

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.

 

 Aerospace

 

Our Aerospace Segment businesses provide repair products and services for flight and ground-based turbine engines; manufacture and distribute precision-machined components; and design, manufacture and market cargo-handling systems. These products require a high degree of engineering sophistication and are often custom-designed. Major operations are located in North America, Europe and Asia.

 

Commercial aviation markets represent a significant majority percentage of revenues in this segment. Markets for these products are generally influenced by spending patterns in the commercial aviation and military markets.

 

Repair Products and Services:  The largest single product category in the Aerospace Segment, repair products and services represented 47 percent of segment revenues in 2006. This category includes repair technologies and services primarily for critical components of flight turbines, including fan blades 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. Repair products and services are provided through service locations in North America, Europe and Asia. Our repair products and services business is conducted through a consolidated, but not wholly-owned, subsidiary called Airfoil Technologies International (ATI), whose product line serves many of the industry’s leading aircraft engine providers and a range of commercial airlines.

 

Cargo-handling Systems:  Products in this category represented 29 percent of Aerospace Segment revenues in 2006. Our cargo-handling systems include on-board cargo-handling systems for wide-body and narrow-body aircraft, actuators, cargo containers, aftermarket spare parts and repair services. Marketed under the Telair International brand name, our wide-body cargo-handling systems are sold to aircraft OEMs or to airlines and air freight carriers as “buyer furnished equipment” for original installations or as retrofits for existing equipment. Our other Telair products in this category include narrow-body aircraft cargo-loading systems and cargo containers. We also manufacture and repair components for our systems and other related aircraft controls, including canopy and door actuators, cargo winches and flight controls.

 

Precision-Machined Components:  Products in this category represented 24 percent of Aerospace Segment revenues in 2006. Our precision-machined components include: fan blades, compressor blades, cases, blisks and other components for military and commercial flight turbine engines and a range of custom-designed and manufactured products for industrial markets. Most of our precision-machined components are sold to original equipment manufacturers of aircraft engines and for military applications, with a very small percentage of products sold to industrial markets.

 

The following table sets forth revenues for 2006, 2005 and 2004 by product category for the Aerospace Segment.

 

The following table sets forth the percentage of revenues by end market for 2006 for the Aerospace Segment.

 

 

Backlog:  As of December 31, 2006, our backlog of firm orders for our Aerospace Segment was $329 million, of which we expect approximately 80 percent to be filled in 2007. Our backlog for our Aerospace Segment on December 25, 2005 was $316 million.

 

Marketing:  Generally, products sold to the aerospace market are sold through our own force of field representatives.

 

Discontinued Operations

 

In October 2006, we sold a small medical business that was classified as held for sale during the second quarter of 2005. During the third quarter of 2005, we completed the sale of our automotive pedal systems business and sold a European medical product sterilization business. During the first quarter of 2005, we completed the sale of Sermatech International, a surface-engineering/specialty coatings business. For 2006 and comparable periods, the small medical business, the automotive pedal systems business, the European medical product sterilization business and Sermatech business have been presented in our consolidated financial statements as discontinued operations. The Sermatech business was previously reported as part of our Aerospace Segment. For a more complete discussion, see Note 16 to our consolidated financial statements included in this Annual Report on Form 10-K.

 

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. The U.S. National Highway Traffic Safety Administration and government agencies in other countries regulate the manufacture and sale of many of our automotive products.

 

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, 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 OEMs.

 

Seasonality

 

A portion of our revenues, particularly in the Commercial and Medical segments, are subject to seasonal fluctuations. Revenues in the automotive and industrial markets are generally reduced in the third quarter of each year as a result of preparations by OEMs for the upcoming model year. In addition, marine aftermarket revenues 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 19,800 full-time and temporary employees at December 31, 2006. Of these employees, approximately 7,100 were employed in the United States and 12,700 in countries outside of the United States. Less than 10 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 and information, proxy statements and other information with the Securities and Exchange Commission. 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 Web site. The address is www.teleflex.com. We make available through our Web site, 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 pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. The information on our Web site is not and should not be considered part of this Annual Report on Form 10-K and 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 15, 2007 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. Sickler has been Vice Chairman since December 2000. He has been a director since May 2006. From May 2006 to October 2006, he served as Interim President of Teleflex Medical, and from December 2003 until August 2004, he was Interim Chief Financial Officer. Prior to December 2000 he was a Senior Vice President.

 

Mr. Headley has been Executive Vice President and Chief Financial Officer since August 2004. From July 1996 until August 2004, he was Vice President and Chief Financial Officer of Roper Industries, Inc., a diversified industrial company that designs, manufactures and distributes engineered products and solutions for global niche markets. From July 1993 to June 1996, Mr. Headley served as Chief Financial Officer of the U.S. operations of McKechnie Group, plc, a manufacturer of components and assemblies for a variety of industries.

 

Mr. Miller has been Senior Vice President, General Counsel and Secretary since November 2004, following a 20-year career with Aramark Corporation, a diversified management services company providing food, refreshment, facility and other support services for a variety of organizations. From November 2001 until November 2004, he was Senior Vice President and Associate General Counsel for the Food & Support Services division of Aramark. From June 1994 until November 2001, Mr. Miller was Senior Vice President and General Counsel for Aramark Uniform Services.

 

Mr. Gordon has been Senior Vice President — Corporate Development since June 2005. 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. Northfield has been the President of Teleflex Commercial since June 2005. 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. 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.

 

Our officers are elected annually by the Board of Directors at the first meeting of the Board held after our annual stockholders meeting. 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:

 

Many of the industries in which we operate are cyclical, and, accordingly, our business is subject to changes in the economy.

 

Although we believe that the diversified nature of our business reduces the risk that all of our operations would experience simultaneous cyclical downturns, many of the businesses which we operate are subject to specific industry and general economic cycles, most acutely in the automotive, marine, aerospace and transportation industries. Accordingly, any downturn in these or other markets in which we participate could materially adversely affect us. Moreover, if we fail to respond promptly to changes in demand, our results of operations could be materially adversely affected in any given quarter.

 

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 entities that are not wholly-owned and other alliances. As of December 31, 2006, approximately 45% of our total assets and 57% of our total 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.

 

Our products are typically integrated into other manufacturers’ products. As a result, changes in demand for our customers’ products may adversely affect our revenues on short notice.

 

Many of our customers in the Commercial and Aerospace segments, including OEMs, integrate our products into products our customers sell. Our customers also generally have no obligation to purchase any minimum quantity of product from us and may terminate our arrangement on short notice, typically 30 to 90 days, sometimes less. Therefore, our reported backlog may not be realized as revenues. Revenues could

materially decline if these customers experience a reduction in demand for their products or cancel a significant number of contracts and we cannot replace them with similar arrangements.

 

Customers in our Medical Segment depend on third party reimbursement.

 

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 items 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 maintain a currency hedging program to reduce the effects of this fluctuation, changes in the relative values of currencies occur from time to time and 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, including developing electronic technology to replace or improve upon mechanical technology. 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 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 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 us 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 are subject to a variety of litigation in the course of our business 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, 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.

 

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

 

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. Product liability, warranty and recall costs may have a material adverse effect on our financial condition and results of operations.

 

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

 

Numerous national and local government agencies in a number of countries regulate our products and the products sold by our customers incorporating our products. The U.S. National Highway Traffic Safety Administration regulates the manufacture and sale of many of our automotive products. The U.S. Food and Drug

Administration regulates 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 or delays in product manufacturing.

 

We are also 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 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.

 

The costs associated with our restructuring programs may be greater than expected.

 

We are engaged in restructuring programs, which require management to utilize significant estimates related to realizable values of assets made redundant or obsolete and expenses for severance and other employee separation costs, lease cancellation and other exit costs. Actual results could differ materially from those estimated due to, among other things: unanticipated expenditures in connection with the effectuation of the programs; costs and length of time required to comply with legal requirements applicable to certain aspects of the programs; inability to realize anticipated cost savings; and unanticipated difficulties in connection with consolidation of manufacturing and administrative functions.

 

Our implementation of a new enterprise resource planning system in our Medical Segment may result in problems that could adversely affect us.

 

We are in the process of implementing a third party enterprise resource planning, or ERP, system across our Medical Segment in an effort to enhance operating efficiencies and provide more effective management of business operations. The first phase of the implementation, which relates to our Medical Segment operations in North America, is expected to be completed in the third quarter of 2007. In the event we encounter any problems in the implementation of the ERP system, we could experience business disruptions in our Medical Segment, which could adversely affect customer relationships and divert the attention of our Medical Segment management team away from daily operations. In addition, any delays in the implementation of the ERP system could cause us to incur additional unexpected costs. Should we experience such difficulties, our business, cash flows and results of operations could be adversely affected.

 

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. However, we may not be able to identify suitable acquisition candidates, complete acquisitions or integrate acquisitions successfully. 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 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 significant 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 170 owned and leased properties consisting of plants, engineering and research centers, distribution warehouses, offices and other facilities. The properties are maintained in good operating condition and are suitable for their intended use. All the plants have space available for the activities currently conducted therein and expected in the next several years.

 

Our major facilities are as follows:

 

 

In addition to the properties listed above, we own or lease approximately 1,399,000 square feet of warehousing, manufacturing and office space located in the United States, Canada, Mexico, South America, Europe, Australia and Asia. We also own or lease certain properties that are no longer being used in our operations. We are actively marketing these owned properties and seeking to sublease these leased properties. At December 31, 2006, the owned properties were classified as held for sale.

 

We are a party to various lawsuits and claims arising in the normal course of business. These lawsuits and claims include actions involving product liability, intellectual property, employment and environmental matters. Based on information currently available, advice of counsel, established reserves and other resources, we do not believe that any such actions are likely to be, individually or in the aggregate, material to our business, financial condition, results of operations or liquidity. However, in the event of unexpected further

developments, it is possible that the ultimate resolution of these matters, or other similar matters, if unfavorable, may be materially adverse to our business, financial condition, results of operations or liquidity.

 

In February 2004, a jury verdict of $34.8 million was rendered against one of our subsidiaries in a trademark infringement action. In February 2005, the trial judge entered an order rejecting the jury award in its entirety. In October 2006, the United States Court of Appeals for the Federal Circuit upheld the February 2005 decision. As no appeal of the Court of Appeals’ decision was filed within the requisite time for filing appeals in this matter, the decision has become final.

 

No matters were submitted to a vote of our stockholders during the quarter ended December 31, 2006.

 

Our common stock is listed on the New York Stock Exchange, Inc. (symbol “TFX”). Our quarterly high and low stock prices and dividends for 2006 and 2005 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, $148 million of retained earnings was available for dividends and stock repurchases at December 31, 2006. On February 21, 2007, the Board of Directors declared a quarterly dividend of $0.285 per share on our common stock, which is payable on March 15, 2007 to holders of record on March 5, 2007. As of February 15, 2007, we had approximately 957 holders of record of our common stock.

 

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 approved plan, we repurchased a total of 2,317,347 shares on the open market during 2005 and the first nine months of 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, 2001 and that all dividends were reinvested.

 

MARKET PERFORMANCE
Comparison of Cumulative Five Year Total Return

 

 

 

Certain reclassifications have been made to the prior years’ selected financial data to conform to current year presentation. Certain financial information is presented on a rounded basis, which may cause minor differences.

 

 

 

Overview

 

We are focused on achieving consistent and sustainable growth through the continued development of our core businesses and carefully selected acquisitions. Our internal growth initiatives include the development of new products, moving existing products into market adjacencies in which we already participate with other products and the expansion of market share. Our core revenue growth in 2006 as compared to 2005, excluding the impacts of currency, acquisitions and divestitures, was 5%. Core growth was strongest in our Aerospace Segment, which grew 8%, and weakest in our Medical Segment, which grew 3% year over year.

 

Segment operating profit increased 10% in 2006 due primarily to cost and productivity improvements in our Aerospace and Medical segments, offset, in part, by a decline in our Commercial Segment margins.

 

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. 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 approved plan, 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, with 1,627,247 shares repurchased during 2006 for an aggregate purchase price of $93.5 million, and aggregate fees and commissions of $0.1 million.

 

In November 2006, we acquired Taut, Inc., or Taut, a producer of instruments and devices for minimally invasive surgical procedures, particularly laparoscopic surgery, for $28.0 million. The results for Taut are included in our Medical Segment. Also in November 2006, we acquired Ecotrans Technologies, Inc., or Ecotrans, a leading supplier of locomotive anti-idling and emissions reduction solutions for the railroad industry, for $10.1 million. The results for Ecotrans are included in our Commercial Segment.

 

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.

 

 

Inventories are valued at the lower of cost or market. Inherent in this valuation are significant management judgments and estimates concerning excess inventory and obsolescence rates. Based upon these judgments and estimates, we record a reserve to adjust the carrying amount of our inventories. 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 inventory reserve was $46.6 million and $44.6 million at December 31, 2006 and December 25, 2005, respectively.

 

 

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.

 

 

In accordance with SFAS No. 142, we perform an annual impairment test of our recorded goodwill. In addition, we test our other indefinite-lived intangible assets for impairment. These impairment tests can be significantly altered by estimates of future performance, long-term discount rates and market price valuation multiples. These estimates will likely change over time. Many of our businesses operate in cyclical industries and the valuation of these businesses can be expected to fluctuate as a result of this cyclicality. Goodwill and other intangible assets totaled $725.8 million and $712.0 million at December 31, 2006 and December 25, 2005, respectively.

 

 

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.

 

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. A 50 basis point increase in the assumed discount rate would have decreased the total net periodic pension and postretirement healthcare expense for 2006 by approximately $1.8 million and would have decreased the projected benefit obligation at December 31, 2006 by approximately $17.9 million. A 50 basis point decrease in the assumed discount rate would have increased these amounts by approximately $2.0 million and $19.7 million, respectively. A 50 basis point change in the expected return on plan assets would have impacted 2006 annual pension expense by approximately $0.7 million. A 1.0% increase in the assumed healthcare trend rate would have increased the 2006 benefit expense by approximately $0.3 million and would have increased the projected benefit obligation by approximately $2.7 million. A 1.0% decrease in the assumed healthcare trend rate would have decreased the

2006 benefit expense by approximately $0.1 million and would have decreased the projected benefit obligation by approximately $2.3 million.

 

 

Restructuring costs, which include termination benefits, contract termination costs and other restructuring costs, are recorded at estimated fair value. Key assumptions in calculating the restructuring costs include the terms that may be negotiated to exit certain contractual obligations and the timing of employees leaving the company.

 

 

An allowance for doubtful accounts is maintained for which the collection of the full amount of accounts receivable is doubtful. The allowance is based on our historical experience, the period an account is outstanding, the financial position of the customer and information provided by credit rating services. We review the allowance periodically and adjust it as necessary. Our allowance for doubtful accounts was $10.1 million at both December 31, 2006 and December 25, 2005.

 

 

Most of our sales are covered by warranty provisions for the repair or replacement of qualifying defective items for a specified period after the time of the sales. We estimate our warranty costs and liability based on a number of factors including historical trends of units sold, the status of existing claims, recall programs and communication with customers. Our estimated product warranty liability was $14.1 million and $14.2 million at December 31, 2006 and December 25, 2005, respectively.

 

 

Our annual provision for income taxes and determination of the deferred tax assets and liabilities require management to assess uncertainties, make judgments regarding outcomes and utilize estimates. We conduct a broad range of operations around the world, subjecting us to complex tax regulations in numerous international taxing jurisdictions, resulting at times in tax audits, disputes and potentially litigation, the outcome of which is uncertain. Management must make judgments about such uncertainties and determine estimates of our tax assets and liabilities. To the extent the final outcome differs, future adjustments to our tax assets and liabilities will be necessary. Our income taxes payable was $38.6 million and $46.2 million at December 31, 2006 and December 25, 2005, respectively.

 

We are also required to assess the realizability of our deferred tax assets, taking into consideration our forecast of future taxable income and available tax planning strategies that could be implemented to realize the deferred tax assets. Based on this assessment, management must evaluate the need for, and amount of, valuation allowances against our deferred tax assets. To the extent facts and circumstances change in the future, adjustments to the valuation allowances may be required.

 

Accounting Standards Issued Not Yet Adopted

 

In June 2006, the Financial Accounting Standards Board, or FASB, issued Interpretation, or FIN, No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN No. 48 requires that the impact of a tax position be recognized in the financial statements if it is more likely than not that the tax position will be sustained on tax audit, based on the technical merits of the position. FIN No. 48 also provides guidance on derecognition of tax positions that do not meet the “more likely than not” standard, classification of tax assets and liabilities, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of

FIN No. 48 are effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of FIN No. 48 on our financial position, results of operations and cash flows.

 

See also Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K.

 

Results of Operations

 

Discussion of growth from acquisitions reflects the impact of a purchased company 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, the impact of eliminating the one-month reporting lag for certain of our foreign operations and the comparable activity of divested companies within the most recent twelve-month period. The following comparisons exclude the impact of the automotive pedal systems business, Sermatech International business, European medical product sterilization business and small medical business, which have been presented in our consolidated financial results as discontinued operations.

 

 

Revenues increased 5% in 2006 to $2.65 billion from $2.51 billion in 2005, principally due to core growth. The Commercial, Medical and Aerospace segments comprised 47%, 33% and 20% of our 2006 revenues, respectively.

 

Materials, labor and other product costs as a percentage of revenues improved to 70.7% in 2006 from 71.8% in 2005, due primarily to the benefits of our restructuring initiatives and other cost reduction efforts. Selling, engineering and administrative expenses (operating expenses) as a percentage of revenues increased to 18.6% in 2006 compared with 17.9% in 2005, due primarily to $10.4 million of costs associated with the initial phases of an information systems implementation program in our Medical Segment, $6.8 million of stock-based compensation expensed under SFAS No. 123(R) and various temporary inefficiencies in our Medical Segment during the first half of 2006.

 

Interest expense declined in 2006 principally as a result of lower debt balances. Interest income increased in 2006 primarily due to higher average cash balances and more favorable interest rates compared to the prior period. The effective income tax rate was 24.72% in 2006 compared with 22.99% 2005. The increase in the effective income tax rate primarily reflects the favorable impact in 2005 of the American Jobs Creation Act, or AJCA, repatriation benefit. Minority interest in consolidated subsidiaries increased $4.6 million in 2006 due to increased profits from our entities that are not wholly-owned. Net income for 2006 was $139.4 million compared to $138.8 million for 2005. Diluted earnings per share increased 3% to $3.49 for 2006.

 

On December 26, 2005, we adopted the provisions of SFAS No. 123(R), “Share-Based Payment,” which requires the measurement and recognition of compensation expense for all stock-based awards made to employees based on estimated fair values. SFAS No. 123(R) supersedes previous accounting under Accounting Principles Board, or APB, Opinion No. 25, “Accounting for Stock Issued to Employees,” for periods beginning in fiscal 2006. In March 2005, the SEC issued Staff Accounting Bulletin, or SAB, No. 107, providing supplemental implementation guidance for SFAS 123(R). We have applied the provisions of SAB No. 107 in our adoption of SFAS No. 123(R).

 

SFAS No. 123(R) requires companies to estimate the fair value of stock-based awards on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods. We adopted SFAS No. 123(R) using the modified prospective application method, which requires the application of the standard starting from December 26, 2005, the first day of our 2006 fiscal year. Our consolidated financial statements for 2006 reflect the impact of SFAS No. 123(R).

 

Stock-based compensation expense related to employee stock options recognized under SFAS No. 123(R) for 2006 was $6.8 million and is included in selling, engineering and administrative expenses. The total income tax benefit recognized for share-based compensation arrangements for 2006 was $1.4 million. As of December 31, 2006, total unamortized stock-based compensation cost related to non-vested stock options, net of expected forfeitures, was $9.2 million, which is expected to be recognized over a weighted-average period of 1.9 years.

 

Prior to the adoption of SFAS No. 123(R), we accounted for stock-based awards to employees using the intrinsic value method in accordance with APB No. 25, as allowed under SFAS No. 123, “Accounting for Stock-Based Compensation.” Under the intrinsic value method, no stock-based compensation expense for employee stock options had been recognized in our consolidated statements of operations because the exercise price of our stock options granted to employees equaled the fair market value of the underlying stock at the date of grant. In accordance with the modified prospective transition method we used in adopting SFAS No. 123(R), our results of operations prior to fiscal 2006 have not been restated to reflect, and do not include, the impact of SFAS No. 123(R).

 

Additional information regarding stock-based compensation and our stock compensation plans is presented in Notes 1 and 11 to our consolidated financial statements included in this Annual Report on Form 10-K.

 

In June 2006, we began certain restructuring initiatives that affect all three of our operating segments. These initiatives involve the consolidation of operations and a related reduction in workforce at several of our facilities in Europe and North America. We have determined to undertake these initiatives as a means to improving operating performance and to better leverage our existing resources. The charges associated with the 2006 restructuring program that are included in restructuring and impairment charges during 2006 totaled $5.9 million, of which 55%, 26% and 19% were attributable to our Commercial, Medical and Aerospace segments, respectively. As of December 31, 2006, we expect to incur future restructuring costs associated with our 2006 restructuring program of between $3.0 million and $5.4 million in our Commercial, Medical and Aerospace segments over the next two quarters.

 

During the first quarter of 2006, we began a restructuring activity in our Aerospace Segment. The actions relate to the closure of a manufacturing facility, termination of employees and relocation of operations. The charges associated with this activity that are included in restructuring and impairment charges during 2006 totaled $0.6 million. We do not expect to incur future restructuring costs associated with this activity.

 

During the fourth quarter of 2004, we announced and commenced implementation of a restructuring and divestiture program designed to improve future operating performance and position us for future earnings growth. The actions have included exiting or divesting non-core or low performing businesses, consolidating manufacturing operations and reorganizing administrative functions to enable businesses to share services. The charges, including changes in estimates, associated with the 2004 restructuring and divestiture program for continuing operations that are included in restructuring and impairment charges during 2006, 2005 and 2004 totaled $10.4 million, $27.1 million and $67.6 million, respectively. The $10.4 million was attributable to our Medical Segment. Of the $27.1 million, 13%, 76% and 11% were attributable to our Commercial, Medical and Aerospace segments, respectively. Of the $67.6 million, 31%, 15% and 54% were attributable to our Commercial, Medical and Aerospace segments, respectively. As of December 31, 2006, we expect to incur future restructuring costs associated with our 2004 restructuring and divestiture program of between $1.6 million and $3.2 million in our Medical Segment during 2007.

 

Certain costs associated with the 2004 restructuring and divestiture program are not included in restructuring and impairment charges. All inventory adjustments that resulted from the 2004 restructuring and divestiture program and certain other costs associated with closing out businesses during 2005 and 2004 are included in materials, labor and other product costs and totaled $2.0 million and $17.0 million, respectively. The $2.0 million in costs for 2005 related to our Aerospace Segment. Of the $17.0 million in costs for 2004, $4.5 million and $12.5 million were attributed to our Commercial and Aerospace segments, respectively.

 

The cost savings from our restructuring programs were lower than expected in 2006 due primarily to implementation inefficiencies in our Medical Segment during the first half of the year, but we began to experience our anticipated rate of savings during the second half of the year.

 

For a more complete discussion of our restructuring programs, see Note 4 to our consolidated financial statements included in this Annual Report on Form 10-K.

 

We performed an annual impairment test of our recorded goodwill and indefinite-lived intangible assets in the fourth quarter of 2006 and determined that a portion of our goodwill was impaired. We recorded a charge of $1.0 million, which is included in restructuring and impairment charges. Also during 2006, we determined that three minority held investments and certain fixed assets were impaired and recorded an aggregate charge of $7.4 million, which is included in restructuring and impairment charges.

 

 

Revenues increased 5% in 2005 to $2.51 billion from $2.39 billion in 2004. This increase was due to increases of 5% from core growth and 4% from acquisitions, offset, in part, by decreases of 3% from dispositions and 1% from the impact of eliminating the one-month reporting lag in 2004 for certain of our foreign operations. The Commercial, Medical and Aerospace segments comprised 47%, 33% and 20% of our 2005 revenues, respectively.

 

Materials, labor and other product costs as a percentage of revenues increased to 71.8% in 2005 compared with 71.3% in 2004 due primarily to the impact of duplicate costs and inefficiencies related to the transfer of products between facilities in the Commercial Segment associated with the restructuring program. Selling, engineering and administrative expenses (operating expenses) as a percentage of revenues declined to 17.9% in 2005 compared with 20.4% in 2004 due primarily to the continuing reduction of facilities and supporting infrastructure costs and decreased corporate expenses relative to higher revenues.

 

Interest expense increased in 2005 principally from higher acquisition related debt balances in the first half of 2005. Interest income increased in 2005 primarily due to higher average cash balances, related to increased proceeds received from sales of businesses and assets in 2005. The effective income tax rate was 22.99% in 2005 compared with 13.17% in 2004. The higher rate in 2005 was primarily the result of the increase in foreign earnings for businesses located in higher-taxed jurisdictions. Minority interest in consolidated subsidiaries increased $1.1 million in 2005 due to increased profits from our entities that are not wholly-owned. Net income for 2005 was $138.8 million, an increase of $129.3 million from 2004, due primarily to a 60% decrease in restructuring costs and to the gain on the sale of the Sermatech business. Diluted earnings per share increased $3.15 to $3.39, and includes the net gain on sales of businesses and assets and the cost of restructuring and discontinued operations.

 

Segment Reviews

 

The following is a discussion of our segment operating results. Additional information regarding our segments is presented in Note 15 to our consolidated financial statements included in this Annual Report on Form 10-K.

 

 Commercial

 

Products in the Commercial Segment are manufactured for broad distribution as well as custom fabricated to meet individual customer needs. Consumer spending patterns influence the market trends for products sold to the automotive, marine and certain power equipment markets.

 

Automotive cable and shifter products are manufactured primarily for automotive OEMs. Discussion of marine and industrial product lines below includes the manufacturing and distribution of driver controls,

motion controls, power and vehicle management systems and fuel management systems to the automotive supply, marine and industrial markets.

 

 

Commercial Segment revenues increased 5% in 2006 to $1.25 billion from $1.19 billion in 2005, principally due to core growth. The segment benefited from increased sales in 2006 of alternative fuel systems and auxiliary power systems and sales of heavy-duty rigging and cable used in marine construction and the securing of oil platforms, offset, in part, by lower volume and customer price reductions for automotive products.

 

Commercial Segment operating profit declined 3% in 2006 to $78.4 million from $81.1 million in 2005. Operating profit improvements resulting from sales of auxiliary power units and other higher margin industrial products were more than offset by costs associated with the end of certain automotive programs, mix and margin pressure associated with lower volume and customer price reductions for automotive products coupled with increases in commodity pricing. Operating profit as a percent of revenues declined to 6.3% in 2006 from 6.8% in 2005.

 

Assets in the Commercial Segment declined $11.1 million or 2%, primarily due to the decrease in net property, plant and equipment and accounts receivable, offset, in part, by the impact of currency.

 

 

Commercial Segment revenues declined 1% in 2005 to $1.19 billion from $1.20 billion in 2004. The segment generated an increase of 3% from core growth that was more than offset by a 4% decrease from dispositions. The segment benefited from strength in its industrial OEM markets, the contribution of new driver controls and power and vehicle management system products and increased sales of driver and motion controls to automotive OEM markets. These benefits were more than offset by slower sales of products into marine and recreational markets.

 

Commercial Segment operating profit declined 23% in 2005 to $81.1 million from $105.7 million in 2004. This decline primarily reflects lower volume related contributions from higher margin marine and recreational products, the impact of duplicate costs and inefficiencies related to the transfer of products between two Tier 2 automotive supply facilities, the bankruptcy of an automotive supply customer and the impact of divestitures made in 2004. Operating profit as a percent of revenues declined to 6.8% in 2005 from 8.8% in 2004.

 

Assets in the Commercial Segment declined $120.2 million or 14%, primarily due to the decrease in non-current deferred tax assets and net property, plant and equipment and the impact of currency.

 

 Medical

 

Products in the Medical Segment generally are required to meet exacting standards of performance and have long product life cycles. Economic influences on revenues relate primarily to spending patterns in the worldwide medical devices and hospital supply market.

 

 

Medical Segment revenues increased 3% in 2006 to $858.7 million from $831.1 million in 2005, principally due to core growth. The segment benefited from sales of new products in respiratory care and sleep therapy, including distribution of products through alliances with other manufacturers, and continued growth of diagnostic and therapeutic device products sold to medical device manufacturers, offset by a decline in sales of orthopedic specialty devices sold to medical device manufacturers.

 

Medical Segment operating profit increased 8% in 2006 to $161.7 million from $150.0 million in 2005. This increase primarily reflects cost and productivity improvements in the second half of the year, following

completion of significant restructuring activities. 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. We also incurred significant costs as planned in connection with the initial phases of an information systems implementation program during the first half of 2006. Operating profit as a percent of revenues increased to 18.8% in 2006 from 18.0% in 2005.

 

Assets in the Medical Segment declined $6.6 million or 1%, primarily due to the decrease in accounts receivable, deferred tax assets and net property, plant and equipment, offset, in part, by the impact of the Taut acquisition and the impact of currency.

 

 

Medical Segment revenues increased 13% in 2005 to $831.1 million from $736.4 million in 2004. This increase was due to increases of 13% from acquisitions and 3% from core growth, offset, in part, by decreases of 2% from the impact of eliminating the one-month reporting lag in 2004 for certain of our foreign operations and 1% from dispositions. Medical Segment revenues increased primarily as a result of the increased sale of disposable medical products, particularly related to the third quarter 2004 acquisition of HudsonRCI, a provider of respiratory care products. Sales of surgical instruments and medical devices increased primarily as a result of new product sales and volume increases for specialty devices sold to medical device manufacturers.

 

Medical Segment operating profit increased 29% in 2005 to $150.0 million from $116.7 million in 2004 driven primarily by the HudsonRCI acquisition and significant improvements in the core business as benefits of the restructuring program began to be recognized. Operating profit as a percent of revenues increased to 18.0% in 2005 from 15.8% in 2004.

 

Assets in the Medical Segment declined $166.0 million or 15%, primarily due to the decrease in accounts receivable, including the sale of certain receivables under a non-recourse securitization program, the decrease in non-current deferred tax assets and the impact of currency.

 

 Aerospace

 

Products and services in the Aerospace Segment, many of which are proprietary, require a high degree of engineering sophistication and are often custom-designed. Economic influences on these products and services relate primarily to spending patterns in the worldwide aerospace industry and the demand for additional air cargo capacity.

 

 

Aerospace Segment revenues increased 9% in 2006 to $537.2 million from $493.8 million in 2005. This increase was due to increases of 8% from core growth and 1% from acquisitions. Core growth in wide body cargo handling systems, repair services and precision machined components was partially offset by the $6.5 million decrease in revenues resulting from the phase out of our industrial gas turbine aftermarket services business in 2005.

 

Aerospace Segment operating profit increased 51% to $50.6 million from $33.4 million in 2005. Volume-related efficiencies, additional higher margin cargo spares sales and mix within our precision-machined components business contributed to the improvement as did a reduction in losses resulting from the exit of the industrial gas turbine aftermarket services business. Operating profit as a percent of revenues increased to 9.4% in 2006 from 6.8% in 2005.

 

Assets in the Aerospace Segment increased $4.3 million or 2%, primarily due to the impact of currency.

 

 

Aerospace Segment revenues increased 9% in 2005 to $493.8 million from $453.2 million in 2004. Strong core growth in repair products and services and in sales of both narrow-body cargo loading systems and wide-body cargo system conversions, along with an increase due to a small acquisition in 2005, was partially offset by the impact of eliminating the one-month reporting lag in 2004 for certain of our foreign operations and by the phase out and closure of industrial gas turbine aftermarket services.

 

Aerospace Segment operating profit increased to a profit of $33.4 million in 2005 from a loss of $10.5 million in 2004, an improvement of $43.9 million. Higher volume and improvements in precision-machined components and the cargo systems businesses contributed to the increase as did a reduction in losses resulting from the exit of the industrial gas turbine aftermarket services. Operating profit (loss) as a percent of revenues was 6.8% in 2005 versus (2.3)% in 2004.

 

Assets in the Aerospace Segment declined $107.7 million or 30%, primarily due to the impact of the sale of the Sermatech International business.

 

Liquidity and Capital Resources

 

Operating activities from continuing operations provided net cash of $343.9 million during 2006. Changes in our operating assets and liabilities during 2006 resulted in a net cash inflow of $46.8 million. The most significant change was a decrease in accounts receivable, which was primarily due to improved cash collection. Our financing activities from continuing operations during 2006 consisted primarily of purchases of shares of our common stock of $93.6 million, a decrease in notes payable and current borrowings of $68.8 million, a reduction in long-term borrowings of $55.0 million and payment of dividends of $44.1 million. Our investing activities from continuing operations during 2006 consisted primarily of capital expenditures of $63.2 million and payments for businesses acquired of $41.7 million, including a $4.3 million deferred payment related to a prior period acquisition. During 2006, we also had proceeds from the sale of businesses and assets of $8.0 million and made a $6.0 million payment in connection with a post-closing purchase price adjustment based on working capital for a divested business. We had net cash provided by discontinued operations of $0.7 million in 2006.

 

Operating activities from continuing operations provided net cash of approximately $333.5 million during 2005. Changes in our operating assets and liabilities during 2005 resulted in a net cash inflow of $69.7 million. The most significant change was a decrease in accounts receivable, which was primarily due to improved cash collection including the sale of certain receivables under a non-recourse securitization program. Our financing activities during 2005 consisted primarily of a reduction in long-term borrowings of $270.3 million and proceeds from long-term borrowings of $109.2 million, as a result of improved operating cash flow, the repatriation of foreign earnings, proceeds from the disposition of businesses and lower capital spending. During 2005, we also paid dividends to minority interest shareholders of $63.0 million and made purchases of shares of our common stock of $46.5 million. Our investing activities during 2005 consisted primarily of proceeds from the sale of businesses and assets of $142.9 million. During 2005, we also had capital expenditures of $69.9 million. We had net cash used in discontinued operations of $2.7 million in 2005.

 

Operating activities from continuing operations provided net cash of approximately $249.9 million during 2004. Changes in our operating assets and liabilities during 2004 resulted in a net cash inflow of $25.9 million. The most significant changes were an increase in accounts payable and accrued expenses and a decrease in inventories, offset, in part, by an increase in accounts receivable and a decrease in income taxes payable. The increase in accounts payable and accrued expenses was due primarily to increased accruals associated with the restructuring and divestiture program. The decrease in inventories was the result of our focus on improved working capital management. The increase in accounts receivable was largely a result of increased business levels and the HudsonRCI acquisition. The decrease in income taxes payable was a result of tax deductions associated with the restructuring and divestiture program, for which the cash benefits were received in 2005.

Our financing activities during 2004 consisted primarily of the receipt of $511.6 million in gross proceeds from long-term borrowings, primarily for the acquisition of HudsonRCI. This amount is offset by a decrease in notes payable and current borrowings of $137.8 million and a reduction in long-term borrowings of $77.9 million, driven by improved operating cash flow, proceeds from the disposition of businesses and lower year-over-year capital spending. Our investing activities during 2004 consisted primarily of payments for businesses acquired of $458.5 million. We had net cash provided by discontinued operations of $7.4 million in 2004.

 

We use an accounts receivable securitization program to gain access to enhanced credit markets and reduce financing costs. As currently structured, we sell certain trade receivables on a non-recourse basis to a consolidated special purpose entity, which in turn sells an interest in those receivables to a commercial paper conduit. The conduit issues notes secured by that interest to third party investors. The assets of the special purpose entity are not available to satisfy our obligations. In accordance with the provisions of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” transfers of assets under the program qualify as sales of receivables and accordingly, $40.1 million of accounts receivable and the related amounts previously recorded in notes payable were removed from the consolidated balance sheet as of both December 31, 2006 and December 25, 2005.

 

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. 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 approved plan, 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, with 1,627,247 shares repurchased during 2006 for an aggregate purchase price of $93.5 million, and aggregate fees and commissions of $0.1 million.

 

The valuation allowance for deferred tax assets of $51.3 million and $32.6 million at December 31, 2006 and December 25, 2005, respectively, relates principally to the uncertainty of the utilization of certain deferred tax assets, primarily tax loss and credit carryforwards in various jurisdictions. We believe that we will generate sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax asset. The valuation allowance was calculated in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes,” which requires that a valuation allowance be established and maintained when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. The valuation allowance increase in 2006 was primarily attributable to the recording of deferred tax assets associated with state tax loss carryforwards at full value which required a valuation allowance.

 

In addition to the cash generated from operations, we have approximately $406 million in committed and $165 million in uncommitted unused lines of credit available. The availability of the lines of credit is dependent upon us maintaining our financial condition including our continued compliance with bank covenants. 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, $148 million of retained earnings was available for dividends and stock repurchases at December 31, 2006.

 

On February 21, 2007, the Board of Directors declared a quarterly dividend of $0.285 per share on our common stock, which is payable on March 15, 2007 to holders of record on March 5, 2007. As of February 15, 2007, we had approximately 957 holders of record of our common stock.

 

Fixed rate borrowings, excluding the effect of derivative instruments, comprised 82% of total borrowings at December 31, 2006. Approximately 19% of our total borrowings of $518.4 million are denominated in currencies other than the U.S. dollar, principally the euro, which we believe provides a natural hedge against fluctuations in the value of assets outside the United States.

 

During the fourth quarter of 2005, in order to take advantage of the provisions of the AJCA, management executed a foreign earnings repatriation plan. Under this plan, we repatriated $304 million of dividends during November and December 2005.

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

 

 

The decline in our percent of net debt to total capital for 2006 as compared to 2005 is primarily due to the repayment of current and long-term borrowings during 2006, which was funded principally by cash generated from operations.

 

We believe that our cash flow from operations and our ability to access additional funds through credit facilities will enable us to fund our operating requirements, capital expenditures and additional acquisition opportunities.

 

Contractual obligations at December 31, 2006 are as follows:

 

 

 

 

We also have obligations with respect to our pension and other postretirement benefit plans. See Note 13 to our consolidated financial statements included in this Annual Report on Form 10-K.

 

Off Balance Sheet Arrangements

 

We have residual value guarantees under operating leases for plant and equipment. The maximum potential amount of future payments we could be required to make under these guarantees is approximately $4.8 million.

 

We use an accounts receivable securitization program to gain access to enhanced credit markets and reduce financing costs. As currently structured, we sell certain trade receivables on a non-recourse basis to a

consolidated special purpose entity, which in turn sells an interest in those receivables to a commercial paper conduit. The conduit issues notes secured by that interest to third party investors. The assets of the special purpose entity are not available to satisfy our obligations. In accordance with the provisions of SFAS No. 140, transfers of assets under the program qualify as sales of receivables and accordingly, $40.1 million of accounts receivable and the related amounts previously recorded in notes payable were removed from the consolidated balance sheet as of both December 31, 2006 and December 25, 2005.

 

See also Note 14 to our consolidated financial statements included in this Annual Report on Form 10-K.

 

 Market Risk

 

We are exposed to certain financial risks, specifically fluctuations in market interest rates, foreign currency exchange rates and, to a lesser extent, commodity prices. We use derivative financial instruments to manage or reduce the impact of some of these risks. All instruments are entered into for other than trading purposes. We are also exposed to changes in the market traded price of our common stock as it influences the valuation of stock options and their effect on earnings.

 

 Interest Rate Risk

 

We are exposed to changes in interest rates as a result of our borrowing activities and our cash balances. Interest rate swaps are used to manage a portion of our interest rate risk. The table below is an analysis of the amortization and related interest rates by year of maturity for our fixed and variable rate debt obligations. Variable interest rates shown below are weighted average rates of the debt portfolio. For the swaps, notional amounts and related interest rates are shown by year of maturity. The fair value of the interest rate swaps as of December 31, 2006 was $0.3 million.

 

 

A 1.0% increase or decrease in variable interest rates would adversely or positively impact our expected net earnings by approximately $0.2 million or ($0.2 million), respectively.

 

 Foreign Currency Risk

 

We are exposed to fluctuations in market values of transactions in currencies other than the functional currencies of certain subsidiaries. We have entered into forward contracts with several major financial institutions to hedge a portion of projected cash flows from these exposures. The fair value of the open forward contracts as of December 31, 2006 was $0.4 million. The following table presents our open forward currency

contracts as of December 31, 2006, which all mature in 2007. Forward contract notional amounts presented below are expressed in the stated currencies (in thousands).

 

     Forward Currency Contracts:

 

 

A movement of 10% in the value of the U.S. dollar against foreign currencies would impact our expected net earnings by approximately $0.1 million.

 

The financial statements and supplementary data required by this Item are included herein, commencing on page F-1.

 

None.

 

(a) Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

 

(b) Management’s Report on Internal Control Over Financial Reporting

 

Our management’s report on internal control over financial reporting is set forth on page F-2 of this Annual Report on Form 10-K and is incorporated by reference herein.

 

(c) Change in Internal Control over Financial Reporting

 

No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

None.

 

For the information required by this Item 10, other than with respect to our Executive Officers, see “Election Of Directors,” “Nominees for Election to the Board of Directors,” “Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance,” in the Proxy Statement for our 2007 Annual Meeting, which information is incorporated herein by reference. The Proxy Statement for our 2007 Annual Meeting will be filed within 120 days of the close of our fiscal year.

 

For the information required by this Item 10 with respect to our Executive Officers, see Part I of this report on page 9, which information is incorporated herein by reference.

 

For the information required by this Item 11, see “Executive Compensation,” “Compensation Committee Report on Executive Compensation” and “Compensation Committee Interlocks and Insider Participation” in the Proxy Statement for our 2007 Annual Meeting, which information is incorporated herein by reference.

 

For the information required by this Item 12 under Item 403 of Regulation S-K, see “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement for our 2007 Annual Meeting, which information is incorporated herein by reference.

 

The following table sets forth certain information as of December 31, 2006 regarding our 1990 Stock Compensation Plan, 2000 Stock Compensation Plan and Global Employee Stock Purchase Plan:

 

 

 

 

For the information required by this Item 13, see “Certain Transactions” and “Corporate Governance” in the Proxy Statement for our 2007 Annual Meeting, which information is incorporated herein by reference.

 

For the information required by this Item 14, see “Audit and Non-Audit Fees” and “Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Registered Public Accounting Firm” in the Proxy Statement for our 2007 Annual Meeting, which information is incorporated herein by reference.

 

(a) Consolidated Financial Statements:

 

The Index to Consolidated Financial Statements and Schedule is set forth on page F-1 hereof.

 

(b) Exhibits:

 

The Exhibits are listed in the Index to Exhibits.

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized as of the date indicated below.

 

TELEFLEX INCORPORATED

 

Jeffrey P. Black

Chairman and Chief Executive Officer

(Principal Executive Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and as of the date indicated below.

 

Martin S. Headley

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

 

Charles E. Williams

Corporate Controller and Chief Accounting Officer

(Principal Accounting Officer)

 

 

Dated: March 1, 2007

TELEFLEX INCORPORATED

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

CONSOLIDATED FINANCIAL STATEMENTS

 

 

FINANCIAL STATEMENT SCHEDULE

 

 

The management of Teleflex Incorporated and its subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. In making this assessment, management used the framework established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As a result of this assessment and based on the criteria in the COSO framework, management has concluded that, as of December 31, 2006, the Company’s internal control over financial reporting was effective.

 

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

 

 

February 28, 2007

 

To the Board of Directors and Shareholders of Teleflex Incorporated:

 

We have completed integrated audits of Teleflex Incorporated’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

 

Consolidated financial statements and financial statement schedule

 

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Teleflex Incorporated and its subsidiaries at December 31, 2006 and December 25, 2005 and the results of their operations and their cash flows for the years ended December 31, 2006, December 25, 2005 and December 26, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in 2006.

 

Internal control over financial reporting

 

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting, appearing on page F-2, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania

February 28, 2007

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

The accompanying notes are an integral part of the consolidated financial statements.