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10-Q - FORM 10-Q - TELEFLEX INC | c06141e10vq.htm |
EX-32.2 - EXHIBIT 32.2 - TELEFLEX INC | c06141exv32w2.htm |
EX-31.1 - EXHIBIT 31.1 - TELEFLEX INC | c06141exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - TELEFLEX INC | c06141exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - TELEFLEX INC | c06141exv32w1.htm |
EXCEL - IDEA: XBRL DOCUMENT - TELEFLEX INC | Financial_Report.xls |
Exhibit 99.1
The following risk factors were included on pages S-11 to S-26, S-28, S-29 and S-32 to S-34 of
the Companys Prospectus Supplement, dated August 3, 2010 (to the Prospectus dated August 2, 2010)
and are incorporated by reference into Part II, Item 1A of the quarterly report on Form 10-Q to
which this Exhibit 99.1 is filed as an exhibit.
RISK FACTORS
An investment in our securities may involve various risks. Prior to making a decision about
investing in our securities, and in consultation with your own financial and legal advisors, you
should carefully consider, among other matters, the risks described below as well as other
information and data included in, or incorporated by reference into, this prospectus supplement and
accompanying prospectus. If any of the events described in the risk factors below occur, our
business, financial condition, operating results and prospects could be materially adversely
affected, which in turn could adversely affect our ability to repay the notes or the trading price
of the notes and our common stock.
Risks Related to Our Business
Our Medical Segment is subject to extensive government regulation, which may require us to incur
significant expenses to ensure compliance. Our failure to comply with those regulations could have
a material adverse effect on our results of operations and financial condition.
The products within our Medical Segment are classified as medical devices and are subject to
extensive regulation in the United States by the FDA and by comparable government agencies in other
countries. The regulations govern the development, design, approval, manufacturing, labeling,
importing and exporting and sale and marketing of many of our medical products. These regulations
are also subject to future change. Failure to comply with applicable regulations and quality
assurance guidelines could lead to manufacturing shutdowns, product shortages, delays in product
manufacturing, product seizures, recalls, operating restrictions, withdrawal or suspension of
required licenses, and prohibitions against exporting of products to, or importing products from,
countries outside the United States. We could be required to expend significant financial and human
resources to remediate failures to comply with applicable regulations and quality assurance
guidelines. See, for example, If we are unable to resolve issues raised in our FDA corporate
warning letter, it could have a material adverse effect on our business, financial condition and
results of operations, our relationship with the FDA and the perception of our products by
hospitals, clinics and physicians. In addition, civil and criminal penalties, including exclusion
under Medicaid or Medicare, could result from regulatory violations. Any one or more of these
events could have a material adverse effect on our business, financial condition and results of
operations.
In the United States, before we can market a new medical device, or a new use of, or claim
for, or significant modification to, an existing product, we must first receive either 510(k)
clearance or approval of a premarket approval, or PMA, application from the FDA, unless an
exemption applies. In the 510(k) clearance process, the FDA must determine that our proposed
product is substantially equivalent to a device legally on the market, known as a predicate
device, with respect to intended use, technology and safety and effectiveness, in order to clear
the proposed device for marketing. The PMA pathway requires us to demonstrate the safety and
effectiveness of the device based, in part, on data obtained in human clinical trials. Similarly,
most major markets for medical devices outside the United States also require clearance, approval
or compliance with certain standards before a product can be commercially marketed. The process of
obtaining regulatory clearances and approvals to market a medical device, particularly from the FDA
and certain foreign governmental authorities, can be costly and time consuming, and clearances and
approvals might not be granted for new products on a timely basis, if at all. In addition,
once a device has been cleared or approved, a new clearance or approval may be required before
the device may be modified or its labelling changed. Furthermore, the FDA is currently reviewing
its 510(k) clearance process, and may make the process more rigorous, which could require us to
generate additional clinical or other data, and expend more time and effort, in obtaining future
510(k) product clearance. The regulatory clearance and approval process may result in, among other
things, delayed realization of product revenues, in substantial additional costs or in limitations
on indicated uses of products, any one of which could have a material adverse effect on our
financial condition and results of operations.
Even after a product has received marketing approval or clearance, such product approval or
clearance by the FDA can be withdrawn or limited due to unforeseen problems with the device or
integrity issues relating to the marketing application. Later discovery of violations of FDA
requirements for medical devices could result in FDA enforcement actions, including warning
letters, fines, delays or suspensions of regulatory clearances, product seizures or recalls,
injunctions, advisories or other field actions, and/or operating restrictions. Medical devices are
cleared or approved for one or more specific intended uses. Promoting a device for an off-label use
could result in FDA enforcement action.
Furthermore, our Medical Segment facilities are subject to periodic inspection by the FDA and
other federal, state and foreign governmental authorities, which require manufacturers of medical
devices to adhere to certain regulations, including the Quality System Regulation which requires
testing, complaint handling, periodic audits, design controls, quality control testing and
documentation procedures. FDA may also inspect for compliance with Medical Device Reporting
Regulation, which requires manufacturers to submit reports to FDA of certain adverse events or
malfunctions, and whether the facilities have submitted notifications of product recalls or other
corrective actions in accordance with FDA regulations. Issues identified during such periodic
inspections may result in warning letters, manufacturing shutdowns, product shortages, product
seizures or recalls, fines and delays in product manufacturing, and may require significant
resources to resolve.
Customers in our Medical Segment depend on third party coverage and reimbursement and the failure
of healthcare programs to provide coverage and reimbursement, or the reduction in levels of
reimbursement, for our medical products could adversely affect our Medical Segment.
The ability of our customers to obtain coverage and reimbursements for our medical products is
important to our Medical Segment. Demand for many of our existing and new medical products is, and
will continue to be, affected by the extent to which government healthcare programs and private
health insurers reimburse our customers for patients medical expenses in the countries where we do
business. Even when we develop or acquire a promising new product, we may find limited demand for
the product unless reimbursement approval is obtained from private and governmental third party
payors. Internationally, healthcare reimbursement systems vary significantly, with medical centers
in some countries having fixed budgets, regardless of the level of patient treatment. Other
countries require application for, and approval of, government or third party reimbursement.
Without both favorable coverage determinations by, and the financial support of, government and
third party insurers, the market for many of our medical products could be adversely affected.
We cannot be sure that third party payors will maintain the current level of coverage and
reimbursement to our customers for use of our existing products. Adverse coverage determinations or
any reduction in the amount of reimbursement could harm our business by altering the extent to
which potential customers select our products and the prices they are willing to pay or otherwise.
In addition, as a result of their purchasing power and continually rising healthcare costs, third
party payors are implementing cost cutting measures such as discounts, price reductions,
limitations on coverage and reimbursement for new medical technologies and procedures, or other
incentives from medical products suppliers. These trends could lead to pressure to reduce prices
for our existing products and potential new
products and could cause a decrease in the size of the market or a potential increase in
competition that could negatively affect our business, financial condition and results of
operations.
We may incur material losses and costs as a result of product liability and warranty claims that
may be brought against us and recalls, which may adversely affect our results of operations and
financial condition. Furthermore, as a medical device company, we face an inherent risk of damage
to our reputation if one or more of our products are, or are alleged to be, defective.
Our businesses expose us to potential product liability risks that are inherent in the design,
manufacture and marketing of our products. In particular, our medical device products are often
used in surgical and intensive care settings with seriously ill patients. Many of these products
are designed to be implanted in the human body for varying periods of time, and component failures,
manufacturing flaws, design defects or inadequate disclosure of product-related risks with respect
to these or other products we manufacture or sell could result in an unsafe condition or injury to,
or death of, the patient. As a result, we face an inherent risk of damage to our reputation if one
or more of our products are, or are alleged to be, defective. In addition, our products for the
aerospace and commercial industries are used in potentially hazardous environments. Although we
carry product liability insurance, we may be exposed to product liability and warranty claims in
the event that our products actually or allegedly fail to perform as expected or the use of our
products results, or is alleged to result, in bodily injury and/or property damage. The outcome of
litigation, particularly any class-action lawsuits, is difficult to quantify. Plaintiffs often seek
recovery of very large or indeterminate amounts, including punitive damages. The magnitude of the
potential losses relating to these lawsuits may remain unknown for substantial periods of time and
the cost to defend against any such litigation may be significant. Accordingly, we could experience
material warranty or product liability losses in the future and incur significant costs to defend
these claims.
In addition, if any of our products are, or are alleged to be, defective, we may voluntarily
participate, or be required by applicable regulators, to participate in a recall of that product if
the defect or the alleged defect relates to safety. In the event of a recall, we may experience
lost sales and be exposed to individual or class-action litigation claims and reputational risk.
Product liability, warranty and recall costs may have a material adverse effect on our business,
financial condition and results of operations.
We are subject to healthcare fraud and abuse laws, regulation and enforcement; our failure to
comply with those laws could have a material adverse effect on our results of operations and
financial conditions.
We are also subject to healthcare fraud and abuse regulation and enforcement by the federal
government and the states and foreign governments in which we conduct our business. The laws that
may affect our ability to operate include:
| the federal healthcare programs Anti-Kickback Law, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs; |
| federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent; |
| the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), which created federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters; and |
| state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers. |
If our operations are found to be in violation of any of the laws described above or any other
governmental regulations that apply to us, we may be subject to penalties, including civil and
criminal penalties, damages, fines, the curtailment or restructuring of our operations, the
exclusion from participation in federal and state healthcare programs and imprisonment, any of
which could adversely affect our ability to operate our business and our financial results. The
risk of our being found in violation of these laws is increased by the fact that many of them have
not been fully interpreted by the regulatory authorities or the courts, and their provisions are
open to a variety of interpretations.
Further, the recently enacted the Patient Protection and Affordable Care Act, as amended by
the Health Care and Education Affordability Reconciliation Act (collectively, the Healthcare
Reform Act), among other things, amends the intent requirement of the federal anti-kickback and
criminal health care fraud statutes. A person or entity no longer needs to have actual knowledge of
this statute or specific intent to violate it. In addition, the Healthcare Reform Act provides that
the government may assert that a claim including items or services resulting from a violation of
the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false
claims statutes. Any action against us for violation of these laws, even if we successfully defend
against it, could cause us to incur significant legal expenses and divert our managements
attention from the operation of our business.
The Healthcare Reform Act also imposes new reporting and disclosure requirements on device
manufacturers for any transfer of value made or distributed to prescribers and other healthcare
providers, effective March 30, 2013. Such information will be made publicly available in a
searchable format beginning September 30, 2013. In addition, device manufacturers will also be
required to report and disclose any investment interests held by physicians and their immediate
family members during the preceding calendar year. Failure to submit required information may
result in civil monetary penalties of up to an aggregate of $150,000 per year (and up to an
aggregate of $1 million per year for knowing failures), for all payments, transfers of value or
ownership or investment interests not reported in an annual submission.
In addition, there has been a recent trend of increased federal and state regulation of
payments made to physicians for marketing. Some states, such as California, Massachusetts and
Vermont, mandate implementation of commercial compliance programs, along with the tracking and
reporting of gifts, compensation, and other remuneration to physicians. The shifting commercial
compliance environment and the need to build and maintain robust and expandable systems to comply
with multiple jurisdictions with different compliance and/or reporting requirements increases the
possibility that a healthcare company may run afoul of one or more of the requirements.
If we are unable to resolve issues raised in our FDA corporate warning letter, it could have a
material adverse effect on our business, financial condition and results of operations, our
relationship with the FDA and the perception of our products by hospitals, clinics and physicians.
On October 11, 2007, our subsidiary Arrow received a corporate warning letter from the FDA.
The letter expressed concerns with Arrows quality systems, including complaint handling,
corrective and preventive action, process and design validation, inspection and training
procedures. It also advised that
Arrows corporate-wide program to evaluate, correct and prevent quality system issues had been
deficient.
Our efforts to address the issues raised in the corporate warning letter have required the
dedication of significant internal and external resources. We developed a comprehensive plan to
correct these previously-identified regulatory issues and further improve overall quality systems
and have substantially implemented the measures outlined in the plan. From the end of 2009 to the
beginning of 2010, the FDA reinspected the Arrow facilities covered by the corporate warning letter
and notified us of observations from those inspections. We have responded to the observations
issued by the FDA.
In the third quarter of 2010, we began submitting requests for certificates to foreign
governments, or CFGs, to the FDA for review, and recently received approvals of 41 of our 85
submitted requests. We believe that the FDAs approval of these CFG requests is an indication that
we have substantially corrected the quality system issues identified in the corporate warning
letter. We have now submitted all of our currently eligible CFG requests to the FDA for review and
anticipate receiving the FDAs approval with respect to most of these requests in the third quarter
of 2010. We will, however, continue to be unable to sell those products in those countries for
which we do not currently have valid CFGs until we receive approvals with respect to those CFGs,
and we cannot assure you we will receive approval of these CFG requests in the anticipated period
of time, if at all.
While we continue to believe we have substantially remediated the issues raised in the
corporate warning letter through the corrective actions taken to date, we have not received
agreement with the FDA on final resolution of all outstanding issues. If our remedial actions are
not satisfactory to the FDA, we may have to devote additional financial and human resources to our
efforts, and the FDA may take further regulatory actions against us. These actions may include
seizing our product inventory, assessing civil monetary penalties or seeking an injunction against
us, which could in turn have a material adverse effect on our business, financial condition and
results of operations.
Health care reform, including the recently enacted legislation, may have a material adverse effect
on our industry and our results of operations.
Political, economic and regulatory influences are subjecting the health care industry to
fundamental changes. In March 2010, the Healthcare Reform Act was enacted. It substantially changes
the way health care is financed by both governmental and private insurers, encourages improvements
in the quality of health care items and services, and significantly impacts the U.S. pharmaceutical
and medical device industries. Among other things, the Healthcare Reform Act:
| establishes a 2.3% deductible excise tax on any entity that manufactures or imports certain medical devices offered for sale in the United States, beginning 2013; |
| establishes a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research; |
| implements payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain health care services through bundled payment models, beginning on or before January 1, 2013; and |
| creates an independent payment advisory board that will submit recommendations to reduce Medicare spending if projected Medicare spending exceeds a specified growth rate. |
We currently estimate the impact of the 2.3% deductible excise tax to be approximately $16.0
million annually, beginning 2013. However, we cannot predict at this time the full impact of the
Healthcare Reform Act and/or other healthcare reform measures that may be adopted in the future on
our financial condition, results of operations and cash flow.
An interruption in our manufacturing operations and/or our supply of raw materials may adversely
affect our business.
Many of our key products across all three of our business segments are manufactured at single
locations, with limited alternate facilities. If an event occurs that results in damage to one or
more of our facilities, it may not be possible to timely manufacture the relevant products at
previous levels or at all. In addition, in the event of delays or cancellations in shipments of raw
materials by our suppliers, it may not be possible to timely manufacture the affected products at
previous levels or at all. Furthermore, with respect to our Medical Segment, in the event of a
disruption in our supply of certain components or materials, due to the stringent regulations and
requirements of the FDA and other regulatory authorities regarding the manufacture of our products,
we may not be able to quickly establish additional or replacement sources for such components or
materials. A reduction or interruption in manufacturing, or an inability to secure alternative
sources of raw materials or components that are acceptable to us, could have an adverse effect on
our business, results of operations and financial condition.
We depend upon relationships with physicians and other health care professionals.
The research and development of some of our medical products is dependent on our maintaining
strong working relationships with physicians and other health care professionals. We rely on these
professionals to provide us with considerable knowledge and experience regarding our medical
products and the development of our medical products. Physicians assist us as researchers, product
consultants, inventors and as public speakers. If we fail to maintain our working relationships
with physicians and receive the benefits of their knowledge, advice and input, our medical products
may not be developed and marketed in line with the needs and expectations of the professionals who
use and support our products, which could have a material adverse effect on our business, financial
condition and results of operations.
We face strong competition. Our failure to successfully develop and market new products could
adversely affect our results.
The medical device industry across all of our different product lines, as well as in each
geographic market in which our products are sold, is highly competitive. We compete with many
medical device companies ranging from small start-up enterprises which might only sell a single or
limited number of competitive products or which may participate only in a specific market segment,
to companies that are larger and more established than us with access to significant financial and
marketing resources.
In addition, the medical device industry is characterized by extensive product research and
development and rapid technological advances. Also, while our products for the aerospace and
commercial industries generally have longer life cycles, many of those products require changes in
design or other enhancements to meet the evolving needs of our customers. The future success of our
business will depend, in part, on our ability to design and manufacture new competitive products
and to enhance existing products. Our product development efforts may require substantial
investment by us. There can be no assurance that unforeseen problems will not occur with respect to
the development, performance or market acceptance of new technologies or products, such as the
inability to:
| identify viable new products; |
| obtain adequate intellectual property protection; |
| gain market acceptance of new products; or |
| successfully obtain regulatory approvals. |
Moreover, we may not otherwise be able to successfully develop and market new products or
enhance existing products. In addition, our competitors may currently be developing, or may develop
and market in the future, technologies that are more effective than those that we develop or which
may render our products obsolete. Our failure to successfully develop and market new products or
enhance existing products could reduce our revenues and margins, which would have an adverse effect
on our business, financial condition and results of operations.
We are subject to risks associated with our non-U.S. operations.
We have significant manufacturing and distribution facilities, research and development
facilities, sales personnel and customer support operations outside the United States in countries
such as Canada, Belgium, the Czech Republic, France, Germany, Ireland, Malaysia, Mexico, Norway and
Singapore. As of December 31, 2009, approximately 41% of our net property, plant and equipment was
located outside the United States. In addition, approximately 48% of our net revenues (based on
business unit location) were derived from operations outside the United States. Approximately 69%
of our full-time and temporary employees as of December 31, 2009 were employed in countries outside
of the United States.
Our international operations are subject to varying degrees of risk inherent in doing business
outside the United States, including:
| exchange controls, currency restrictions and fluctuations in currency values; |
| trade protection measures; |
| potentially costly and burdensome import or export requirements; |
| laws and business practices that favor local companies; |
| changes in non-U.S. medical reimbursement policies and procedures; |
| subsidies or increased access to capital for firms who are currently or may emerge as competitors in countries in which we have operations; |
| scrutiny of foreign tax authorities which could result in significant fines, penalties and additional taxes being imposed on us; |
| potentially negative consequences from changes in tax laws; |
| restrictions and taxes related to the repatriation of foreign earnings; |
| differing labor regulations; |
| additional U.S. and foreign government controls or regulations; |
| difficulties in the protection of intellectual property; and |
| unsettled political and economic conditions and possible terrorist attacks against American interests. |
In addition, the U.S. Foreign Corrupt Practices Act (the FCPA) and similar worldwide
anti-bribery laws in non-U.S. jurisdictions generally prohibit companies and their intermediaries
from making improper payments to non-U.S. officials for the purpose of obtaining or retaining
business. The FCPA also imposes accounting standards and requirements on publicly traded U.S.
corporations and their foreign affiliates, which are intended to prevent the diversion of corporate
funds to the payment of bribes and other improper payments, and to prevent the establishment of
off books slush funds from which such improper payments can be made. Because of the predominance
of government-sponsored health care systems around the world, many of our customer relationships
outside of the United States are with governmental entities and are therefore subject to such
anti-bribery laws. Our policies mandate compliance with these anti-bribery laws. Despite our
training and compliance programs, our internal control policies and procedures may not always
protect us from reckless or criminal acts committed by our employees or agents. Violations of these
laws, or allegations of such violations, could disrupt our operations, involve significant
management distraction and result in a material adverse effect on our business, financial condition
and results of operations. We also could suffer severe penalties, including criminal and civil
penalties, disgorgement and other remedial measures, including further changes or enhancements to
our procedures, policies and controls, as well as potential personnel changes and disciplinary
actions.
Furthermore, we are subject to the export controls and economic embargo rules and regulations
of the United States, including, but not limited to, the Export Administration Regulations and
trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets
Control within the Department of the Treasury as well as the laws and regulations administered by
the Department of Commerce. These regulations limit our ability to market, sell, distribute or
otherwise transfer our products or technology to prohibited countries or persons. While we train
our employees and contractually obligate our distributors to comply with these regulations, we
cannot assure you that there will not be a violation, whether knowingly or inadvertently. Failure
to comply with these rules and regulations may result in substantial penalties, including fines and
enforcement actions and civil and/or criminal sanctions, the disgorgement of profits and the
imposition of a court-appointed monitor, as well as the denial of export privileges, and debarment
from participation in U.S. government contracts, and may have an adverse effect on our reputation.
These and other factors may have a material adverse effect on our international operations or
on our business, results of operations and financial condition generally.
Further adverse developments in general domestic and global economic conditions combined with a
continuation of volatile global credit markets could adversely impact our operating results,
financial condition and liquidity.
We are subject to risks arising from adverse changes in general domestic and global economic
conditions, including recession or economic slowdown and disruption of credit markets. The credit
and capital markets experienced extreme volatility and disruption over the past year, leading to
recessionary conditions and depressed levels of consumer and commercial spending. These
recessionary conditions have caused customers to reduce, modify, delay or cancel plans to purchase
our products and services. While recent indicators suggest modest improvement in the United States
and global economy, we cannot predict the timing or extent of any economic recovery or the extent
to which our customers will return to more normalized spending behaviors. If the recessionary
conditions continue or worsen, our customers
may terminate existing purchase orders or reduce the volume of products or services they
purchase from us in the future.
Adverse economic and financial market conditions may also cause our suppliers to be unable to
meet their commitments to us or may cause suppliers to make changes in the credit terms they extend
to us, such as shortening the required payment period for outstanding accounts receivable or
reducing the maximum amount of trade credit available to us. These types of actions by our
suppliers could significantly affect our liquidity and could have a material adverse effect on our
results of operations and financial condition. If we are unable to successfully anticipate changing
economic and financial market conditions, we may be unable to effectively plan for and respond to
those changes, and our business could be negatively affected.
In addition, the amount of goodwill and other intangible assets on our consolidated balance
sheet have increased significantly in recent years, primarily as a result of the acquisition of
Arrow International in 2007. Adverse economic and financial market conditions may result in future
charges to recognize impairment in the carrying value of our goodwill and other intangible assets,
which could have a material adverse effect on our financial results.
Foreign currency exchange rate, commodity price and interest rate fluctuations may adversely affect
our results.
We are exposed to a variety of market risks, including the effects of changes in foreign
currency exchange rates, commodity prices and interest rates. We expect revenue from products
manufactured in, and sold into, non-U.S. markets to continue to represent a significant portion of
our net revenue. Our consolidated financial statements reflect translation of financial statements
denominated in non-U.S. currencies to U.S. dollars, our reporting currency. When the U.S. dollar
strengthens or weakens in relation to the foreign currencies of the countries where we sell or
manufacture our products, such as the euro, our U.S. dollar-reported revenue and income will
fluctuate. Although we have entered into forward contracts with several major financial
institutions to hedge a portion of projected cash flows denominated in non-functional currency in
order to reduce the effects of currency rate fluctuations, changes in the relative values of
currencies may, in some instances, have a significant effect on our results of operations.
Many of our products have significant plastic resin content. We also use quantities of other
commodities, such as aluminum. Increases in the prices of these commodities could increase the
costs of our products and services. We may not be able to pass on these costs to our customers,
particularly with respect to those products we sell pursuant to group purchase agreements, and this
could have a material adverse effect on our results of operations and cash flows.
Increases in interest rates may adversely affect the financial health of our customers and
suppliers and thus adversely affect their ability to buy our products and supply the components or
raw materials we need, which could have a material adverse effect on our results of operations and
cash flows.
Our strategic initiatives may not produce the intended growth in revenue and operating income.
Our strategies include making significant investments to achieve revenue growth and margin
improvement targets. If we do not achieve the expected benefits from these investments or otherwise
fail to execute on our strategic initiatives, we may not achieve the growth improvement we are
targeting and our results of operations may be adversely affected.
In addition, as part of our strategy for growth, we have made, and may continue to make,
acquisitions and divestitures and enter into strategic alliances such as joint ventures and joint
development
agreements. However, we may not be able to identify suitable acquisition candidates, complete
acquisitions or integrate acquisitions successfully, and our strategic alliances may not prove to
be successful. In this regard, acquisitions involve numerous risks, including difficulties in the
integration of the operations, technologies, services and products of the acquired companies and
the diversion of managements attention from other business concerns. Although our management will
endeavor to evaluate the risks inherent in any particular transaction, there can be no assurance
that we will properly ascertain all such risks. In addition, prior acquisitions have resulted, and
future acquisitions could result, in the incurrence of substantial additional indebtedness and
other expenses. 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.
We may not be successful in achieving expected operating efficiencies and sustaining or improving
operating expense reductions, and may experience business disruptions associated with announced
restructuring, realignment and cost reduction activities.
Over the past few years we have announced several restructuring, realignment and cost
reduction initiatives, including significant realignments of our businesses, employee terminations
and product rationalizations. While we have started to realize the efficiencies of these actions,
these activities may not produce the full efficiency and cost reduction benefits we expect.
Further, such benefits may be realized later than expected, and the ongoing costs of implementing
these measures may be greater than anticipated. If these measures are not successful or
sustainable, we may undertake additional realignment and cost reduction efforts, which could result
in future charges. Moreover, our ability to achieve our other strategic goals and business plans
may be adversely affected and we could experience business disruptions with customers and elsewhere
if our restructuring and realignment efforts prove ineffective.
Fluctuations in our effective tax rate and changes to tax laws may adversely affect our results.
As a company with significant operations outside of the United States, we are subject to
taxation in numerous countries, states and other jurisdictions. As a result, our effective tax rate
is derived from a combination of applicable tax rates in the various countries, states and other
jurisdictions in which we operate. In preparing our financial statements, we estimate the amount of
tax that will become payable in each of the countries, states and other jurisdictions in which we
operate. Our effective tax rate may, however, be lower or higher than experienced in the past due
to numerous factors, including a change in the mix of our profitability from country to country,
changes in accounting for income taxes and changes in tax laws. Any of these factors could cause us
to experience an effective tax rate significantly different from previous periods or our current
expectations, which could have an adverse effect on our business and results of operations.
In addition, unfavorable results of tax audits and changes in tax laws in jurisdictions in
which we operate, among other things, could adversely affect our results of operations and cash
flows.
Our technology is important to our success, and our failure to protect our intellectual property
rights could put us at a competitive disadvantage.
We rely on the patent, trademark, copyright and trade secret laws of the United States and
other countries to protect our proprietary rights. Although we own numerous U.S. and foreign
patents and have applied for numerous patent applications, we cannot assure you that any pending
patent applications will issue, or that any patents, issued or pending, will provide us with any
competitive advantage or will not be challenged, invalidated or circumvented by third parties. In
addition, we rely on confidentiality and non-disclosure agreements with employees and take other
measures to protect our know-how and trade secrets. The steps we have taken may not prevent unauthorized use of our technology by
unauthorized parties or competitors who may copy or otherwise obtain and use these products or
technology, particularly in foreign countries where the laws may not protect our proprietary rights
as fully as in the United States. There is no guarantee that current and former employees,
contractors and other parties will not breach their confidentiality agreements with us,
misappropriate proprietary information or copy or otherwise obtain and use our information and
proprietary technology without authorization or otherwise infringe on our intellectual property
rights. Moreover, there can be no assurance that others will not independently develop the know-how
and trade secrets or develop better technology than our own, which could reduce or eliminate any
competitive advantage we have developed. Our inability to protect our proprietary technology could
result in competitive harm that could adversely affect our business.
Our products or processes may infringe the intellectual property rights of others, which may cause
us to pay unexpected litigation costs or damages or prevent us from selling our products.
We cannot be certain that our products do not and will not infringe issued patents or other
intellectual property rights of third parties. We may be subject to legal proceedings and claims in
the ordinary course of our business, including claims of alleged infringement of the intellectual
property rights of third parties. Any such claims, whether or not meritorious, could result in
litigation and divert the efforts of our personnel. If we are found liable for infringement, we may
be required to enter into licensing agreements (which may not be available on acceptable terms or
at all) or to pay damages and to cease making or selling certain products. We may need to redesign
some of our products or processes to avoid future infringement liability. Any of the foregoing
could be detrimental to our business.
Other pending and future litigation may lead us to incur significant costs and have an adverse
effect on our business.
We also are party to various lawsuits and claims arising in the normal course of business
involving contracts, intellectual property, import and export regulations, employment and
environmental matters. The defense of these lawsuits may divert our managements attention, and we
may incur significant expenses in defending these lawsuits. In addition, we may be required to pay
damage awards or settlements, or become subject to injunctions or other equitable remedies, that
could have a material adverse effect on our financial condition and results of operations. While we
do not believe that any litigation in which we are currently engaged would have such an adverse
effect, the outcome of litigation, including regulatory matters, is often difficult to predict, and
we cannot assure that the outcome of pending or future litigation will not have a material adverse
effect on our business, financial condition or results of operations.
Our operations expose us to the risk of material environmental liabilities, litigation and
violations.
We are subject to numerous foreign, federal, state and local environmental protection and
health and safety laws governing, among other things:
| the generation, storage, use and transportation of hazardous materials; |
| emissions or discharges of substances into the environment; and |
| the health and safety of our employees. |
These laws and government regulations are complex, change frequently and have tended to become
more stringent over time. We cannot provide assurance that our costs of complying with current or
future environmental protection and health and safety laws, or our liabilities arising from past or
future
releases of, or exposures to, hazardous substances will not exceed our estimates or will not
adversely affect our financial condition and results of operations. Moreover, we may become subject
to additional environmental claims, which may include claims for personal injury or cleanup, based
on our past, present or future business activities, which could also adversely affect our financial
condition and results of operations.
Our Aerospace Segment is subject to government regulation, which may require us to incur expenses
to ensure compliance. Our failure to comply with those regulations could have adverse effect on our
results of operations.
The U.S. Federal Aviation Administration (the FAA) regulates the manufacture and sale of
some of our aerospace products and licenses for the operation of our repair stations. Comparable
agencies, such as the European Aviation Safety Agency in Europe (the EASA), regulate these
matters in other countries. If we fail to qualify for or obtain a required license for one of our
products or services or lose a qualification or license previously granted, the sale of the subject
product or service would be prohibited by law until such license is obtained or renewed and our
business, financial condition and results of operations could be materially adversely affected. In
addition, designing new products to meet existing regulatory requirements and retrofitting
installed products to comply with new regulatory requirements can be expensive and time consuming.
From time to time, the FAA, the EASA or comparable agencies propose new regulations or changes
to existing regulations. These changes or new regulations generally increase the costs of
compliance. To the extent the FAA, the EASA or comparable agencies implement regulatory changes, we
may incur significant additional costs to achieve compliance.
If we fail to establish and maintain proper and effective internal controls, our ability to produce
accurate financial statements on a timely basis could be impaired, which would adversely affect our
consolidated results, and our ability to operate our business and our stock price.
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting to provide reasonable assurance regarding the reliability of our financial
reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles in the United States.
Any failure on our part to remedy any identified control deficiencies, or any delays or errors
in our financial reporting, would have a material adverse effect on our business, results of
operations, or financial condition.
Our workforce covered by collective bargaining and similar agreements could cause interruptions in
our provision of products and services.
Approximately 13% of our net revenues are generated by operations for which a significant part
of our workforce is covered by collective bargaining agreements and similar agreements in foreign
jurisdictions. It is likely that a portion of our workforce will remain covered by collective
bargaining and similar agreements for the foreseeable future. Strikes or work stoppages could occur
that would adversely impact our relationships with our customers and our ability to conduct our
business.
Risks Related to Our Indebtedness and This Offering
Our substantial indebtedness could adversely affect our business, financial condition or results of
operations and prevent us from fulfilling our obligations under the notes.
We have and, after this offering, will continue to have a significant amount of indebtedness.
As of June 27, 2010, we had total consolidated indebtedness of $1,169.7 million on an actual basis
and would have had $1,133.1 million (which amount, with respect to the notes, reflects the face
amount of the notes) on an as adjusted basis after giving effect to the Refinancing Transactions.
Our substantial level of indebtedness increases the risk that we may be unable to generate
cash sufficient to pay amounts due in respect of our indebtedness, including the notes. It could
also have significant effects on our business. For example, it could:
| make it more difficult for us to satisfy our obligations with respect to the notes; |
| increase our vulnerability to general adverse economic and industry conditions; |
| require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes; |
| limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate; |
| restrict us from exploiting business opportunities; |
| place us at a competitive disadvantage compared to our competitors that have less indebtedness; and |
| limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general corporate purposes. |
Despite current substantial indebtedness levels, we and our subsidiaries may still be able to incur
substantially more indebtedness. This could further exacerbate the risks associated with our
substantial leverage.
We and our subsidiaries may be able to incur substantial additional indebtedness in the
future, including secured indebtedness. For example, as of June 27, 2010, on an as adjusted basis
after giving effect to the Refinancing Transactions, after taking into account the limitations
under the covenants under the Credit Facilities and the Existing Senior Notes, we would have had
approximately $345.4 million borrowing capacity, consisting of $311.0 million of aggregate
borrowing capacity under our revolving credit facility and $34.4 million of borrowing capacity
under our accounts receivable securitization facility. Except for the limitation on our ability to
incur any indebtedness that is subordinated in right of payment to any senior indebtedness and
senior in right of payment to the notes, the indenture does not limit the amount of indebtedness
which may be issued by us or our subsidiaries under the indenture or otherwise. Adding new
indebtedness to current debt levels could make it more difficult for us to satisfy our obligations
with respect to the notes.
Our indebtedness may restrict our current and future operations, which could adversely affect our
ability to respond to changes in our business and to manage our operations.
The Credit Facilities and Existing Senior Notes contain financial and other restrictive
covenants that limit our ability to engage in activities that may be in our long-term best
interests such as incur debt, create liens, consolidate, merge or dispose of certain assets, make
certain investments and engage in certain acquisitions. Our failure to comply with those covenants
could result in an event of default which, if not cured or waived, could result in the acceleration
of all of our debts.
We may not be able to generate sufficient cash to service all of our indebtedness, including the
notes. Our ability to generate cash depends on many factors beyond our control. We may be forced to
take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make payments on, and to refinance, our indebtedness, including the notes, and
to fund planned capital expenditures, research and development efforts, working capital,
acquisitions and other general corporate purposes depends on our ability to generate cash in the
future. This, to a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors, some of which are beyond our control. If we do not
generate sufficient cash flow from operations or if future borrowings are not available to us in an
amount sufficient to pay our indebtedness, including the notes, or to fund our liquidity needs, we
may be forced to:
| refinance all or a portion of our indebtedness, including the notes, on or before the maturity thereof; |
| sell assets; |
| reduce or delay capital expenditures; or |
| seek to raise additional capital. |
In addition, we may not be able to affect any of these actions on commercially reasonable
terms or at all. Our ability to refinance this indebtedness will depend on our financial condition
at the time, the restrictions in the instruments governing our indebtedness and other factors,
including market conditions. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to
refinance or restructure our obligations on commercially reasonable terms or at all, would have an
adverse effect, which could be material, on our business, financial condition and results of
operations, as well as our ability to satisfy our obligations in respect of the notes.
We are a holding company. Substantially all of our business is conducted through our subsidiaries.
Our ability to repay our debt, including the notes, depends on the performance of our subsidiaries
and their ability to make distributions to us. Claims of noteholders will be structurally
subordinated to claims of creditors of our subsidiaries because our subsidiaries will not guarantee
the notes.
We are a holding company. Substantially all of our business is conducted through our
subsidiaries, which are separate and distinct legal entities. Therefore, our ability to service our
indebtedness, including the notes, is dependent on the earnings and the distribution of funds
(whether by dividend, distribution or loan) from our subsidiaries. None of our subsidiaries is
obligated to make funds available to us for payment on the notes. We cannot assure you that the
agreements governing the existing and future indebtedness of our subsidiaries will permit our
subsidiaries to provide us with sufficient dividends, distributions or loans to fund payments on
the notes when due. In addition, any payment of
dividends, distributions or loans to us by our subsidiaries could be subject to restrictions on
dividends or repatriation of earnings under applicable local law and monetary transfer restrictions
in the jurisdictions in which our subsidiaries operate. Furthermore, payments to us by our
subsidiaries will be contingent upon our subsidiaries earnings.
We may not pay dividends on our common stock in the future.
Holders of our common stock are only entitled to receive dividends as our board of directors
may declare out of funds legally available for such payments. The declaration and payment of future
dividends to holders of our common stock will be at the discretion of our board of directors and
will depend upon many factors, including our financial condition, earnings, compliance with debt
instruments, legal requirements and other factors as our board of directors deems relevant. We
cannot assure you that the current $0.34 quarterly cash dividend will not be reduced, or
eliminated, in the future.
The contingent conversion features of the notes, if triggered, may adversely affect our financial
condition.
In the event a conversion contingency is triggered, holders of notes will be entitled to
convert the notes at any time during specified periods at their option. See Description of Notes
Conversion Rights. If one or more holders elect to convert their notes, unless we elect to satisfy
our conversion obligation by delivering solely shares of our common stock (other than cash in lieu
of any fractional shares), we would be required to settle a portion of or all of our conversion
obligation through the payment of cash, which could adversely affect our liquidity. In addition,
even if holders do not elect to convert their notes, if the method of settlement effective during
the period reflected in the financial statements is cash settlement or combination settlement, we
would be required under applicable accounting rules to reclassify all of the outstanding principal
of the notes as a current rather than long-term liability in such financial statements, which would
result in a material reduction of our net working capital.
The convertible note hedge transactions and warrant transactions may affect the value of the notes
and our common stock.
In connection with the pricing of the notes, we intend to enter into privately negotiated
convertible note hedge transactions with the hedge counterparties. The convertible note hedge
transactions cover, subject to customary anti-dilution adjustments, the number of shares of our
common stock that will initially underlie the notes sold in the offering. The convertible note
hedge transactions are expected to reduce our exposure to potential dilution with respect to our
common stock and/or reduce our exposure to potential cash payments that may be required to be made
by us upon conversion of the notes. Separately, we also intend to enter into privately negotiated
warrant transactions relating to the same number of shares of our common stock with the hedge
counterparties with a strike price of $74.648, subject to customary anti-dilution adjustments,
pursuant to which we may be obligated to issue shares of our common stock. The warrant transactions
could have a dilutive effect with respect to our common stock or, if we so elect, obligate us to
make cash payments to the extent that the market price per share of our common stock exceeds the
strike price of the warrants on any expiration date of the warrants.
In connection with establishing its initial hedges of the convertible note hedge transactions
and the warrant transactions, the hedge counterparties (and/or their affiliates):
| expect to enter into various cash-settled over-the-counter derivative transactions with respect to our common stock concurrently with, or shortly following, the pricing of the notes; and |
| may unwind these cash-settled over-the-counter derivative transactions and purchase shares of our common stock in open market transactions shortly following the pricing of the notes. |
These activities could have the effect of increasing or preventing a decline in the price of
our common stock concurrently with or shortly following the pricing of the notes. The effect,
including the direction or magnitude of the effect of these activities, if any, on the market price
of our common stock or the notes will depend on several factors, including market conditions, and
cannot be ascertained at this time.
In addition, the hedge counterparties (and/or their affiliates) expect to modify their hedge
positions following the pricing of the notes from time to time (and are likely to do so during any
conversion period related to the conversion of the notes) by entering into or unwinding various
over-the-counter derivative transactions with respect to shares of our common stock, and/or by
purchasing or selling shares of our common stock or the notes in privately negotiated transactions
and/or open market transactions. The effect, if any, of these transactions and activities on the
market price of our common stock or the notes will depend in part on market conditions and cannot
be ascertained at this time, but any of these activities could adversely affect the value of our
common stock and the value of the notes and, as a result, the value that you will receive upon the
conversion of the notes.
The decision by the hedge counterparties (and/or their affiliates) to engage in any of these
hedging transactions and discontinue any of these transactions with or without notice, once
commenced, is within the sole discretion of the hedge counterparties (and/or their affiliates).
In addition, if the convertible note hedge transactions and warrant transactions fail to
become effective, or if the offering is not completed, the hedge counterparties or their affiliates
may unwind their hedge positions with respect to our common stock, which could adversely affect the
value of our common stock and, if the notes have been issued, the value of the notes.
See Description of the Concurrent Convertible Note Hedge Transactions and Warrant
Transactions and Underwriting; Conflicts of Interest.
The convertible note hedge transactions and the warrant transactions are separate transactions
(in each case entered into by us with the hedge counterparties), are not part of the terms of the
notes and will not affect holders rights under the notes. As a holder of the notes, you will not
have any rights with respect to the convertible note hedge transaction or the warrant transactions.
We are subject to counterparty risk with respect to the convertible note hedge transactions.
Each hedge counterparty is a financial institution or the affiliate of a financial
institution, and we will be subject to the risk that one or more hedge counterparties may default
under the convertible note hedge transactions. Our exposure to the credit risk of each hedge
counterparty will not be secured by any collateral. Recent global economic conditions have resulted
in the actual or perceived failure or financial difficulties of many financial institutions,
including a bankruptcy filing by Lehman Brothers Holdings Inc. and its various affiliates. If a
hedge counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor
in those proceedings with a claim equal to our exposure at that time under the convertible note
hedge transaction with that hedge counterparty. Our exposure will depend on many factors but,
generally, the increase in our exposure will be correlated to the increase in our stock market
price and in volatility of our common stock. In addition, upon a default by a hedge counterparty,
we may suffer adverse tax consequences and dilution with respect to our common stock. We can
provide no assurances as to the financial stability or viability of the hedge counterparties.
The market price of our common stock has in the past been, and may in the future be, volatile. This
volatility may adversely affect the trading price of the notes and the price at which you could
sell shares of our common stock you receive upon conversion, if any.
The market price of our common stock has varied between a low of $42.34 on July 20, 2009 and a
high of $66.07 on April 20, 2010 in the twelve-month period ended June 30, 2010. This volatility
may affect the price at which you could sell the shares of our common stock, if any, you receive
upon conversion of your notes, and the sale of substantial amounts of our common stock could
adversely affect the price of our common stock. Our stock price is likely to continue to be
volatile and subject to significant price and volume fluctuations in response to market and other
factors, including:
| variations in our quarterly operating results from our expectations or those of securities analysts or investors; |
| strategic actions by us or our competitors, such as significant acquisitions, strategic partnerships, joint ventures or capital commitments; |
| changes in market valuations or operating performance of our competitors or companies similar to us; |
| additions and departures of key personnel; |
| downward revisions in securities analysts estimates; |
| changes in accounting standards, policies, guidance, interpretations or principles applicable to our business; |
| conditions in the industries in which we compete; |
| general global macroeconomic conditions; and |
| economic, financial, geopolitical, regulatory or judicial events that affect us or the financial markets generally. |
In addition, in recent years, the global equity markets have experienced substantial price and
volume fluctuations. This volatility has had a significant impact on the market price of securities
issued by many companies including us and other companies in our industries. The price of our
common stock could fluctuate based on factors that have little or nothing to do with our company
and are outside of our control, and these fluctuations could materially reduce the price of our
common stock and your ability to sell the shares you receive, if any, upon conversion of your notes
at a price at or above the price your paid for your investment.
We may Issue additional shares of our common stock or instruments convertible into our common
stock, including in connection with conversions of notes, which could lower the price of our common
stock and adversely affect the trading price of the notes.
Subject to lock-up provisions that apply for the first 90 days after the date of this
prospectus supplement, we are not restricted from issuing additional shares of our common stock or
other instruments convertible into our common stock during the life of the notes. As of June 27,
2010, we had outstanding approximately 39.9 million shares of our common stock, options to purchase
approximately 2.5 million shares of our common stock (of which approximately 1.5 million were
vested as of that date),
approximately 0.4 million of restricted stock awards (which are expected to vest over the next
three years) and approximately 20,000 shares of our common stock to be distributed from the
deferred compensation plan. In addition, a substantial number of shares of our common stock is
reserved for issuance upon the exercise of stock options, upon conversion of the notes and upon the
exercise of the warrants to be issued in connection with this offering. We cannot predict the size
of future issuances or the effect, if any, that they may have on the market price for our common
stock.
If we issue additional shares of our common stock or instruments convertible into our common
stock, it may materially and adversely affect the price of our common stock and, in turn, the price
of the notes. Furthermore, the conversion of some or all of the notes may dilute the ownership
interests of existing stockholders, and any sales in the public market of such shares of our common
stock issuable upon any conversion of the notes could adversely affect prevailing market prices of
our common stock. In addition, the anticipated issuance and sale of substantial amounts of common
stock or conversion of the notes into shares of our common stock could depress the price of our
common stock.
Certain provisions of our corporate governing documents and Delaware law could discourage, delay,
or prevent a merger or acquisition.
Provisions of our certificate of incorporation and bylaws could impede a merger, takeover or
other business combination involving us or discourage a potential acquirer from making a tender
offer for our common stock. For example, our certificate of incorporation authorizes our board of
directors to determine the number of shares in a series, the consideration, dividend rights,
liquidation preferences, terms of redemption, conversion or exchange rights and voting rights, if
any, of unissued series of preferred stock, without any vote or action by our stockholders. Thus,
our board of directors can authorize and issue shares of preferred stock with voting or conversion
rights that could adversely affect the voting or other rights of holders of our common stock. We
are also subject to Section 203 of the Delaware General Corporation Law, which imposes restrictions
on mergers and other business combinations between us and any holder of 15% or more of our common
stock. These provisions could have the effect of delaying or deterring a third party to acquire us
even if an acquisition might be in the best interest of our stockholders, and accordingly could
reduce the market price of our common stock and the value of your notes.
Certain provisions in the notes and the indenture could delay or prevent an otherwise beneficial
takeover or takeover attempt of us.
Certain provisions in the notes and the indenture could make it more difficult or more
expensive for a third party to acquire us. For example, if an acquisition event constitutes a
fundamental change, holders of the notes will have the right to require us to purchase their notes
in cash. In addition, if an acquisition event constitutes a make-whole fundamental change, we may
be required to increase the conversion rate for holders who convert their notes in connection with
such acquisition event. In either case, and in other cases, our obligations under the notes and the
indenture could increase the cost of acquiring us or otherwise discourage a third party from
acquiring us or removing incumbent management, and accordingly could reduce the market price of our
common stock and the value of your notes.
The accounting method for convertible debt securities that may be settled in cash, such as the
notes, could have an adverse effect on our reported financial results.
In May 2008, the Financial Accounting Standards Board, which we refer to as FASB, issued ASC
470-20. Under ASC 470-20, an entity must separately account for the liability and equity components
of the convertible debt instruments (such as the notes) that may be settled entirely or partially
in cash upon conversion in a manner that reflects the issuers economic interest cost. ASC 470-20
requires the fair value of the conversion option of the notes be reported as a component of
stockholders equity and
included in the additional paid-in-capital on our consolidated balance sheet. The value of the
conversion option of the notes will be reported as discount to the notes. We will report lower net
income in our financial results because ASC 470-20 will require interest to include both the
current periods amortization of the debt discount (non-cash interest) and the instruments cash
interest, which could adversely affect our reported or future financial results, the trading price
of our common stock and the trading price of the notes.