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UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 28, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______________ to
_______________
Commission File No. 1-5375
TECHNITROL, INC.
(Exact name of registrant as specified in Charter)
PENNSYLVANIA 23-1292472
(State of Incorporation) (IRS Employer Identification Number)
1210 Northbrook Drive, Suite 385, Trevose, Pennsylvania 19053
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 215-355-2900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each Exchange on which registered
------------------- -----------------------------------------
Common Stock par value $.125 per share
Common Stock Purchase Rights New York Stock Exchange
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 the filing
requirements for at least the past 90 days.
YES __X__ NO ____
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 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. [X]
The aggregate market value of voting stock held by non-affiliates as of February
26, 2002 is $648,978,900 computed by reference to the closing price on the New
York Stock Exchange on such date.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of February 26, 2002.
Number of shares outstanding
Title of each class February 15, 2002
------------------- -----------------
Common stock 33,683,420
par value $.125 per share
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT REFERENCE
- -------- ---------
Portions of the Registrant's definitive proxy statement Part III
to be used in connection with the Registrant's 2002 Page 40 of 77 pages
Annual Meeting of Shareholders.
Page 1 of 77
Part I
Item 1 Business
General
Technitrol, Inc. is a global producer of precision-engineered passive
magnetics-based electronic components and electrical contact products and
materials. We believe we are a leading global producer of these products and
materials in the primary markets we serve based on our estimates of the size of
our primary markets in annual revenues and our share of those markets relative
to our competitors. Passive magnetics-based electronic components are used in
virtually all types of electronic products to manage and regulate electronic
signals and power. Electrical contact products and materials are used in any
device in which the continuation or interruption of electrical currents is
necessary. In each case, our products are critical to the functioning of the end
product.
Our world-class design and manufacturing capabilities, together with the
breadth of our product offerings, provides us with a competitive advantage that
enables us to anticipate and deliver highly-customized solutions for our
customers' product needs. In addition, our global presence enables us to
participate in all relevant product and geographic markets and provides us with
proximity to our global customer base. This allows us to better understand and
more easily satisfy our customers' unique design and product requirements.
We operate our business in two distinct segments: the electronic components
segment ("ECS"), which operates under the name Pulse, and the electrical contact
products segment ("ECPS"), which operates under the name AMI Doduco. We refer to
these segments as ECS or Pulse, and ECPS or AMI Doduco, respectively.
We incorporated in Pennsylvania on April 10, 1947.
Pulse
Pulse designs and manufactures a wide variety of highly-customized passive
magnetics-based electronic components. These components manage and regulate
electronic signals and power for use in a variety of devices by filtering out
radio frequency interference and adjusting and ensuring proper current and
voltage. These products are often referred to as chokes, inductors, filters and
transformers. Pulse sells its products to multinational original equipment
manufacturers, contract manufacturers and distributors.
Pulse's products are used in a broad array of industries, including:
o telecommunications;
o enterprise networking;
o power conversion;
o automotive;
o consumer electronics; and
o military/aerospace.
Page 2 of 77
Representative end products that use Pulse's components include:
o Ethernet switches;
o voice over Internet equipment;
o broadband access equipment including cable modems and digital
subscriber line, or DSL, devices for telephone central office and home
use;
o routers;
o automotive controls;
o video game consoles;
o power supplies; and
o military/aerospace navigation and weapon guidance systems.
Pulse's products are generally characterized by short life cycles and rapid
technological change. This allows us to utilize our design and engineering
expertise to meet our customers' evolving needs. We believe that the industries
served by Pulse have been, and will continue to be, characterized by ongoing
product innovation that will drive the growth in the passive magnetics-based
electronic components industry.
Pulse represented $253.3 million, or 53.4% of our revenues for the year
ended December 28, 2001 and $438.8 million, or 66.0% of our revenues for the
year ended December 29, 2000. Excluding restructuring charges, Pulse represented
$9.4 million, or 59.8% of our operating profit in the year ended December 28,
2001 and $110.9 million, or 89.9% of our operating profit for the year ended
December 29, 2000.
AMI Doduco
We believe AMI Doduco is the only global manufacturer that produces a full
range of electrical contact products that range from contact materials to
completed contact subassemblies. Contact products complete or interrupt
electrical circuits in virtually every electrical device. AMI Doduco provides
its customers with a broad array of highly engineered products and tools
designed to meet unique customer needs. AMI Doduco sells its products to
multinational original equipment manufacturers.
AMI Doduco's products are used in a broad array of industries, including:
o appliance;
o automotive;
o building construction circuitry;
o electric power;
o commercial and industrial machinery; and
o telephone equipment.
Representative end products that use AMI Doduco's products include:
o electrical circuit breakers;
o switches and relays;
o motor and temperature controls;
o wiring devices;
Page 3 of 77
o sensors;
o power substations; and
o telephone equipment.
AMI Doduco's products are generally characterized by longer life cycles and
slower technological change, providing longer life cycle revenue streams than
Pulse's products. We believe that expansion and technological developments in
some of the industries served by AMI Doduco, particularly in the electric power,
appliance and automotive industries, along with opportunities arising from
customer outsourcing and consolidation of the electrical contact industry,
present attractive growth opportunities for AMI Doduco.
AMI Doduco represented $220.9 million, or 46.6% of our revenues for the
year ended December 28, 2001 and $225.6 million, or 34.0% of our revenues for
fiscal December 29, 2000. Excluding restructuring charges, AMI Doduco
represented $6.3 million, or 40.2% of our operating profit for the year ended
December 28, 2001 and $12.5 million, or 10.1% of our operating profit for the
year ended December 29, 2000.
Our overall strategy is to further enhance our market positions in the
passive magnetics-based electronic component and electrical contact products
industries. In order to accomplish this, we intend to focus on attractive growth
markets; utilize our engineering and design capabilities; achieve the lowest
cost, highest quality manufacturing; continue to undertake strategic
acquisitions and attractive outsourcing opportunities; and focus on economic
profit and financial flexibility.
Products
Pulse designs and manufactures a wide array of passive magnetics-based
electronic components. These products are highly-customized to address our
customers' needs. The following table contains a list of some of Pulse's key
products:
- --------------------------------------------------------------------------------------------------------------------
Primary Products Function Application
- --------------------------------------------------------------------------------------------------------------------
Discrete Filter or Choke Removes interference, or Network switches, routers, hubs
noise from circuitry and personal computers
Automotive electronics
Phone, fax and alarm systems used
with digital subscriber lines, or DSL
- --------------------------------------------------------------------------------------------------------------------
Filtered Connector, which Removes interference, or Local area networks, or LANs, and
combines a filter with a noise, from circuitry and wide area networks, or WANs
connector connects electronic applications equipment for personal computers
and video game consoles
- --------------------------------------------------------------------------------------------------------------------
Inductor/chip inductor Regulates electrical AC/DC & DC/DC power supplies
current under conditions Mobile phones and portable devices
of varying load
- --------------------------------------------------------------------------------------------------------------------
Power Transformer Modifies circuit voltage AC/DC & DC/DC power supplies
- --------------------------------------------------------------------------------------------------------------------
Signal Transformer Limits distortion of signal Analog circuitry
as it passes from one Military/aerospace navigation and
medium to another weapon guidance systems
- --------------------------------------------------------------------------------------------------------------------
Page 4 of 77
AMI Doduco designs and manufactures a wide array of contact materials,
parts and completed contact subassemblies. The following table contains a list
of some of AMI Doduco's key products:
- ----------------------------------------------------------------------------------------------------------------
Primary Products Function Application
- ----------------------------------------------------------------------------------------------------------------
Contact prematerial such Raw materials Made into our customers'
as wire and metal tapes electrical contact parts
- ----------------------------------------------------------------------------------------------------------------
Electrical contact parts, Complete or interrupt an Electrical switches, relays,
either discrete or affixed electrical circuit circuit breakers and motor controls
to precision stamped parts
- ----------------------------------------------------------------------------------------------------------------
Component subassemblies Integrate contact with precision Sensors and control devices
stampings and plastic housings
- ----------------------------------------------------------------------------------------------------------------
Within each segment, our primary products are similar in design, material
content, production process, application and customer base. We continually
introduce new or improved products in response to customers' needs and changes
within the markets served.
Sales, Marketing and Distribution
Each of Pulse and AMI Doduco sells its products predominantly through its
own separate worldwide direct sales forces. Given the highly technical nature of
our customers' needs, our direct salespeople typically team up with members of
our engineering staff to discuss a sale with a customer's sales and engineering
personnel. During the sales process, there is close engineer-to-engineer
interaction between our engineers and those in our customers' organizations.
This interaction extends throughout a product's life cycle, engendering strong
customer relationships. As of December 28, 2001, Pulse had 52 salespeople and 13
sales offices worldwide and AMI Doduco had 28 salespeople and 11 sales offices
worldwide.
We provide technical and sales support for our direct and indirect sales
force. We believe that our coordinated sales effort provides a high level of
market penetration and efficient coverage of our customers on a cost-effective
basis.
Customers and End Markets
We sell our products and services to original equipment manufacturers
("OEMs"), which design, build and market end-user products. Pulse also sells its
products to contract equipment manufacturers ("CEMs"), which are companies hired
by OEMs to manufacture their products, as well as to independent distributors,
which sell components and materials to both OEMs and CEMs. In recent years, the
trend in the electronics industry has been for many OEMs to use CEMs primarily
or exclusively to build their products. Nonetheless, OEMs often control the
decision as to which component designs best meet their needs. Accordingly, we
consider OEMs to be customers for our products even if they purchase our
products through CEMs or independent distributors. In order to maximize our
sales
Page 5 of 77
opportunities, Pulse's engineering and sales teams also maintain close
relationships with CEMs and distributors.
No customer of either Pulse or AMI Doduco accounted for more than 10% of
our net sales during the year ended December 28, 2001 or the year ended December
29, 2000. Sales to our ten largest customers accounted for 30.7% of net sales
during the year ended December 28, 2001 and 35.9% of net sales in the year ended
December 29, 2000.
An increasing percentage of our sales in recent years has been outside of
the United States. We now have operations in 12 countries. For the year ended
December 28, 2001, 64.9% of our net sales were outside of the United States.
During the year ended December 29, 2000, 55.5% of our net sales were to
customers outside of the United States. Sales made by Pulse to its customers
outside the United States accounted for 63.8% of its net sales for the year
ended December 28, 2001 and 54.7% of its net sales in the year ended December
29, 2000. Sales made by AMI Doduco to its customers outside the United States
accounted for 69.4% of its net sales for the year ended December 28, 2001 and
61.1% of its net sales in the year ended December 29, 2000.
Development and Engineering
Our development and engineering efforts are focused on the design and
development of innovative products in collaboration with our customers. We work
closely with OEMs to identify their design and engineering requirements. We
maintain strategically located design centers throughout the world where
proximity to customers enables us to better understand and more readily satisfy
their design and engineering needs. Pulse's design process is a disciplined,
orderly process that uses a product data management system to track the level of
design activity enabling us to manage and improve how our engineers design
products. Pulse typically owns the customized designs that it uses to make its
products.
Pulse's development and engineering expenditures were $16.0 million for the
year ended December 28, 2001 and $15.7 million for the year ended December 29,
2000. AMI Doduco's development and engineering expenditures were $4.2 million
for the year ended December 28, 2001 and $4.4 million in the year ended December
29, 2000. We intend to continue to invest in personnel and new technologies to
improve product performance.
Competition
We believe we are a market leader in the primary markets we serve based on
our estimates of the size of our primary markets in annual revenues and our
share of those markets relative to our competitors. We do not believe that any
one company competes with all of the product lines of either Pulse or AMI Doduco
on a global basis. However, both Pulse and AMI Doduco frequently encounter
strong competition within individual product lines, both domestically and
internationally. In addition, several OEMs internally manufacture many of the
products offered by Pulse or AMI Doduco. We believe that this represents an
opportunity to capture additional market share as OEMs decide to outsource
business. Therefore, we constantly work to identify these opportunities and to
convince these OEMs that our economies of scale, purchasing power and
manufacturing core competencies enable us to produce these products better and
more efficiently.
Page 6 of 77
Competitive factors in the markets for our products include:
o product quality and reliability;
o global design and manufacturing capabilities;
o breadth of product line;
o customer service; and
o price.
We believe we compete favorably on the basis of each of these factors.
Product quality and reliability, as well as design and manufacturing
capabilities, are enhanced through our commitment to continually invest in and
improve our manufacturing and designing resources and our close relationships
with our customers' engineers. The breadth of our product offering provides
customers with the ability to satisfy their entire magnetic component and
contact needs through one supplier. Our global presence enables us to deepen our
relationship with our customers and to better understand and more easily satisfy
the needs of local markets. In addition, our ability to purchase raw materials
in large quantities reduces our manufacturing costs, enabling us to price our
products competitively.
Employees
As of December 28, 2001, we had approximately 14,800 full-time employees as
compared to 30,600 as of December 29, 2000. Of the 14,800 full-time employees,
approximately 1,200 were located in the United States and approximately 60
employees in the United States were covered by collective-bargaining
arrangements. In addition, some foreign employees are members of trade and
government-affiliated unions. We have not experienced any major work stoppages
and consider our relations with our employees to be good. The vast majority of
the employee reductions in the year ended December 28, 2001 came from voluntary
attrition and involuntary workforce reductions at manufacturing facilities in
the PRC, where severance payments are unnecessary.
Raw Materials
Raw materials necessary for the manufacture of our products include:
o ferrite cores;
o precious metals; and
o copper, brass and bronze.
We do not currently have difficulty obtaining any of our raw materials and
do not currently anticipate that we will face any significant difficulties in
the near future. However, many of the raw materials we use are considered
commodities and are subject to price volatility. Although we are not dependent
on any one particular source of supply, several of our raw materials are only
sold by a limited number of suppliers, which may have an adverse affect on the
price of these materials. Should prices rise or a shortage occur in any
necessary raw material, our manufacturing costs will likely increase, which may
result in lower margins or decreased sales.
Page 7 of 77
AMI Doduco uses precious metals, primarily silver, in manufacturing a vast
majority of its electrical contacts, contact materials and contact
subassemblies. Historically, we have leased or held these materials through
consignment arrangements with our suppliers. Leasing and consignment costs have
been substantially below the costs to borrow funds to purchase the metals and
these arrangements eliminate the fluctuations in the market price of owned
precious metal. AMI Doduco's terms of sale allow us to charge customers for the
fabricated market value of silver on the day after we deliver the silver bearing
product to the customer. See additional discussion of precious metals on page
28.
Backlog
Our backlog of orders at December 28, 2001 was $48.2 million compared to
$182.9 million at December 29, 2000. We expect to ship the majority of the
backlog over the next six months. Customers can cancel orders at any time,
sometimes requiring a payment of cancellation charges.
We do not believe that backlog is an accurate indicator of near-term
business activity as customers may make multiple orders of the same component
from multiple sources when lead times are long and may cancel orders when
business is weak and inventories are excessive. Pulse has experienced a
significant number of cancellations and order push outs as a result of the
current downturn in the market for electronic equipment. Conversely, many of AMI
Doduco's products are repeat products which are continuously ordered by
customers by phone for delivery within several days. In addition, in the last
two years, many customers have negotiated vendor managed inventory and other
similar consignment type arrangements with us, particularly Pulse. Orders from
these arrangements typically are not reflected in backlog prior to shipment.
Intellectual Property
We own a number of patents and have acquired licenses under patents of
others under license agreements, which impose restrictions on our ability to
utilize the intellectual property. We seek to limit disclosure of our
intellectual property by generally requiring employees and consultants with
access to our proprietary information to execute confidentiality agreements with
us and by restricting access to our proprietary information.
Existing legal protections afford only limited protection for our products.
For example, others may independently develop similar or competing products or
attempt to copy or use aspects of our products that we regard as proprietary.
Furthermore, intellectual property law may not fully protect products or
technology that we consider to be our own, and claims of intellectual property
infringement may be asserted against us or against our customers in connection
with their use of our products.
While our intellectual property is important to us in the aggregate, we do
not believe any individual patent or license is material to our business or
operations.
Environmental
Our manufacturing operations are subject to a variety of local, state,
federal, and international environmental laws and regulations governing air
emissions, wastewater
Page 8 of 77
discharges, the storage, use, handling, disposal and remediation of hazardous
substances, wastes and chemicals and employee health and safety. We will
continue to make expenditures to meet or exceed the environmental standards set
by these laws.
We are involved in several legal actions relating to non-owned waste
disposal sites. Our involvement in these matters has generally arisen from the
alleged disposal by waste haulers of small amounts of waste material many years
ago. In addition, we are aware of contamination at two locations. In Sinsheim,
Germany, there is shallow groundwater and soil contamination that is naturally
decreasing over time. The Germany environmental authorities have not required
corrective action to date. A property in Leesburg, Indiana, which was acquired
with our acquisition of GTI in 1998, is the subject of a 1994 Corrective Action
Order to GTI by the Indiana Department of Environmental Management. The order
requires us to investigate and take corrective actions. Monitoring data is being
collected to confirm and implement the corrective measures. We anticipate making
additional environmental expenditures in future years to continue our
environmental studies, analysis and remediation activities.
While we cannot predict the future costs of environmental studies, cleanup
activities, capital expenditures, or operating costs for environmental
compliance at our present or former facilities or any third party disposal
sites, we do not believe these costs, individually or in the aggregate, will
have a material impact on our operations or our consolidated financial position,
liquidity or operating results.
Factors That May Affect Our Future Results (Cautionary Statements for Purposes
of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act
of 1995)
Our disclosures and analysis in this report contain forward-looking
statements. Forward-looking statements reflect our current expectations of
future events or future financial performance. You can identify these statements
by the fact that they do not relate strictly to historical or current facts.
They often use words such as "anticipate", "estimate", "expect", "project",
"intend", "plan", "believe", and similar terms. These forward-looking statements
are based on our current plans and expectations.
Any or all of our forward-looking statements in this report may prove to be
incorrect. They may be affected by inaccurate assumptions we might make or by
risks and uncertainties which are either unknown or not fully known or
understood. Accordingly, actual outcomes and results may differ materially from
what is expressed or forecasted in this report.
We sometimes provide forecasts of future financial performance. The risks
and uncertainties described under "Risk Factors" as well as other risks
identified from time to time in other Securities and Exchange Commission
reports, registration statements and public announcements, among others, should
be considered in evaluating our prospects for the future. We undertake no
obligation to release updates or revisions to any forward-looking statement,
whether as a result of new information, future events or otherwise.
Page 9 of 77
Risk Factors
Cyclical changes in the markets we serve, including the current contraction,
could result in a significant decrease in demand for our products and reduce our
profitability.
Our components are used in various products for the electronic and
electrical equipment markets. These markets are highly cyclical. The demand for
our components reflects the demand for products in the electronic and electrical
equipment markets generally. Beginning in late 2000 and continuing to the
present, these markets, particularly the electronics market, have experienced a
severe worldwide contraction. This contraction has resulted in a decrease in
demand for our products, as our customers have:
o canceled many existing orders;
o introduced fewer new products; and
o worked to decrease their inventory levels.
The decrease in demand for our products has had a significant adverse
effect on our operating results and profitability. We cannot predict how long
this contraction will last nor the strength of any recovery. Accordingly, we may
continue to experience weakness in both our revenues and profits.
Reduced prices for our products may adversely affect our profit margins if we
are unable to reduce our costs of production.
The average selling prices for our products tend to decrease over their
life cycle. In addition, the recent economic contraction has significantly
increased the pressure on our customers to seek lower prices from their
suppliers. As a result, our customers are likely to continue to demand lower
prices from us. To maintain our margins and remain profitable, we must continue
to meet our customers' design needs while reducing costs through efficient raw
material procurement and process and product improvements. Our profit margins
will suffer if we are unable to reduce our costs of production as sales prices
decline.
An inability to adequately respond to changes in technology may decrease our
sales.
Pulse operates in an industry characterized by rapid change caused by the
frequent emergence of new technologies. Generally, we expect life cycles for our
products in the electronic components industry to be relatively short. This
requires us to anticipate and respond rapidly to changes in industry standards
and customer needs and to develop and introduce new and enhanced products on a
timely and cost effective basis. Our engineering and development teams place a
priority on working closely with our customers to design innovative products and
improve our manufacturing processes. Our inability to react to changes in
technology quickly and efficiently may decrease our sales and profitability.
Page 10 of 77
If our inventories become obsolete, our future performance and operating results
will be adversely affected.
The life cycles of our products depend heavily upon the life cycles of the
end products into which our products are designed. Many of Pulse's products have
very short life cycles which are measured in quarters. Products with short life
cycles require us to closely manage our production and inventory levels.
Inventory may become obsolete because of adverse changes in end market demand.
During market slowdowns, this may result in significant charges for inventory
write offs, as was the case during 2001. Our future operating results may be
adversely affected by material levels of obsolete or excess inventories.
An inability to capitalize on our recent or future acquisitions may adversely
affect our business.
In recent years we have completed several acquisitions. We continually seek
acquisitions to grow our business. We may fail to derive significant benefits
from our acquisitions. In addition, if we fail to achieve sufficient financial
performance from an acquisition, goodwill and other intangibles could become
impaired, resulting in our recognition of a loss. While our acquisitions have
not generally resulted in goodwill impairment in the past, we expect to have a
goodwill impairment charge in the first quarter of 2002 of between $16 million
and $19 million related to AMI Doduco. The degree of success of any of our
acquisitions depends on our ability to:
o successfully integrate or consolidate acquired operations into our
existing businesses;
o identify and take advantage of cost reduction opportunities; and
o further penetrate the markets for the product capabilities acquired.
Integration of acquisitions may take longer than we expect and may never be
achieved to the extent originally anticipated. This could result in slower than
anticipated business growth or higher than anticipated costs. In addition,
acquisitions may:
o cause a disruption in our ongoing business;
o distract our managers;
o unduly burden our other resources; and
o result in an inability to maintain our historical standards,
procedures and controls.
Integration of acquisitions in to the acquiring segment may limit the ability of
investors to track the performance of individual acquisitions and to analyze the
trends in our operating results.
Our practice has been to quickly integrate acquisitions into the existing
business of the acquiring segment and to only report financial performance on
the segment level. As a result of this practice, we do not separately track the
stand-alone performance of acquisitions after the date of the transaction.
Consequently, investors cannot quantify the financial performance and success of
any individual acquisition or the financial performance and success of a
particular segment excluding the impact of acquisitions. In addition, our
Page 11 of 77
practice of quickly integrating acquisitions into the financial performance of
each segment may limit the ability of investors to analyze any trends in our
operating results over time.
An inability to identify additional acquisition opportunities may slow our
future growth.
We intend to continue to identify and consummate additional acquisitions to
further diversify our business and to penetrate important markets. We may not be
able to identify suitable acquisition candidates at reasonable prices. Even if
we identify promising acquisition candidates, the timing, price, structure and
success of future acquisitions are uncertain. An inability to consummate
attractive acquisitions may reduce our growth rate and our ability to penetrate
new markets.
If our customers terminate their existing agreements, or do not enter into new
agreements or submit additional purchase orders for our products, our business
will suffer.
Most of our sales are made on a purchase order basis as needed by our
customers. In addition, to the extent we have agreements in place with our
customers, most of these agreements are either short term in nature or provide
our customers with the ability to terminate the arrangement with little or no
prior notice. Our contracts typically do not provide us with any material
recourse in the event of non-renewal or early termination. We will lose business
and our revenues will decrease if a significant number of customers:
o do not submit additional purchase orders;
o do not enter into new agreements with us; or
o elect to terminate their relationship with us.
If we do not effectively manage our business in the face of fluctuations in the
size of our organization, our business may be disrupted.
We have grown rapidly over the last few years, both organically and as a
result of acquisitions. However, in the past twelve months we have significantly
reduced our workforce and facilities in response to a dramatic decrease in
demand for our products due to prevailing global market conditions. These rapid
fluctuations place strains on our resources and systems. If we do not
effectively manage our resources and systems, our business may suffer.
Uncertainty in demand for our products may result in increased costs of
production and an inability to service our customers.
We currently have very little visibility into our customers' purchasing
patterns and are highly dependent on our customers' forecasts. These forecasts
are non-binding and often highly unreliable. Given the fluctuation in growth
rates and cyclical demand for our products, as well as our reliance on often
imprecise customer forecasts, it is difficult to accurately manage our
production schedule, equipment and personnel needs and our raw material and
working capital requirements. Our failure to effectively manage these issues may
result in:
o production delays;
Page 12 of 77
o increased costs of production;
o an inability to make timely deliveries; and
o a decrease in profits.
A decrease in availability or increase in cost of our key raw materials could
adversely affect our profit margins.
We use several types of raw materials in the manufacturing of our products,
including:
o precious metals such as silver;
o base metals such as copper and brass; and
o ferrite cores.
Some of these materials are produced by a limited number of suppliers. From
time to time, we may be unable to obtain these raw materials in sufficient
quantities or in a timely manner to meet the demand for our products. The lack
of availability or a delay in obtaining any of the raw materials used in our
products could adversely affect our manufacturing costs and profit margins. In
addition, if the price of our raw materials increases significantly over a short
period of time, customers may be unwilling to bear the increased price for our
products and we may be forced to sell our products containing these materials at
prices that reduce our profit margins.
Some of our raw materials, such as precious metals, are considered
commodities and are subject to price volatility. We attempt to limit our
exposure to fluctuations in the cost of precious materials, including silver, by
holding the majority of our precious metal inventory through leasing or
consignment arrangements with our suppliers. We then typically purchase the
precious metal from our supplier at the current market price on the day after
delivery to our customer and pass this cost on to our customer. In addition,
leasing and consignment costs have historically been substantially below the
costs to borrow funds to purchase the precious metals. We currently have four
consignment or leasing agreements related to precious metals, all of which
generally have one year terms with varying maturity dates, but can be terminated
by either party with 30 days' prior notice. Our results of operations and
liquidity will be negatively impacted if:
o we are unable to enter into new leasing or consignment arrangements
with similarly favorable terms after our existing agreements
terminate, or
o our leasing or consignment fees increase significantly in a short
period of time and we are unable to recover these increased costs
through higher sale prices.
Fees charged by the consignor are driven by interest rates and the market
price of the consigned material. The market price of the consigned material is
determined by the supply of and the demand for the material. Consignment fees
will increase if interest rates or the price of the consigned material increase.
Page 13 of 77
Competition may result in lower prices for our products and reduced sales.
Both Pulse and AMI Doduco frequently encounter strong competition within
individual product lines from various competitors throughout the world. We
compete principally on the basis of:
o product quality and reliability;
o global design and manufacturing capabilities;
o breadth of product line;
o customer service; and
o price.
Our inability to successfully compete on any or all of the above factors
may result in reduced sales.
Our backlog is not an accurate measure of future revenues and is subject to
customer cancellation.
While our backlog consists of firm accepted orders with an express release
date generally scheduled within six months of the order, many of the orders that
comprise our backlog may be canceled by customers without penalty. It is widely
known that customers in the electronics industry have on occasion double and
triple ordered components from multiple sources to ensure timely delivery when
quoted lead time is particularly long. In addition, customers often cancel
orders when business is weak and inventories are excessive, a process that we
have experienced in the current contraction. Although you should not rely on our
backlog as an indicator of our future revenues, our results of operations could
be adversely impacted if customers cancel a material portion of orders in our
backlog.
Fluctuations in foreign currency exchange rates may adversely affect our
operating results.
We manufacture and sell our products in various regions of the world and
export and import these products to and from a large number of countries.
Fluctuations in exchange rates could negatively impact our cost of production
and sales that, in turn, could decrease our operating results and cash flow. For
example, there has been a material devaluation of the euro against the U.S.
dollar in the last several years which has negatively impacted our reported
profits. Although we engage in limited hedging transactions, including foreign
currency contracts, to reduce our transaction and economic exposure to foreign
currency fluctuations, these measures may not eliminate or substantially reduce
our risk in the future.
Our international operations subject us to the risks of unfavorable political,
regulatory, labor and tax conditions in other countries.
We manufacture and assemble some of our products in foreign locations,
including Estonia, France, Germany, Hungary, Italy, Mexico, the Philippines, the
Peoples' Republic of China, or PRC, and Spain. In addition, approximately 64.9%
of our revenues for the year ended December 28, 2001 were derived from sales to
our customers outside the United
Page 14 of 77
States. Our future operations and earnings may be adversely affected by the
risks related to, or any other problems arising from, operating in international
markets.
Risks inherent in doing business internationally may include:
o economic and political instability;
o expropriation and nationalization;
o trade restrictions;
o capital and exchange control programs;
o transportation delays;
o foreign currency fluctuations; and
o unexpected changes in the laws and policies of the United States or of
the countries in which we manufacture and sell our products.
In particular, Pulse has a significant portion of its manufacturing
operations in the PRC. Our presence in the PRC has enabled Pulse to maintain
lower manufacturing costs and to flexibly adjust its work force to demand levels
for its products. Although the PRC has a large and growing economy, its
potential economic, political, legal and labor developments entail uncertainties
and risks. While the PRC has been receptive to foreign investment, we cannot be
certain that its current policies will continue indefinitely into the future. In
the event of any changes that adversely affect our ability to conduct our
operations within the PRC, our business will suffer.
In addition, we have benefited over recent years from favorable tax
treatment as a result of our international operations. We operate in foreign
countries where we realize favorable income tax treatment relative to the U.S.
statutory rate. We have also been granted special tax incentives commonly known
as tax holidays in other countries such as the PRC and the Philippines. This
favorable situation could change if these countries were to increase rates or
revoke the special tax incentives, or if we discontinue our manufacturing
operations in any of these countries and do not replace the operations with
operations in other locations with favorable tax incentives. Accordingly, in the
event of changes in laws and regulations affecting our international operations,
we may not be able to continue to take advantage of similar benefits in the
future.
Shifting our operations between regions may entail considerable expense.
In the past we have shifted our operations from one region to another in
order to maximize manufacturing and operational efficiency. We may close one or
more additional factories in the future. This could entail significant one-time
earnings charges to account for severance, equipment write offs or write downs
and moving expenses. In addition, as we implement transfers of our operations we
may experience disruptions, including strikes or other types of labor unrest
resulting from lay offs or termination of employees.
Liquidity requirements could necessitate movements of existing cash balances
which may be subject to restrictions or cause unfavorable tax and earnings
consequences.
A significant portion of our cash is held offshore by our international
subsidiaries and is predominantly denominated in U.S. dollars. If we encounter a
significant domestic need
Page 15 of 77
for liquidity that we cannot fulfill through borrowings or other internal or
external sources, we may experience unfavorable tax and earnings consequences as
this cash is transferred to the United States. These adverse consequences would
occur if the transfer of cash into the United States is taxed and no offsetting
foreign tax credit is available to offset the U.S. tax liability, resulting in
lower earnings. In addition, we may be prohibited from transferring cash from
the PRC. With the exception of approximately $10.0 million of retained earnings
as of December 28, 2001 in the PRC that are restricted in accordance with the
PRC Foreign Investment Enterprises Law, substantially all retained earnings are
free from legal or contractual restrictions. The PRC Foreign Investment
Enterprise Law restricts 10% of our net earnings in the PRC, up to a maximum
amount equal to 50% of the total capital we have invested in the PRC. We have
not experienced any significant liquidity restrictions in any country in which
we operate and none are presently foreseen. However, foreign exchange ceilings
imposed by local governments and the sometimes lengthy approval processes which
some foreign governments require for international cash transfers may delay our
internal cash movements from time to time.
Losing the services of our executive officers or our other highly qualified and
experienced employees could adversely affect our business.
Our success depends upon the continued contributions of our executive
officers, many of whom have many years of experience and would be extremely
difficult to replace. We must also attract and maintain experienced and highly
skilled engineering, sales and marketing and managerial personnel. Competition
for qualified personnel is intense in our industries, and we may not be
successful in hiring and retaining these people. If we lose the services of our
executive officers or cannot attract and retain other qualified personnel, our
business could be adversely affected.
Environmental liability and compliance obligations may affect our operations and
results.
Our manufacturing operations are subject to a variety of environmental laws
and regulations governing:
o air emissions;
o wastewater discharges;
o the storage, use, handling, disposal and remediation of hazardous
substances, wastes and chemicals; and
o employee health and safety.
If violations of environmental laws should occur, we could be held liable
for damages, penalties, fines and remedial actions. Our operations and results
could be adversely affected by any material obligations arising from existing
laws, as well as any required material modifications arising from new
regulations that may be enacted in the future. We may also be held liable for
past disposal of hazardous substances generated by our business or businesses we
acquire. In addition, it is possible that we may be held liable for
contamination discovered at our present or former facilities.
We are aware of contamination at two locations. In Sinsheim, Germany, there
is a shallow groundwater and soil contamination that is naturally decreasing
over time. The
Page 16 of 77
German environmental authorities have not required corrective action to date. In
addition, property in Leesburg, Indiana, which was acquired with our acquisition
of GTI in 1998, is the subject of a 1994 Corrective Action Order to GRI by the
Indiana Department of Environmental Management. The order requires us to
investigate and take corrective actions. Monitoring data is being collected to
confirm and implement the corrective measures. We anticipate making additional
environmental expenditures in future years to continue our environmental
studies, analysis and remediation activities. Based on current knowledge, we do
not believe that any future expenses or liabilities associated with
environmental remediation will have a material impact on our operations or our
consolidated financial position, liquidity or operating results, however, we may
be subject to additional costs and liabilities if the scope of the contamination
or the cost of remediation exceeds our current expectations.
Pennsylvania law and our organizational documents contain provisions that could
discourage or prevent a potential takeover of our company that might otherwise
result in shareholders receiving a premium over the market price for their
shares.
Provisions of Pennsylvania law, our Rights Agreement and our articles of
incorporation and bylaws could complicate the acquisition of us by means of a
tender offer, a proxy contest, or otherwise, and the removal of incumbent
officers and directors.
These provisions include:
o Subsection 25F of the Pennsylvania Business Corporation Law, which
prohibits various change of control transactions with a 20%-or-greater
shareholder, such as a party that has completed a successful tender
offer, until five years after that party became a 20%-or-greater
shareholder,
o our Rights Agreement, known as a poison pill, which gives the board
and shareholders the ability to severely dilute the ownership of any
person acquiring 15% or more of our common stock, thereby making the
acquisition impractical,
o our articles of incorporation, which require an affirmative vote of
75% of our outstanding shares of stock to approve various change of
control transactions with a holder of more than 5% of our stock, and
o our classified board, which prevents a wholesale change in the board's
composition.
These provisions may have the effect of delaying, deterring or preventing a
future takeover or change in control of us unless such takeover or change in
control is approved by our board of directors.
Page 17 of 77
Item 2 Properties
We are headquartered in Trevose, Pennsylvania where we lease 11,000 square
feet of office space. Through Pulse and AMI Doduco, we operated 25 manufacturing
plants in 10 countries as of December 28, 2001. We continually seek to size our
operations correctly in order to maximize cost efficiencies. Accordingly, in the
future, we may take further actions to increase or decrease our manufacturing
capacity. To maximize production efficiencies, we seek whenever practical to
establish manufacturing facilities in countries where we can take advantage of
lower labor costs and, if available, various government incentives and tax
benefits. We also seek to maintain facilities in those regions where we market
our products in order to maintain a local presence in proximity to our
customers.
The following is a list of the locations of our principal manufacturing
facilities:
Pulse
Percentage
Approx. Owned/ Used For
Location (1) Square Ft. (2) Leased Manufacturing
- ------------ -------------- ------ -------------
Dongguan, People's Republic
of China, or PRC 482,000 Leased 100%
Zhuhai, PRC 252,000 Leased 100%
Cavite, Philippines 49,000 Owned 62%
Mexico City, Mexico 46,000 Leased 100%
Orgelet, France 38,000 Owned(3) 30%
Zhongshan, PRC 37,000 Leased 100%
Greensboro, Maryland 20,000 Owned 95%
-------
Total 924,000
(1) In addition to these manufacturing locations, Pulse has 252,000 square feet
of space which is used for engineering, sales and administrative support
functions, including Pulse's headquarters in San Diego, California. In
addition, Pulse leases approximately 1,621,000 square feet of space for
dormitories, canteen and other employee-related facilities in the PRC.
(2) Consists of aggregate square footage in each locality where manufacturing
facilities are located. More than one manufacturing facility may be located
within each locality.
(3) There are mortgages on this property related to mortgage notes due in 2007,
of which approximately $0.7 million was outstanding as of December 28,
2001.
Page 18 of 77
AMI Doduco
Percentage
Approx. Owned/ Used For
Location (1) Square Ft. Leased Manufacturing
- -------- --------- ------ -------------
Pforzheim, Germany 490,000 Owned 65%
Reidsville, North Carolina 260,000 Owned 60%
Sinsheim, Germany 222,000 Owned 57%
Export, Pennsylvania 115,000 Leased 80%
Tianjin, PRC 59,000 Leased 85%
Noisy, France 43,000 Leased 88%
Luquillo, Puerto Rico 32,000 Owned 80%
Madrid, Spain 32,000 Owned 90%
Mexico City, Mexico 25,000 Leased 84%
Tallinn, Estonia 23,000 Owned 80%
Lentate S/Seveso, Italy 23,000 Leased 90%
Madrid, Spain 19,000 Leased 90%
Lancaster, Pennsylvania 15,000 Leased 85%
Dorog, Hungary 11,000 Leased 95%
---------
Total 1,369,000
(1) Engineering, sales and administrative support functions for AMI Doduco are
generally contained in these locations.
We have developed our manufacturing processes in ways intended to maximize
our economic profitability. Accordingly, the manufacturing processes at Pulse
facilities maintain a cost structure that is labor intensive and highly
variable, which enables us to increase and decrease production rapidly and to
contain costs during slower periods. On the other hand, AMI Doduco's products
tend to have longer business cycles, longer time to market and are more capital
intensive. As a result, we have automated many more functions at AMI Doduco
facilities and vertically integrated its products in an attempt to utilize all
of our manufacturing capabilities to create higher value added products.
Traditionally, our engineers design products to meet our customers' product
needs and then we mass-produce the products once a contract is awarded by or
orders are received from our customer. We also service customers that design
their own components and outsource production of these components to us. We then
build the components to the customer's design.
The productive capacity and extent of utilization of our facilities are
difficult to quantify. In any one facility, maximum capacity and utilization
vary periodically depending on the segment's manufacturing strategies, the
product being manufactured and the current market conditions and demand. We
estimate that our average utilization of overall production capacity in 2001 was
between 40% to 50% for Pulse and 65% to 80% for AMI Doduco.
Page 19 of 77
Item 3 Legal Proceedings
We or our subsidiaries are a party to various legal proceedings and
administrative actions. We consider lawsuits to be part of what arises in the
normal course of business. Although it is difficult to predict the outcome of
any legal proceeding, we do not believe these proceedings and actions will,
individually or in the aggregate, have a material adverse effect on our
consolidated financial condition or results of operations.
Item 4 Submission of Matters to a Vote of Security Holders
None
Page 20 of 77
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is traded on the New York Stock Exchange under the ticker
symbol "TNL". The following table reflects the highest and lowest sales prices
in each quarter of the last two years. The dividends paid are also shown. All
amounts reflect stock splits through December 28, 2001.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2001 High $ 57.00 $ 33.89 $ 26.80 $ 28.42
2001 Low $ 21.75 $ 19.60 $ 20.53 $ 21.80
2001 Dividends Paid $.03375 $.03375 $.03375 $.03375
2000 High $ 30.63 $ 49.28 $ 76.13 $ 62.13
2000 Low $ 19.38 $ 24.31 $ 45.50 $ 36.56
2000 Dividends Paid $.03375 $.03375 $.03375 $.03375
On February 28, 2002, there were approximately 1,950 registered holders of
our common stock, which has a par value of $.125 per share and is the only class
of stock that we have outstanding. See additional discussion on restricted
earnings in Item 7, Liquidity and Capital Resources, and in Note 8 of Notes to
Consolidated Financial Statements.
After paying a dividend of $0.03375 on January 25, 2002 to shareholders of
record on January 4, 2002, we no longer intend to pay cash dividends on our
common stock. We currently intend to retain future earnings to finance the
growth of our business.
Page 21 of 77
Item 6 Selected Financial Data (In Thousands, Except Per Share Data)
2001 2000 1999 1998 1997(a)
---- ---- ---- ---- -------
Net sales $474,199 $664,378 $530,436 $448,539 $397,067
Net earnings $ 2,466 $ 99,308 $ 44,312 $ 33,309 $ 29,086
Earnings per share:
Basic (b) $ .07 $ 3.05 $ 1.38 $ 1.04 $ .90
Diluted (b) $ .07 $ 3.02 $ 1.36 $ 1.03 $ .90
Total assets $525,020 $520,771 $381,239 $344,134 $255,334
Total long-term debt $ 89,129 $ 48,588 $ 60,496 $ 60,898 $ 32,957
Shareholders' equity $329,231 $324,430 $215,635 $174,809 $142,375
Net worth per share (b) $ 9.77 $ 9.76 $ 6.63 $ 5.40 $ 4.41
Working capital (c) $189,257 $230,397 $141,851 $102,336 $ 87,618
Current ratio 2.9 to 1 2.7 to 1 2.5 to 1 2.0 to 1 2.2 to 1
Number of shares outstanding:
Weighted average,
including common stock
equivalents 33,566 32,859 32,492 32,406 32,274
Year end 33,683 33,237 32,532 32,340 32,270
Dividends declared per share (b)(d) $ .1350 $ .1350 $ .13125 $ .11625 $ .105
Price range per share:
High (b) $ 57.00 $ 76.13 $ 23.13 $ 22.19 $ 21.56
Low (b) $ 19.60 $ 19.38 $ 9.94 $ 8.44 $ 8.57
(a) Amounts reflect continuing operations after dispositon of the businesses
comprising our Test and Measurement Segment which was divested on June 4,
1997 for approximately $34.0 million.
(b) Per share amounts reflect two-for-one stock splits on February 28, 1997 and
November 27, 2000.
(c) Includes cash and cash equivalents and current installments of long-term
debt.
(d) After January 25, 2002, we no longer intend to pay cash dividends on our
common stock.
Page 22 of 77
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
This discussion and analysis of our financial condition and results of
operations as well as other sections of this report, contain certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, including the
risks faced by us described in "Risk Factors" section of this report on page 10
through 17.
Overview
Technitrol is a global producer of precision-engineered passive
magnetics-based electronic components and electrical contact products and
materials. We believe we are a leading global producer of these products and
materials in the primary markets we serve based on our estimates of the size of
our primary markets in annual revenues and our share of those markets relative
to our competitors.
We operate our business in two distinct segments:
o the electronic components segment, which operates under the name Pulse, and
o the electrical contact products segment, which operates under the name AMI
Doduco.
General. We experienced consistent growth in net sales from fiscal 1991
through fiscal 2000. We define net sales as gross sales less returns and
allowances. We sometimes refer to net sales as revenue. During the past several
years, the growth in our consolidated net sales has been due in large part to
the growth of Pulse. However, since late 2000, the electronics markets served by
Pulse have experienced a severe global contraction. While we currently do not
have a great deal of visibility with respect to future demand for our products,
particularly at Pulse, we believe that the markets we serve have begun to
stabilize and that a market rebound will be gradual.
Based on recent increases in the level of order activity, we are optimistic
that demand for Pulse's products will gradually recover from the global slowdown
in the electronics markets which began in the fourth quarter of 2000. We also
believe that this recovery began in the first quarter of 2002. While Pulse's
revenues in the first part of the quarter were weak, there have been indications
of firming market conditions, other than in the telecommunications sector,
beginning in mid-February of 2002. This is consistent with reports from our
customers and peers. While the electronic components business has yet to show
significant prolonged progress, Pulse's order entry rates since mid-February of
2002 have increased from their levels in late 2001. Additionally, Pulse has
increased its development activities for military/aerospace applications,
automotive electronics systems, and consumer electronic applications such as
video game consoles.
Page 23 of 77
Demand has slowed at AMI Doduco, mirroring the prevailing economic
conditions in North America and Europe as we entered 2002. However, AMI Doduco
has seen increases in design and quoting activities for component subassemblies
in Europe for automotive applications such as tire pressure monitoring systems,
multi-function switches, motor control sensors and ignition security systems,
and non-automotive uses such as appliance and industrial controls and medical
equipment. Although some of our customers and the popular press generally report
modest optimism for the second half of the year, AMI Doduco is continuing its
cost reduction actions. For example, in addition to workforce adjustments in
line with demand around the world, AMI Doduco is also continuing the North
American plant consolidation begun in 2001, as well as the consolidation of all
European contact pre-material production into our Pforzheim, Germany facility
and other product and plant consolidation actions in Europe.
Historically, the gross margin at Pulse has been significantly higher than
at AMI Doduco. As a result, the mix of net sales generated by Pulse and AMI
Doduco during a period affects our consolidated gross margin. For example, our
gross margin for the year ended December 28, 2001 was 24.1% compared to 38.3%
for the year ended December 29, 2000. For the year ended December 28, 2001,
Pulse generated approximately 53.4% of our consolidated net sales compared to
approximately 66.0% for the year ended December 29, 2000. Our gross margin is
also significantly affected by capacity utilization, particularly at AMI Doduco.
Pulse has a relatively short-term product life cycle. As a result, significant
product turnover occurs each year. Therefore, Pulse's changes in average selling
prices do not necessarily provide a meaningful and quantifiable measure of
Pulse's operations. AMI Doduco has a fairly long-term and mature product line,
without significant turnover. There is minimal variation in the prices of
product sold. Therefore, changes in prices do not have a material impact on AMI
Doduco revenue. Accordingly, substantially all of the sales growth and
contraction at AMI Doduco is attributable to changes in unit volume.
Acquisitions. Historically, acquisitions have been an important part of our
growth strategy. In many cases, our move into new and high-growth extensions of
our existing product lines or markets has been facilitated by an acquisition.
Our acquisitions continually change the mix of our net sales. Pulse made
numerous acquisitions in recent years which have increased its penetration into
its primary markets and expanded its presence in new markets. Recent examples of
these acquisitions include Excelsus, Grupo ECM and EWC. Excelsus was acquired in
August 2001 for approximately $85.9 million, net of cash acquired. Excelsus is
based in Carlsbad, California and is a leading North American producer of
customer-premises digital subscriber line filters and other broadband
accessories. Pulse acquired Electro Componentes Mexicana, which we refer to as
Grupo ECM, in March 2001. Grupo ECM is a manufacturer of inductive components
primarily for automotive applications. In October 2000, Pulse acquired various
assets of EWC, a manufacturer of magnetic components primarily for the defense
and aerospace industries.
Similarly, AMI Doduco has made a number of recent acquisitions. In January
2001, AMI Doduco acquired the electrical contact and materials business of
Engelhard-CLAL, a manufacturer of electrical contacts, wire and strip contact
materials and related products. In addition, in fiscal 2000, AMI Doduco acquired
a tool and mold fabrication facility in Estonia and in fiscal 1999 it acquired
MEC Betras Italia, a producer of electrical contact rivets and
Page 24 of 77
stamped electrical contact parts, located near Milan, Italy. These acquisitions
were driven by our strategy of expanding our product and geographical market
presence for electrical contact products. Due to our quick integration of
acquisitions and the interchangeable sources of net sales between existing and
acquired operations, we do not separately track the net sales of an acquisition
after the date of the transaction.
Recent Cost Reduction Programs. During 1999 and 2000, the electronic
components industry served by Pulse was characterized by unprecedented growth.
Beginning in late 2000 and continuing all during 2001, however, the opposite
trend was experienced as these industries experienced a severe worldwide
contraction and many of our customers canceled orders and decreased their level
of business activity as a result of lower demand for their end products. While
the electrical contact industry served by AMI Doduco is generally less dependent
on volatile technology markets, it too was negatively impacted by general
economic trends as reflected in slower housing starts, capital spending and
automotive sales both in the United States and western Europe.
Our manufacturing business model at Pulse has a very high variable cost
component due to the labor-intensity of many processes. This allows us to
quickly change our capacity based on market demand. Just as we expanded capacity
during 1999 and 2000, we reduced capacity during 2001. We implemented numerous
restructuring initiatives during 2001 in order to further reduce Pulse's cost
structure and capacity, although the speed and depth of the contraction in
Pulse's markets made it impossible to reduce costs at the same rate at which
revenues contracted throughout 2001. During the second quarter of 2001, we
announced the closure of our production facility in Thailand and during the
third quarter, we announced the closure of our production facility in Malaysia.
The production at these two facilities was transferred to other Pulse facilities
in Asia. We provided reserves of $3.6 million for these plant closings,
comprised of $2.5 million for severance and related payments and $1.1 million
for other exit costs. The majority of this accrual will be utilized by the end
of the first quarter of 2002.
We also adopted other restructuring plans during 2001. In this regard,
provisions of $6.4 million were recorded during 2001. Approximately 3,500
manufacturing personnel primarily in Asia, and approximately 200 support
personnel in North America and Europe were terminated. Approximately 75% of all
of the employee severance and related payments in connection with these actions
were completed as of December 28, 2001. Approximately $2.3 million of the
provision remains as of December 28, 2001 for severance payments and related
expenses to be made during 2002. An additional $0.7 million remains accrued at
December 28, 2001 for other exit costs in primarily Thailand and Malaysia.
Termination costs for employees at our Thailand and Malaysian facilities have
been included in the separate provisions for exiting those facilities. In
addition to these terminations, headcount was reduced by approximately 12,300
additional personnel, net of new hires, during fiscal 2001 through voluntary
employee attrition and involuntary work force reductions, primarily at
manufacturing facilities in the PRC where severance payments are not necessary.
Accordingly, on a consolidated basis, our employee base dropped from
approximately 30,600 as of December 29, 2000 to approximately 14,800 as of
December 28, 2001.
Page 25 of 77
We recorded pre-tax inventory provisions in cost of sales of $20.3 million
for the year ended December 28, 2001. The provisions were recorded throughout
each quarter of 2001, although the fourth quarter had the most significant
impact. The amounts were determined by comparing quantity on-hand to actual
historical usage and forecasted demand for 2002. The inventory that was fully
reserved in 2001 was primarily raw materials and specific finished goods for
several customers. In addition, a charge of $3.5 million was recorded during the
third quarter of 2001 to write down the value of certain Pulse fixed assets to
their disposal value. These assets include Asian-based production equipment that
became idle in 2001 due to the contraction of Pulse's business. The assets have
been marketed through the liquidation market, and the majority have either been
sold for their residual value or scrapped. The remaining cost basis of the
assets has been reclassified from fixed assets to assets held for sale in the
balance sheet as of December 28, 2001. Additional inventory and fixed asset
write-downs are expected if demand for electronic components decreases in the
future.
Total restructuring and unusual and infrequent items for the year ended
December 28, 2001 includes $3.6 million related to the Thailand and Malaysia
plant closings, $6.4 million for other restructuring plans and $3.5 million for
the write down of Pulse fixed assets.
Approximately $0.5 million for AMI Doduco restructuring actions is included
in the aggregate charge of $6.4 million noted above. The capital-intensity of
AMI Doduco makes quick changes in its cost structure more challenging than at
Pulse. In the quarter ended March 31, 2000, AMI Doduco recorded a $5.5 million
provision for restructuring initiatives due to a reduction in employment levels
by approximately 120 people, primarily in Germany. In addition, the AMI Doduco
restructuring initiative provided for the relocation of high-volume, repetitive
production to lower-cost locations, worldwide continuous process improvement
efforts, and the expansion of our more profitable and automated business based
in Germany. As a result of the program, we provided $3.7 million for employee
severance and related payments, $0.9 million related to the impairment of
certain assets and $0.9 million for other exit costs. Offsetting these costs was
a gain of $1.4 million related to the sale of a non-strategic European product
line and a $0.8 million gain related to an insurance settlement.
As a result of our core business focus on both economic and operating
profit, we will continue to aggressively size both Pulse and AMI Doduco so that
costs are minimized during market downturn, while we plan for the recovery in
demand and pursue additional growth opportunities. We expect to undertake
additional cost reduction actions during the first two quarters of 2002, the
extent of which will be determined by the timing and degree of a recovery in our
markets and the economy in general. We anticipate that Pulse's restructuring
efforts will continue into, and be completed by the end of, the second quarter
of 2002 and will consist largely of additional capacity consolidation and
reductions in operating expenses, including further employment reductions. AMI
Doduco also plans to undertake further consolidation activities into the second
quarter of 2002 consisting mainly of employment reductions. While we do not
currently anticipate significant cost reduction actions past the second quarter
of 2002, they may occur if there is not a recovery in our markets and in the
economy in general. If additional actions are undertaken, the amounts
Page 26 of 77
will depend on specific actions taken to reduce manufacturing capacity and
improve efficiency.
Our restructuring charges are summarized on a year-to-date basis for 2001
as follows:
AMI
Restructuring provision (in millions): Doduco Pulse Total
----------------------- ------ ----- -----
Balance accrued at December 29, 2000 $ 2.5 $ -- $ 2.5
Accrued during the year ended December 28, 2001 0.5 13.1 13.6
Severance and other cash payments (2.2) (7.2) (9.4)
Non-cash asset disposals (0.2) (3.5) (3.7)
------ ------- -------
Balance accrued at December 28, 2001 $ 0.6 $ 2.4 $ 3.0
====== ======= =======
International Operations. An increasing percentage of our sales in recent
years has been outside of the United States. As of December 28, 2001, we have
operations in 12 countries and we have significant net sales in currencies other
than the U.S. dollar. For the year ended December 28, 2001, 64.9% of our net
sales were outside of the U.S. For the year ended December 29, 2000, 55.5% of
our net sales were to customers outside of the U.S. As a result, changing
exchange rates often impact our financial results and the analysis of our
period-over-period results. This is particularly true of movements in the
exchange rate between the U.S. dollar and the euro. AMI Doduco's European sales
are denominated primarily in euros. A portion of Pulse's European sales are also
denominated in euros. However, the proportion at Pulse is much less than it is
at AMI Doduco. As a result of this and other factors, Pulse uses the U.S. dollar
as its functional currency in Europe while AMI Doduco uses the euro. The use of
different functional currencies creates different financial effects. The euro
was 3.3% weaker, on average, relative to the U.S. dollar during the year ended
December 28, 2001 than in the comparable prior-year period. As a result, AMI
Doduco's euro-denominated sales resulted in lower dollar sales upon translation
for our U.S. consolidated financial statements. We also experienced a negative
translation adjustment to equity in the 2001 period because our investment in
AMI Doduco's European operations was worth less in U.S. dollars. At Pulse, we
incurred foreign currency losses as euro denominated assets and liabilities were
remeasured to U.S. dollars for financial reporting purposes during 2001. If an
increasing percentage of our sales are denominated in non-U.S. currencies, it
could increase our exposure to currency fluctuations. The impact of exchange
rate differences on AMI Doduco's European sales will be partially offset by the
impact on its expenses and bank borrowings in Europe, most of which are also
denominated in euros. Despite Pulse's significant presence in Asia, the vast
majority of its revenues from customers in Asia are denominated in U.S. dollars.
As a result, Pulse has less exposure than AMI Doduco to sales fluctuations
caused by currency fluctuations.
In order to reduce our exposure resulting from currency fluctuations, we
may purchase currency exchange forward contracts and/or currency options. These
contracts guarantee a predetermined range of exchange rates at the time the
contract is purchased. This allows us to shift the majority of the risk of
currency fluctuations from the date of the contract to a third party for a fee.
As of December 28, 2001, we had five foreign currency
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forward contracts outstanding to sell forward approximately 44.2 million of euro
in the aggregate in order to hedge intercompany loans. In determining the use of
forward exchange contracts and currency options, we consider the amount of
sales, purchases and net assets or liabilities denominated in local currencies,
the type of currency, and the costs associated with the contracts.
Precious Metals. AMI Doduco uses silver, as well as other precious metals,
in manufacturing some of its electrical contacts, contact materials and contact
subassemblies. Historically, we have leased or held these materials through
consignment arrangements with our suppliers. Leasing and consignment costs have
been substantially below the costs to borrow funds to purchase the metals and
these arrangements eliminate the fluctuations in the market price of owned
precious metal. AMI Doduco's terms of sale generally allow us to charge
customers for the market value of silver on the day after we deliver the silver
bearing product to the customer. Thus far we have been successful in managing
the costs associated with our precious metals. While limited amounts are
purchased for use in production, the majority of our precious metal inventory
continues to be leased or held on consignment. If our leasing/consignment fees
increase significantly in a short period of time, and we are unable to recover
these increased costs through higher sale prices, a negative impact on our
results of operations and liquidity may result. Leasing/consignment fee
increases are caused by increases in interest rates or increases in the price of
the consigned material. See additional discussion in note 1 of the Notes to
Consolidated Financial Statements.
Income Taxes. Our effective income tax rate is affected by the proportion
of our income earned in high-tax jurisdictions such as Germany and the income
earned in low-tax jurisdictions, particularly in Asia. This mix of income can
vary significantly from one period to another. We have benefited over recent
years from favorable offshore tax treatments. However, we may not be able to
take advantage of similar benefits in the future. Developing countries and, in
particular, the People's Republic of China, may change their tax policies at any
time. During the first quarter of fiscal 1999, we initiated a number of actions
aimed at ensuring that our overall tax rate is optimal and appropriate. These
actions followed a comprehensive global review of our business operations and
tax planning opportunities. The effect of these actions was a reduction in our
effective tax rate.
We have not provided for U.S. federal income and foreign withholding taxes
on approximately $294.0 million of our non-U.S. subsidiaries' undistributed
earnings (as calculated for income tax purposes) as of December 28, 2001. Such
earnings include pre-acquisition earnings of foreign entities acquired through
stock purchases, and are intended to be reinvested outside of the U.S.
indefinitely. It is not practical to estimate the amount of unrecognized
deferred taxes on these undistributed earnings. Where excess cash has
accumulated in our non-U.S. subsidiaries and it is advantageous for tax reasons,
subsidiary earnings may be remitted.
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Results of Operations
Year ended December 28, 2001 compared to the year ended December 29, 2000
Net Sales. Net sales for the year ended December 28, 2001 decreased $190.2
million, or 28.6%, to $474.2 million from $664.4 million in the year ended
December 29, 2000. Our sales decline from the comparable period last year was
attributable primarily to the precipitous global downturn in markets served by
Pulse that began late in 2000. Factors contributing to the downturn included
declining capital expenditures by end-users and subsequent excess inventory
levels. This downturn was experienced in Pulse's networking, telecommunications
and power conversion markets on a worldwide basis, particularly in North America
and Europe.
Pulse's net sales decreased $185.5 million, or 42.3%, to $253.3 million
for the year ended December 28, 2001 from $438.8 million in the year ended
December 29, 2000. Pulse's sales were significantly lower in 2001 than in 2000
as new order rates declined and significant customer order cancellations
occurred. Net sales in 2001 include sales derived from our acquisitions of Grupo
ECM and Excelsus since the date of their acquisition in March and August 2001,
respectively.
AMI Doduco's net sales decreased $4.7 million, or 2.1%, to $220.9 million
for the year ended December 28, 2001 from $225.6 million in the year ended
December 29, 2000. Sales in the 2001 period reflect strong European markets and
contributions from the Engelhard-CLAL operations, acquired in early January
2001. However, these positive factors were offset by a slowdown in North
American manufacturing activity during the year ended December 28, 2001, and to
a lesser extent, a decline in the average euro-to-U.S. dollar exchange rate. The
lower manufacturing activity resulted in lower net sales primarily from
customers in the commercial and industrial machinery, telecommunications and
appliance industries.
Cost of Sales. Our cost of sales decreased $50.2 million, or 12.2%, to
$359.7 million for the year ended December 28, 2001 from $409.9 million for the
year ended December 29, 2000. This decrease was due to a decrease in net sales.
Our consolidated gross margin for the year ended December 28, 2001 was 24.1%
compared to 38.3% for the year ended December 29, 2000. Since the Pulse gross
profit as a percentage of sales is typically higher than that of AMI Doduco, our
consolidated gross margin in 2001 was negatively affected by:
o a mix of net sales weighted more heavily by AMI Doduco on a relative
basis,
o manufacturing inefficiencies at both Pulse and AMI Doduco due to
under-utilization of capacity as a result of the market downturn, and
o provisions for slow moving inventory at Pulse due to business
slowdown.
These factors more than offset the positive impact of our restructuring
initiatives.
Selling, General and Administrative Expenses. Total selling, general and
administrative expenses for the year ended December 28, 2001 decreased $32.3
million, or 24.6%, to $98.8 million, or 20.8% of net sales, from $131.1 million,
or 19.7% net of sales
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for the year ended December 29, 2000. The decrease in selling, general and
administrative expenses in 2001 was due to aggressive action that we took to
reduce costs and tighten spending controls. For example, selling expenses, which
are largely variable with net sales, decreased $3.1 million from 2000 to 2001.
Administrative expenses decreased by $30.2 million, due largely to reduced
headcount and lower incentive awards and lower expenses related to our
restricted stock plan in 2001. These decreases were partially offset by higher
research, development and engineering expenses, which increased by $1.0 million
from 2001. The underlying expense for incentive awards is primarily variable and
dependent upon our overall financial performance regarding incentive plan
targets, primarily the achievement of economic profit and net operating profit
objectives. These targets, which were set in December of 2000, were not
achieved, and consequently, except for a small payment by AMI Doduco in the
first quarter of 2001, no cash incentives were paid to executives. These
incentive awards were $0.5 million in 2001 compared to $9.4 million in 2000.
Expenses associated with stock-based compensation plans including the restricted
stock plan were also significantly lower in 2001 versus the year ended December
29, 2000, due to a lower average share price of our common stock throughout 2001
compared to 2000. These expenses were approximately $1.2 million in 2001
compared to $7.0 million in 2000.
Research, development and engineering expenses are included in selling,
general and administrative expenses. We refer to research, development and
engineering expenses as RD&E. For the years ended December 28, 2001 and December
29, 2000, RD&E by segment was as follows (dollars in thousands):
2001 2000
---- ----
Pulse $16,026 $15,748
Percentage of segment sales 6.3% 3.6%
AMI Doduco $ 4,155 $ 4,430
Percentage of segment sales 1.9% 2.0%
Although 2001 had been characterized by cost reduction activities and much
lower sales levels, particularly at Pulse, we largely avoided spending cuts in
the RD&E area as we believe that the recovery in the electronic components
markets will be driven by next-generation products. Design and development
activities with our OEM customers continued at an aggressive pace during 2001.
Interest. Net interest income was $1.4 million for the year ended December
28, 2001 compared to $2.9 million for the year ended December 29, 2000. Invested
cash balances remained essentially consistent with the year ended December 29,
2000, due to the intense focus on cash management throughout 2001. This resulted
in preservation of average cash balances throughout 2001. Outstanding debt
increased during the year ended December 28, 2001 due primarily to $74.0 million
that was incurred in connection with the acquisition of Excelsus in August 2001,
resulting in increased interest expense.
Our new credit facility, which was entered into on June 20, 2001, has
variable interest rates. Accordingly, interest expense may increase if the rates
associated with, or
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the amounts borrowed under, our credit facilities move higher during subsequent
quarters. We may use interest rate swaps or other financial derivatives in order
to manage the risk associated with changes in market interest rates; however, we
have not used any such instruments to date.
Income Taxes. The effective income tax rate for the year ended December 28,
2001 was 54.1% compared to 19.2% for the year ended December 29, 2000. The
higher tax rate in 2001 resulted from the non-deductibility of certain
restructuring charges incurred in 2001. Specifically, plant shut-down costs and
severance expenses were incurred in low-tax jurisdictions or countries where we
have current losses or where we will not have operations in the future. Thus, we
expect to have no future income to offset such charges, resulting in little or
no income tax benefit. In addition, a higher proportion of income was earned in
high-tax jurisdictions.
Year ended December 29, 2000 compared to the year ended December 31, 1999
Net Sales. Net sales in year ended December 29, 2000 increased $133.9
million, or 25.3%, to $664.4 million from $530.4 million in the year ended
December 31, 1999. This increase was attributable to:
o a strong demand cycle throughout 2000 in Pulse markets for data
networking, telecommunications and power conversion, and
o continued new product development by our customers and our related
record number of new product design wins.
Pulse's net sales increased $131.4 million, or 42.8%, to $438.8 million in
the year ended December 29, 2000 from $307.4 million in the year ended December
31, 1999. This sales growth was not impacted by acquisitions and was due to
unprecedented market growth across all of our primary product areas.
AMI Doduco's net sales increased $2.5 million, or 1.1%, to $225.6 million
in the year ended December 29, 2000 from $223.1 million in the year ended
December 31, 1999. This increase was due to strong market growth in our primary
product areas. Despite the increase, AMI Doduco's net sales in the year ended
December 29, 2000 were negatively affected by:
o an average euro-to-U.S. dollar exchange rate that was 6.5% below the
1999 average, and
o our sale of a non-strategic European product line.
Partially offsetting these negative sales factors was the full year of
operating contributions by our acquisition of MEC Betras made in December 1999.
Cost of Sales. Our cost of sales increased $51.3 million, or 14.3%, to
$409.9 million in the year ended December 29, 2000 from $358.6 million in the
year ended December 31, 1999. The increase resulted from higher net sales in the
year ended December 29, 2000. Our consolidated gross margin for the year ended
December 29, 2000 was 38.3% compared to 32.4% in the year ended December 31,
1999. Pulse's gross
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margin increased from the prior year as a result of volume efficiencies, a
favorable sales mix and the full year effect of cost control programs that were
instituted in the first quarter of the year ended December 31, 1999. AMI
Doduco's gross margin increased slightly from the prior year due to our cost
reduction efforts. Product mix was an offsetting factor, due to a higher content
of precious metals, on which we realize low margins, in the year ended December
29, 2000 compared with the year ended December 31, 1999.
Selling, General and Administrative Expenses. Total selling, general and
administrative expenses for the year ended December 29, 2000 increased $20.4
million, or 18.4%, to $131.1 million, or 19.7% of net sales, from $110.7
million, or 20.9% of net sales, in the year ended December 31, 1999. The
increase in absolute dollars was due primarily to the following reasons:
o compensation expense associated with cash performance incentive plans,
which are linked to operating profits, economic profit and earnings
per share targets was $4.3 million higher in the year ended December
29, 2000 compared to the year ended December 31, 1999;
o stock compensation plan expense, which is variable in relation to our
quoted share price, was $4.1 million higher in the year ended December
29, 2000 compared to the year ended December 31, 1999;
o higher spending was required to support the higher level of Pulse
sales including increases of $1.5 million related to selling expenses
such as commissions and other expenses that largely vary with sales;
o administrative expenses, including the stock and incentive
compensation-related items noted above, increased $18.9 million; and
o expenses related to acquisition development and integration activity
such as travel and consulting were higher in the year ended December
29, 2000 compared to the year ended December 31, 1999.
Increases noted above are shown net of the effect of our expense reduction
programs, particularly the reduction in employment levels by approximately 120
people. The annual salary and benefit costs associated with these people was
approximately $4.8 million.
For the year ended December 29, 2000 and December 31, 1999, RD&E by segment
was as follows (dollars in thousands):
2000 1999
---- ----
Pulse $15,748 $13,972
Percentage of segment sales 3.6% 4.6%
AMI Doduco $ 4,430 $ 5,639
Percentage of segment sales 2.0% 2.5%
RD&E spending within Pulse increased from the year ended December 31, 1999
in absolute dollars as Pulse continued to invest in new technologies and related
improvements
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to respond to rapid technology changes in its marketplace. As a percentage of
sales, Pulse spending in the year ended December 29, 2000 was less than the year
ended December 31, 1999 as Pulse's sales reached record levels in the year ended
December 29, 2000. RD&E spending within AMI Doduco decreased from the year ended
December 31, 1999 due to the disproportionate share of RD&E required by the
non-strategic European product line that was divested in the first quarter of
fiscal 2000.
Interest. Interest income for the year ended December 29, 2000 was $6.3
million compared with $1.9 million in the year ended December 31, 1999. Cash and
cash equivalents were substantially higher during the year ended December 29,
2000 than during the year ended December 31, 1999, and the average percentage of
yield was also higher throughout the year ended December 29, 2000. Our higher
level of interest income in the year ended December 29, 2000 over the year ended
December 31, 1999 was also due to the majority of the increase in cash in the
year ended December 31, 1999 being generated during the latter part of 1999.
For the year ended December 29, 2000, interest expense was $3.5 million,
essentially the same as in the year ended December 31, 1999.
Income Taxes. Our effective income tax rate during the year ended December
29, 2000 was 19.2%. This compares to 24.9% in the year ended December 31, 1999.
For the year ended December 29, 2000, a higher proportion of income was earned
in low-tax jurisdictions by Pulse.
Liquidity and Capital Resources
Working capital as of December 28, 2001 was $189.3 million compared to
$230.4 million as of December 29, 2000. This decrease was primarily due to lower
accounts receivable and inventory levels during 2001. Cash and cash equivalents,
which is included in working capital, decreased from $162.6 million as of
December 29, 2000 to $142.3 million as of December 28, 2001.
Net cash from operating activities was $62.7 million for the year ended
December 28, 2001 and $113.8 million in 2000, a decrease of $51.1 million. In
2000, our cash flow from operations was primarily driven by increasing net
earnings. During the year ended December 28, 2001, net earnings declined as a
result of the dramatic slowdown in the markets served by Pulse. However, the
lower earnings have been partially offset by decreased working capital
requirements and aggressive cash management actions that we took in response to
the slowdown. A significant decrease in Pulse's net sales during the year ended
December 28, 2001 caused a significant decrease in accounts receivable. The
decrease in accounts payable and accrued expenses resulted from payments made
for income taxes and compensation related items, as well as a lower level of
trade accounts payable due to reduced production. Net of the effect of
acquisitions, inventory declined by $28.7 million during the year ended December
28, 2001 due to the significant reduction in Pulse's net sales during the period
and corresponding actions to limit purchases and production activity. The
reduction in inventory also reflects $20.3 million of provisions for inventory
during the year ended December 28, 2001.
Page 33 of 77
Capital expenditures were $13.2 million during the year ended December 28,
2001 and $30.0 million in 2000. The level of capital expenditures decreased from
the year ended December 29, 2000, due to tight spending controls and lower Pulse
capacity needs resulting from lower sales. During the year ended December 28,
2001, capital spending was $6.0 million in the first quarter, $2.7 million in
the second quarter, $1.8 million in the third quarter and $2.7 million in the
fourth quarter, as our efforts to maximize cash flow during this period of slow
market activity intensified. We significantly reduced our capital spending in
2001 as compared to fiscal 2000 and expect that our spending in 2002 may be less
than in 2001. We make capital expenditures to expand production capacity and to
improve our operating efficiency. We plan to continue making such expenditures
in the future.
Cash used for acquisitions was $120.3 million for the year ended December
28, 2001 and $5.4 million for the comparable period in 2000. The 2001 spending
includes the August 2001 acquisition of Excelsus for approximately $90.7
million, including cash acquired of $4.8 million. We may acquire other
businesses or product lines to expand our breadth and scope of operations.
We paid dividends of $4.5 million in the year ended December 28, 2001 and
$4.4 million in the year ended December 29, 2000. We received proceeds of $6.5
million during the year ended December 28, 2001 and $8.4 million in the year
ended December 29, 2000 from the sale of stock through our employee stock
purchase plan. We do not expect to continue receiving significant proceeds
through our employee stock purchase plan in the near term. After paying a
dividend on January 25, 2002 to shareholders of record on January 4, 2002, we no
longer intend to pay cash dividends on our common stock. We currently intend to
retain future earnings to finance the growth of our business.
All previous credit facilities and lines of credit, excluding fixed term
loans, were replaced as of June 20, 2001 under a new three-year revolving credit
agreement providing for $225.0 million of credit capacity. The credit facility
consists of:
o a U.S. dollar-based revolving line of credit in the principal amount
of up to $225.0 million;
o a British pounds sterling-based or euro-based revolving line of credit
in the principal amount of up to the U.S. dollar equivalent of $100.0
million; and
o a multicurrency facility providing for the issuance of letters of
credit in an aggregate amount not to exceed the U.S. dollar equivalent
of $10.0 million.
The amounts outstanding under the credit facility in total may not exceed
$225.0 million.
We pay a facility fee irrespective of whether there are outstanding
borrowings or not, which ranges from 0.275% to 0.450% of the total commitment,
depending on our ratio of debt to earnings before interest, taxes, depreciation
and amortization, ("EBITDA"). The interest rate for each currency's borrowing
will be a combination of the base rate for that currency plus a credit margin
spread. The base rate is different for each currency: LIBOR or prime rate for
U.S. dollars, Euro-LIBOR for euros, and a rate approximating sterling LIBOR for
British pounds. The credit margin spread is the same for each currency and is
Page 34 of 77
0.850% to 1.425% depending on our debt to EBITDA ratio. Each of our domestic
subsidiaries with net worth equal to or greater than $5 million has agreed to
guarantee all obligations incurred under the credit facility. The credit
facility also contains covenants requiring maintenance of minimum net worth,
maximum debt to EBITDA ratio, minimum interest expense coverage, capital
expenditure limitations, and other customary and normal provisions. We are in
compliance with all such covenants.
Our German indirect subsidiary, AMI Doduco GmbH, has obligations
outstanding under two term loan agreements. The first is with
Baden-Wurttembergische Bank for the borrowing of two loans, each in the amount
of 10 million Deutsche marks, both due in June 2003. The second is with
Sparkasse Pforzheim, for the borrowing of 10 million Deutsche marks, and is due
in August 2009. We and several of our subsidiaries have guaranteed the
obligations arising under these term loan agreements.
We believe that the combination of cash on hand, cash generated by
operations and, if necessary, additional borrowings under our credit agreement
will be sufficient to satisfy our operating cash requirements in the short-term
and long-term. In addition, we may use internally generated funds or borrowings,
or additional equity offerings for acquisitions of suitable businesses or
assets.
With the exception of approximately $10.0 million of retained earnings as
of December 28, 2001 in the PRC that are restricted in accordance with Section
58 of the PRC Foreign Investment Enterprises Law, substantially all retained
earnings are free from legal or contractual restrictions. The amount restricted
in accordance with the PRC Foreign Investment Enterprise Law is for employee
welfare programs and is applicable to all foreign investment enterprises doing
business in the PRC. The restriction applies to 10% of our net earnings in the
PRC, limited to 50% of the total capital invested in the PRC. We have not
experienced any significant liquidity restrictions in any country in which we
operate and none are foreseen. However, foreign exchange ceilings imposed by
local governments and the sometimes lengthy approval processes which some
foreign governments require for international cash transfers may delay our
internal cash movements from time to time. The retained earnings in other
countries represent a material portion of our assets. We expect to reinvest
these earnings outside of the United States because we anticipate that a
significant portion of our opportunities for growth in the coming years will be
abroad. If these earnings were brought back to the United States, significant
tax liabilities could be incurred in the United States as several countries in
which we operate have rates significantly lower than the U.S. statutory rate.
Additionally, we have not accrued U.S. income taxes on foreign earnings
indefinitely invested abroad. We have also been granted special tax incentives
in other countries such as the PRC and the Philippines. This favorable situation
could change if these countries were to increase rates or revoke the special tax
incentives, or if we were to discontinue manufacturing operations in these
countries. This could have a material unfavorable impact on our net income and
cash position.
We commenced an intercompany lending program during the year ended December
28, 2001, whereby excess U.S. dollar denominated cash is being used to retire
euro denominated debt. The benefit derived from this program is lower net
interest expense, as the U.S. dollar interest income rates have been decreasing,
while the euro interest expense rates have declined less rapidly.
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At December 28, 2001, we had approximately $150.0 million of unused line
credit available under the credit agreement, although outstanding borrowings are
limited to a maximum multiple of three times EBITDA on a rolling twelve-month
basis.
New Accounting Pronouncements
In October 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, ("SFAS 144") which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. While SFAS 144 supersedes FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, ("SFAS 121") it retains many of the
fundamental provisions of SFAS 121. SFAS 144 also supersedes the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, ("APB
30"). SFAS 144 does however, retain the requirement in APB 30 to report
separately discontinued operations, and extends this reporting requirement to a
component of an entity that either has been disposed of by sale, abandonment, or
in a distribution to owners; or is classified as held for sale. Goodwill is
excluded from the scope of SFAS 144. We are required to adopt the provisions of
SFAS 144 during the three months ending March 29, 2002. Adoption of this
standard is not expected to have a material effect on our revenue, operating
results or liquidity.
In August 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations ("SFAS 143") which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS 143 applies to legal
obligations associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development and (or) normal use of
the assets. SFAS 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the liability
is added to the carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If the
obligation is settled for other than the carrying amount of the liability, a
gain or loss on settlement will be recognized. We are required to adopt the
provisions of SFAS 143 during the three months ending March 28, 2003. Adoption
of this standard is not expected to have a material effect on our net sales,
operating results or liquidity.
In July 2001, the FASB issued Statement No. 141, Business Combinations,
("SFAS 141") and Statement No. 142, Goodwill and Other Intangible Assets ("SFAS
142"). SFAS 141 requires that the purchase method of accounting be used for all
business combinations completed after June 30, 2001. SFAS 141 also specifies
that intangible assets acquired in a purchase method business combination must
meet certain criteria to be recognized and reported apart from goodwill. SFAS
142 requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead they are tested for impairment at least
annually in accordance with the provisions of SFAS 142. SFAS 142 will also
require
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that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS 144.
We are adopting the provisions of SFAS 141 immediately, and SFAS 142
effective January 1, 2002. Furthermore, any goodwill and any intangible assets
determined to have an indefinite useful life acquired in a purchase business
combination completed after June 30, 2001 are not amortized, but will continue
to be evaluated for permanent impairment. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 were amortized
until December 28, 2001. Since our acquisition of Excelsus was completed on
August 7, 2001, the provisions of SFAS 141 were applied. Therefore, goodwill and
certain intangibles with indefinite lives resulting from the Excelsus
transaction have not been subject to amortization.
In connection with the transitional goodwill impairment evaluation, SFAS
142 requires us to perform an assessment of whether there is an indication that
goodwill is impaired as of the date of adoption. To accomplish this, we must
determine the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption. We then have up to six months from
the date of adoption to determine the fair value of each reporting unit and
compare it to the reporting unit's carrying amount. To the extent a reporting
unit's carrying amount exceeds its fair value, an indication exists that the
reporting unit's goodwill may be impaired and we must perform the second step of
the transitional impairment test. In the second step, we must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of its assets and liabilities in a manner
similar to a purchase price allocation in accordance with SFAS 141, to its
carrying amount. This second step is required to be completed as soon as
possible, but no later than the end of the year of adoption. Any transitional
impairment loss will be recognized as the cumulative effect of a change in
accounting principle in our statement of earnings.
We had approximately $80.3 million of unamortized goodwill and $48.2
million of other intangible assets as of December 28, 2001, which will be
subject to the transition provisions of SFAS 141 and SFAS 142. Amortization
expense was approximately $5.4 million and $3.8 million for the years ended
December 28, 2001 and December 29, 2000, respectively. We are performing the
transitional impairment test and currently estimate that an impairment loss of
approximately $16.0 to $19.0 million will be recorded in the first quarter of
2002. This loss will be recognized as a cumulative effect of an accounting
principle change.
Item 7a Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our financial instruments, including cash and cash equivalents and
long-term debt, are exposed to changes in interest rates in both the U.S. and
abroad. We invest our excess cash in short-term, investment grade interest
bearing securities. We generally limit our exposure to any one financial
institution to the extent practical. Our board has adopted
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policies relating to these risks, and the audit committee of the board
continually monitors compliance with these policies.
Our existing credit facilities have variable interest rates. Accordingly,
interest expense may increase if the rates associated with, or the amount of,
our borrowings move higher. In addition, we may pursue additional or alternative
financing for growth opportunities in one or both segments. We may use interest
rate swaps or other financial derivatives in order to manage the risk associated
with changes in market interest rates. However, we have not used any of these
instruments to date.
The table below presents principal amounts in U.S. dollars (or equivalent
U.S. dollars with respect to non-U.S. denominated debt) and related weighted
average interest rates by year of maturity for our debt obligations. The column
captioned "Approximate Fair Value" sets forth the carrying value of our
long-term debt as of December 28, 2001, which approximates its fair value at
such date after taking into consideration current rates offered to us for
similar debt instruments of comparable maturities. We do not hold or issue
financial instruments or derivative financial instruments for trading purposes
(dollars in thousands):
Approx.
There- Fair
2002 2003 2004 2005 2006 after Total Value
---- ---- ---- ---- ---- ----- ----- -----
Liabilities
Long-term debt
Fixed rate:
Euro (1) $ 122 $9,154 $ 110 $ 85 $ 95 $ 4,563 $14,129 $14,129
Wt. ave. interest rate 9.02% 5.26% 9.02% 9.02% 9.02% 5.69%
Variable rate:
U. S. Dollar $75,000 $75,000 $75,000
Wt. ave. interest rate 2.91%
(1) U.S. dollar equivalent
Foreign Currency Risk
As of December 28, 2001, substantially all of our cash assets were
denominated in U.S. dollars. However, we conduct business in various foreign
currencies, including those of emerging market countries in Asia and
well-developed European countries. We utilize derivative financial instruments,
primarily forward exchange contracts and currency options, to manage foreign
currency risks. In accordance with SFAS 133, gains and losses related to
qualified hedges of firm commitments and anticipated transactions are deferred
and are recognized in income or as adjustments of carrying amounts when the
hedged transactions occurs. All other forward exchange and options contracts are
marked-to-market and unrealized gains and losses are included in current period
net income. These contracts guarantee a predetermined rate of exchange at the
time the contract is purchased. This allows us to shift the majority of the risk
of currency fluctuations from the date of the contract to a third party for a
fee. We believe there are two potential risks of holding these instruments. The
first is that the foreign currency being hedged could move in a direction which
could create a better economic outcome than if hedging had not taken place. The
second risk is that the counterparty to a currency hedge defaults on its
obligations. We
Page 38 of 77
reduce the risk of counterparty default by entering into relatively short-term
hedges with well capitalized and highly rated banks. In determining the use of
forward exchange contracts and currency options, we consider the amount of sales
and purchases made in local currencies, the type of currency and the costs
associated with the contracts. In addition, beginning in the third quarter of
2001, we began to employ foreign exchange forward contracts to hedge foreign
currency risks associated with intercompany loans. As of December 28, 2001, we
had five foreign exchange forward contracts with an aggregate principal balance
of approximately $39.3 million outstanding on a U.S. dollar equivalent basis.
The terms of these contracts were from one to six months. We did not have any
other financial derivative instruments as of December 28, 2001.
The table below provides information about our other non-derivative, non-U.S.
dollar denominated financial instruments and presents the information in
equivalent U.S. dollars. Amounts set forth under "Liabilities" represent
principal amounts and related weighted average interest rates by year of
maturity for our foreign currency debt obligations. The column captioned
"Approximate Fair Value" sets forth the carrying value of our foreign currency
long-term debt as of December 28, 2001, which approximates its fair value at
such date after taking into consideration current rates offered to use for
similar debt instruments of comparable maturities (dollars in thousands):
Approx.
There- Fair
2002 2003 2004 2005 2006 after Total Value
---- ---- ---- ---- ---- ----- ----- -----
Assets
Cash and equivalents
Variable rate:
Euro (1) $7,206 $ 7,206 $7,206
Other currencies (1) $2,544 $ 2,544 $2,544
Liabilities
Long-term debt
Fixed rate:
Euro (1) $ 122 $9,154 $ 110 $ 85 $ 95 $4,563 $14,129 $14,129
Wt. ave. interest rate 9.02% 5.26% 9.02% 9.02% 9.02% 5.69%
(1) U.S. dollar equivalent
Item 8 Financial Statements and Supplementary Data
Information required by this item is incorporated by reference from the
Independent Auditors' Report found on page 45 and from the consolidated
financial statements and supplementary schedule on pages 46 through 76.
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None
Page 39 of 77
Part III
Cross Reference Index
Form 10-K
Item Number and Caption Incorporated Material
----------------------- ---------------------
Item 10 Directors and Executive Officers of the The disclosure required by this item is
Registrant incorporated by reference to the
sections entitled, "Directors and
Executive Officers" and "Section 16(a)
Beneficial Ownership Reporting
Compliance" in our definitive proxy
statement to be used in connection with
our 2002 Annual Meeting of Shareholders
Item 11 Executive Compensation The disclosure required by this item is
incorporated by reference to the
sections entitled, "Executive
Compensation," "Retirement Plan,"
"Executive Employment arrangements,"
"Compensation of Non-Employee
Directors," "Board Stock Ownership,"
Report of Executive Compensation
Committee on Compensation Policies,"
"Compensation Committee Interlocks and
Insider Participation," and "Comparison
of Five-Year Cumulative Total Return"
in our definitive proxy statement to be
used in connection with our 2002 Annual
Meeting of Shareholders
Item 12 Security Ownership of Certain Beneficial Owners The disclosure required by this item is
and Management incorporated by reference to the
sections entitled, "Persons Owning More
Than Five Percent of Our Stock" and
"Stock Owned by Directors and Officers"
in our definitive proxy statement to be
used in connection with our 2002 Annual
Meeting of Shareholders
Item 13 Certain Relationships and Related Transactions
None
Page 40 of 77
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report
Financial Statements
--------------------
Independent Auditors' Report
Consolidated Balance Sheets - December 28, 2001 and December 29, 2000
Consolidated Statements of Earnings - Years ended December 28,
2001, December 29, 2000 and December 31, 1999 Consolidated
Statements of Cash Flows - Years ended December 28, 2001,
December 29, 2000 and December 31, 1999 Consolidated
Statements of Changes in Shareholders' Equity - Years ended
December 28, 2001, December 29, 2000
and December 31, 1999
Notes to Consolidated Financial Statements
Financial Statement Schedules
-----------------------------
Schedule II, Valuation and Qualifying Accounts
(b) Reports on Form 8-K
We filed a report on Form 8-K dated March 14, 2002. This report
pertains to our expected financial results for the quarter ending
March 29, 2002.
(c) Exhibits
Information required by this item is contained in the "Exhibit Index"
found on page 76 through 77 of this report.
Page 41 of 77
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TECHNITROL, INC.
By /s/James M. Papada, III
-------------------------------
James M. Papada, III
Chairman, President and
Chief Executive Officer
Date March 19, 2002
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 on the dates indicated.
By By /s/Edward M. Mazze
------------------------------ -----------------------------------
Stanley E. Basara Edward M. Mazze
Director Director
Date March 19, 2002 Date March 19, 2002
By /s/John E. Burrows, Jr. By
------------------------------ -----------------------------------
John E. Burrows, Jr. C. Mark Melliar-Smith
Director Director
Date March 19, 2002 Date March 19, 2002
By /s/Rajiv L. Gupta By /s/James M. Papada, III
------------------------------ -----------------------------------
Rajiv L. Gupta James M. Papada, III
Director Chairman, President and Chief
Executive Officer
Date March 19, 2002 (Principal Executive Officer)
By Date March 19, 2002
------------------------------
J. Barton Harrison
Director By /s/Drew A. Moyer
-----------------------------------
Drew A. Moyer
Date March 19, 2002 Corporate Controller and Secretary
(Principal Accounting Officer)
By /s/David H. Hofmann
------------------------------
David H. Hofmann Date March 19, 2002
Director
By /s/Albert Thorp, III
-----------------------------------
Date March 19, 2002 Albert Thorp, III
Vice President - Finance and Chief
By /s/Graham Humes Financial Officer
------------------------------ (Principal Financial Officer)
Graham Humes
Director Date March 19, 2002
Date March 19, 2002
Page 42 of 77
Index to Consolidated Financial Statements and Financial Statement Schedule
Financial Statements
--------------------
Independent Auditors' Report
Consolidated Balance Sheets - December 28, 2001 and December 29, 2000
Consolidated Statements of Earnings - Years ended December 28, 2001, December
29, 2000 and December 31, 1999
Consolidated Statements of Cash Flows - Years ended December 28, 2001, December
29, 2000 and December 31, 1999
Consolidated Statements of Changes in Shareholders' Equity - Years ended
December 28, 2001, December 29, 2000 and December 31, 1999
Notes to Consolidated Financial Statements
Financial Statement Schedule
----------------------------
Schedule II, Valuation and Qualifying Accounts
Page 43 of 77
Independent Auditors' Report
The Board of Directors and Shareholders
Technitrol, Inc.:
We have audited the consolidated financial statements of Technitrol, Inc. and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and the financial statement schedule
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Technitrol, Inc. and
subsidiaries as of December 28, 2001 and December 29, 2000, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 28, 2001, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Philadelphia, Pennsylvania
January 18, 2002
Page 44 of 77
Technitrol, Inc. and Subsidiaries
Consolidated Balance Sheets
December 28, 2001 and December 29, 2000
In thousands, except per share data
Assets 2001 2000
------ --------- ---------
Current assets:
Cash and cash equivalents $ 142,267 $ 162,631
Trade receivables, net 63,294 108,423
Inventories 62,404 86,001
Prepaid expenses and other current assets 18,785 11,679
--------- ---------
Total current assets 286,750 368,734
Property, plant and equipment 170,665 173,739
Less accumulated depreciation 87,613 81,341
--------- ---------
Net property, plant and equipment 83,052 92,398
Deferred income taxes 9,499 11,235
Excess of cost over net assets acquired and other intangibles, net 128,512 47,064
Other assets 17,207 1,340
--------- ---------
$ 525,020 $ 520,771
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt $ 122 $ 151
Accounts payable 24,780 35,046
Accrued expenses 72,591 103,140
--------- ---------
Total current liabilities 97,493 138,337
Long-term liabilities:
Long-term debt, excluding current installments 89,007 48,437
Other long-term liabilities 9,289 9,567
Commitments and contingencies (Note 7)
Shareholders' equity:
Common stock: 175,000,000 shares authorized; 33,683,420 and
33,236,762 outstanding in 2001 and 2000, respectively; $.125
par value per share and additional paid-in capital 70,184 63,909
Retained earnings 264,055 266,132
Other (5,008) (5,611)
--------- ---------
Total shareholders' equity 329,231 324,430
--------- ---------
$ 525,020 $ 520,771
========= =========
See accompanying Notes to Consolidated Financial Statements.
Page 45 of 77
Technitrol, Inc. and Subsidiaries
Consolidated Statements of Earnings
Years ended December 28, 2001, December 29, 2000 and December 31, 1999
In thousands, except per share data
2001 2000 1999
--------- --------- ---------
Net sales $ 474,199 $ 664,378 $ 530,436
Cost of sales 359,681 409,856 358,553
--------- --------- ---------
Gross profit 114,518 254,522 171,883
Selling, general and administrative expenses 98,837 131,113 110,694
Restructuring and unusual and infrequent items 13,594 3,305 --
--------- --------- ---------
Operating profit 2,087 120,104 61,189
Other income (expense):
Interest income 6,401 6,341 1,882
Interest expense (4,998) (3,482) (3,477)
Other, net 1,879 (49) (585)
--------- --------- ---------
3,282 2,810 (2,180)
--------- --------- ---------
Earnings before income taxes 5,369 122,914 59,009
Income taxes 2,903 23,606 14,697
--------- --------- ---------
Net earnings $ 2,466 $ 99,308 $ 44,312
========= ========= =========
Net earnings per share:
Basic $ .07 $ 3.05 $ 1.38
========= ========= =========
Diluted $ .07 $ 3.02 $ 1.36
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
Page 46 of 77
Technitrol, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended December 28, 2001, December 29, 2000 and December 31, 1999
In thousands
2001 2000 1999
--------- --------- --------
Cash flows from operating activities:
Net earnings $ 2,466 $ 99,308 $ 44,312
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 26,553 22,378 19,411
Tax benefit from employee stock compensation 231 1,893 429
Amortization of stock incentive plan expense 1,219 6,990 2,327
Loss on sale of property, plant and equipment 3,863 1,301 1,076
Deferred taxes 4,889 (4,239) 3,319
Restructuring and unusual and infrequent items 599 2,495 --
Inventory provisions 20,295 8,129 4,483
Changes in assets and liabilities, net of effect of
acquisitions and divestitures:
Trade receivables 48,197 (31,527) (9,345)
Inventories 8,437 (30,161) 1,262
Prepaid expenses and other current assets (4,487) 1,462 775
Accounts payable (14,348) 10,630 3,788
Accrued expenses (33,657) 21,321 (3,028)
Other, net (1,571) 3,808 443
--------- --------- --------
Net cash provided by operating activities 62,686 113,788 69,252
--------- --------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired (115,533) (5,365) (15,277)
Capital expenditures, exclusive of acquisitions (13,149) (29,976) (18,766)
Proceeds from sale of property, plant and equipment 4,531 571 1,115
--------- --------- --------
Net cash used in investing activities (124,151) (34,770) (32,928)
--------- --------- --------
Cash flows from financing activities:
Principal payments on long-term debt (97,261) (36,243) (73,185)
Long-term borrowings 140,239 27,269 77,753
Payment of debt assumed in acquisition (3,944) -- --
Dividends paid (4,528) (4,430) (4,133)
Exercise of stock options 17 220 5
Sale of stock through employee stock purchase plan 6,548 8,388 916
--------- --------- --------
Net cash (used in) provided by financing activities 41,071 (4,796) 1,356
--------- --------- --------
Net effect of exchange rate changes on cash 30 248 (82)
--------- --------- --------
Net (decrease) increase in cash and cash equivalents (20,364) 74,470 37,598
Cash and cash equivalents at beginning of year 162,631 88,161 50,563
--------- --------- --------
Cash and cash equivalents at end of year $ 142,267 $ 162,631 $ 88,161
========= ========= ========
See accompanying Notes to Consolidated Financial Statements.
Page 47 of 77
Technitrol, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 28, 2001, December 29, 2000 and December 31, 1999
In thousands, except per share data
Other
---------------------
Accumu-
Common stock and lated other
paid-in capital Deferred compre- Compre-
--------------------- Retained compen- hensive hensive
Shares Amount earnings sation income income
------ ------ -------- ------ ------ ------
Balance at January 1, 1999 16,170 $ 45,109 $ 131,227 $(1,792) $ 265
Stock options, awards and related
compensation 66 1,809 -- (609) --
Tax benefit of stock compensation -- 429 -- -- --
Stock issued under employee stock
purchase plan 30 916 -- -- --
Currency translation adjustments -- -- -- -- (1,770) $ (1,770)
Net earnings -- -- 44,312 -- -- 44,312
--------
Comprehensive income -- -- -- -- -- $ 42,542
========
Dividends declared ($.13125 per share) -- -- (4,261) -- --
-------- -------- --------- ------- --------
Balance at December 31, 1999 16,266 $ 48,263 $ 171,278 $(2,401) $(1,505)
Stock options, awards and related
compensation 88 5,365 -- (1,470) --
Tax benefit of stock compensation -- 1,893 -- -- --
Stock issued under employee stock
purchase plan 265 8,388 -- -- --
Currency translation adjustments -- -- -- -- (235) $ (235)
Net earnings -- -- 99,308 -- -- 99,308
--------
Comprehensive income -- -- -- -- -- $ 99,073
========
Dividends declared ($.135 per share) -- -- (4,454) -- --
Two-for-one stock split effective in
November 2000 16,618 -- -- -- --
-------- -------- --------- ------- --------
Balance at December 29, 2000 33,237 $ 63,909 $ 266,132 $(3,871) $(1,740)
Stock options, awards and related
compensation 48 (504) -- 1,441 --
Tax benefit of stock compensation -- 231 -- -- --
Stock issued under employee stock
purchase plan 398 6,548 -- -- --
Currency translation adjustments -- -- -- -- (838) $ (838)
Net earnings -- -- 2,466 -- -- 2,466
--------
Comprehensive income -- -- -- -- -- $ 1,628
========
Dividends declared ($.135 per share) -- -- (4,543) -- --
-------- -------- --------- ------- --------
Balance at December 28, 2001 33,683 $ 70,184 $ 264,055 $(2,430) $(2,578)
======== ======== ========= ======= ========
See accompanying Notes to Consolidated Financial Statements.
Page 48 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Technitrol,
Inc. (the "Company") and all of its subsidiaries. All material intercompany
accounts and transactions are eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include funds invested in a variety of liquid
short-term investments with a maturity of three months or less.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method. Inventory that is fully reserved in
the ordinary course of business is not written back up after a write-down.
Inventory reserves are utilized when the actual inventory is physically
disposed. The reserves are determined by comparing quantity on-hand to
historical usage and forecasted demand. The Company's inventory reserves at
December 28, 2001 and December 29, 2000 were $23.5 million and $9.2 million,
respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is based
upon the estimated useful life of the assets on both the accelerated and the
straight-line methods. The estimated useful lives of assets range from 5 to 30
years for buildings and improvements and from 3 to 10 years for machinery and
equipment. Expenditures for maintenance and repairs are charged to operations as
incurred, and major renewals and betterments are capitalized. Upon sale or
retirement, the cost of the asset and related accumulated depreciation are
removed from the balance sheet, and any resulting gains or losses are included
in earnings.
(continued)
Page 49 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
Excess of Cost over Net Assets and Other Intangibles
Excess of cost over net assets acquired is amortized on a straight-line
basis over 15 years. When events and circumstances so indicate, the
recoverability of its carrying value is evaluated by determining whether its
remaining balance can be recovered through future undiscounted cash flows from
operations. Such events and circumstances include a sale of all or a significant
part of the operations associated with the excess of cost over net assets
acquired, or a significant decline in the operating performance of the net
assets. If an evaluation indicates that the carrying value cannot be recovered
through future operating undiscounted cash flows, an impairment charge will be
recorded by discounting the future operating cash flows using the implied cost
of capital for that business segment and comparing the resulting discounted cash
flow to the carrying value. The Company has approximately $80.3 million of
goodwill and $48.2 million of other intangibles, including $40.0 million of
trade names, on its balance sheet as of December 28, 2001. The Company had
approximately $47.1 million of goodwill at December 29, 2000. See additional
discussion in Note 2 Acquisitions.
Acquisitions consummated after July 1, 2001 were accounted for by the
transition rules of SFAS 141, and goodwill resulting from such transactions have
not been subjected to amortization.
Revenue Recognition
Revenue is recognized upon shipment of product and passage of title without
right of return, after all performance factors have been met. The Company is not
subject to any significant customer acceptance provisions. Product returns are
covered by reserves based on historical experience and Financial Accounting
Standard No. 48, "Revenue Recognition When Right of Return Exists." The
Company's accounts receivable reserves at December 28, 2001 and December 29,
2000 were $2.6 million and $1.9 million, respectively.
Stock-based Compensation
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). Note 11 presents proforma results of operations as if
Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
(FAS 123), had been used to account for stock-based compensation plans.
(continued)
Page 50 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
Foreign Currency Translation
Certain foreign subsidiaries of the Company use the U.S. dollar as the
functional currency and others use a local currency. For subsidiaries using the
U.S. dollar as the functional currency, non-U.S. dollar monetary assets and
liabilities are remeasured at year-end exchange rates while non-monetary items
are remeasured at historical rates. Income and expense accounts are remeasured
at the average rates in effect during the year, except for depreciation that is
remeasured at historical rates. Gains or losses from changes in exchange rates
are recognized in earnings in the year of occurrence. For entities using a local
currency as the functional currency, net assets are translated at year-end rates
while income and expense accounts are translated at average exchange rates.
Adjustments resulting from these translations are reflected directly in
shareholders' equity.
Financial Instruments and Derivative Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable,
short-term borrowings and accounts payable are a reasonable estimate of their
fair value due to the short-term nature of these instruments. The carrying value
of long-term debt approximates its fair value after taking into consideration
current rates offered to the Company for similar debt instruments of comparable
maturities. The fair values of financial instruments have been determined
through information obtained from quoted market sources and management
estimates. The Company does not hold or issue financial instruments or
derivative financial instruments for trading purposes.
The Company is exposed to market risk from changes in interest rates,
foreign currency exchange rates and precious metal prices. To mitigate the risk
from these changes, the Company periodically enters into hedging transactions
which have been authorized pursuant to the Company's policies and procedures. In
accordance with SFAS 133, gains and losses related to qualified hedges of firm
commitments and anticipated transactions are deferred and are recognized in
income or as adjustments of carrying amounts when the hedged transaction occurs.
All other forward exchange and option contracts are marked-to-market and
unrealized gains and losses are included in current-period net income. At
December 28, 2001, the Company has five foreign exchange contracts in place to
sell forward approximately 44.2 million of euro in connection with hedging the
repayment of intercompany loans. At December 29, 2000, the Company had a foreign
exchange contract in place to sell forward $3.2 million of U.S. dollars for
French francs, in connection with the purchase of the electrical contacts
business of Engelhard-CLAL on January 4, 2001. At December 31, 1999, the Company
did not have any derivative financial instruments outstanding, other than to
sell forward approximately $1.2 million of precious metal purchased as part of
the acquisition of MEC Betras Italia S.r.l. on December 22, 1999.
(continued)
Page 51 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
Precious Metal Consignment-type Leases
The Company has custody of inventories under consignment-type leases from
suppliers ($39.6 million at December 28, 2001 and $40.8 million at December 29,
2000). The Company has four consignment-type leases in place for sourcing all
precious metals. The leases are operating leases and the related inventory and
liability are not recorded on its balance sheet. The leases are generally
one-year in duration and can be extended with annual renewals. Either party can
terminate the lease agreements with 30 days written notice. The primary covenant
in each of the agreements is a prohibition against the company creating security
interests in the consigned metals. Included in interest expense for the years
ended December 28, 2001 and December 29, 2000 are consignment fees of $1.1
million, respectively. These interest costs were $1.4 million in the year ended
December 31, 1999.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
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 significantly from those
estimates.
Reclassifications
Certain amounts in the prior-year financial statements have been
reclassified to confirm with the current-year presentation.
(continued)
Page 52 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(2) Acquisitions
Excelsus Technologies, Inc.: In August 2001, the Company acquired all of
the capital stock of Excelsus Technologies, Inc. ("Excelsus") based in Carlsbad,
California. Excelsus produced customer-premises digital subscriber line filters
and other broadband accessories. The acquisition was accounted for by the
purchase method of accounting. The preliminary purchase price was approximately
$85.9 million, net of $4.8 million of cash acquired and a preliminary purchase
price adjustment of $2.6 million. The fair value of net assets acquired
approximated $18.2 million. Based on the fair value of the assets acquired, the
preliminary allocation of the unadjusted purchase price includes $40.0 million
for trade names, $27.0 million for goodwill and $8.0 million for technology. The
only intangible subject to amortization is the $8.0 million of technology, which
is estimated to have a 5-year life. The purchase price is subject to adjustment
for the net worth of Excelsus at the date of closing and the allocation of the
purchase price is subject to adjustment as details of the transaction are
finalized. A significant portion of the purchase price is being maintained in an
escrow account. Included in the assets acquired is a $6.3 million tax
receivable, generated by the acceleration and settlement of Excelsus stock
options at the time of closing. The Company filed income tax returns for the
period ending on the closing date, and received the full amount of the tax
receivable during the fourth quarter of 2001. In order to fund the purchase
price, the Company used approximately $19.0 million of cash on-hand and borrowed
approximately $74.0 million under its existing credit facility with a syndicate
of commercial banks. Excelsus was integrated into Pulse. Prior to the
acquisition, Excelsus recorded revenues of approximately $40.0 million in 2000.
Full Rise Electronics Co. Ltd.: In April 2001, the Company made a minority
investment in the common stock of Full Rise Electronics Co. Ltd. ("FRE") which
is accounted for by the cost-basis method of accounting. FRE is based in the
Republic of China (Taiwan) and manufactures connector products including single
and multiple port jacks. This investment was made by Pulse and the Company has
an option to purchase additional shares of common stock in FRE in the future.
Grupo ECM: In March 2001, the Company acquired Electro Componentes
Mexicana, S.A. de C.V. and affiliates based in Mexico City. These operations are
referred to as Grupo ECM. Grupo ECM manufactured and marketed inductive
components primarily for automotive applications. This business was integrated
into Pulse. The purchase price was not material to the Company's consolidated
financial position.
(continued)
Page 53 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(2) Acquisitions, continued
Engelhard-CLAL: In January 2001, the Company acquired the electrical
contacts business of Engelhard-CLAL. These operations are based in France with
additional operations in Spain and the United Kingdom. Engelhard-CLAL
manufactured electrical contacts, wire and strip contact materials and related
products primarily for the European electrical equipment market. This business
was integrated into AMI Doduco. The purchase price was not material to the
Company's consolidated financial position.
EWC, Inc: In October 2000, the Company purchased certain assets of EWC,
Inc. EWC manufactured magnetic components primarily for the defense and
aerospace industries. This business was integrated into the Specialty Components
Division of Pulse. The purchase price was not material to the Company's
consolidated financial position.
Tool and Die facility in Estonia from AMP: In January of 2000, the Company
completed the acquisition of a tool and die design and manufacturing operation
near Tallinn, Estonia, from AMP, a division of Tyco Electronics Corporation.
This business was integrated into AMI Doduco. The purchase price was not
material to the Company's consolidated financial position.
(3) Financial Statement Details
The following provides details for certain financial statement captions at
December 28, 2001 and December 29, 2000 (in thousands):
2001 2000
-------- --------
Inventories:
Finished goods $ 22,159 $ 28,710
Work in progress 11,723 15,907
Raw materials and supplies 28,522 41,384
-------- --------
$ 62,404 $ 86,001
======== ========
Property, plant and equipment, at cost:
Land $ 3,287 $ 4,081
Buildings and improvements 30,287 32,362
Machinery and equipment 137,091 137,296
-------- --------
$170,665 $173,739
======== ========
Accrued expenses:
Income taxes payable $ 26,210 $ 37,214
Dividends payable 1,137 1,122
Accrued compensation 10,158 26,746
Other accrued expenses 35,086 38,058
-------- --------
$ 72,591 $103,140
======== ========
(continued)
Page 54 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(4) Long-term Debt
At December 28, 2001 and December 29, 2000, long-term debt was as follows (in
thousands):
Bank Loans 2001 2000
- ---------- ------- -------
Variable-rate, (base rate plus 0.85% to 1.425% depending on debt to EBITDA
ratio; base rate is LIBOR or prime rate for U.S. dollars, Euro-LIBOR for
euros and a rate approximating Sterling LIBOR for British pounds)
multi-currency revolving credit facility with $225.0 million maximum
draw, due June 20, 2004 (2.91%
weighted average rate at December 28, 2001) $75,000 $ --
Variable-rate (EURIBOR plus 0.50%), Eurocurrency revolving credit facility with
$20.0 million maximum draw (5.46% rate at December 29, 2000) -- 14,018
Variable-rate (EURIBOR plus 0.625%), multi-currency bank loan facility with $40.0
million maximum draw (5.625% rate at December 29, 2000) -- 17,827
Fixed-rate (5.57% and 4.85%), unsecured debt in Germany (denominated in Deutsche
marks) due June 26, 2003 9,038 9,636
Fixed-rate (5.65%), unsecured debt in Germany (denominated in Deutsche marks) due
August 2, 2009 4,519 4,818
Variable-rate (EURIBOR plus 0.625%), Eurocurrency offering basis credit facility
with $5.0 million maximum draw (5.625% rate at December 29, 2000) -- 1,413
------- -------
Total bank loans 88,557 47,712
Mortgage Notes, secured by mortgages on land, buildings, and certain equipment:
8.20% - 10.32% mortgage notes, due in monthly installments until 2007 572 876
------- -------
Total long-term debt 89,129 48,588
Less current installments 122 151
------- -------
Long-term debt excluding current installments $89,007 $48,437
======= =======
(continued)
Page 55 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(4) Long-term Debt, continued
All previous credit facilities and lines of credit, excluding fixed term
loans, were replaced as of June 20, 2001 under a new three-year revolving credit
agreement providing for $225.0 million of credit capacity. The credit facility
consists of:
o a U.S. dollar-based revolving line of credit in the principal amount
of up to $225.0 million;
o a British pounds sterling-based or euro-based revolving line of credit
in the principal amount of up to the U.S. dollar equivalent of $100.0
million; and
o a multicurrency facility providing for the issuance of letters of
credit in an aggregate amount not to exceed the U.S. dollar equivalent
of $10.0 million.
The amounts outstanding under the credit facility in total may not exceed
$225.0 million.
The Company pays a facility fee irrespective of whether there are
outstanding borrowings or not, which ranges from 0.275% to 0.450% of the total
commitment, depending on our ratio of debt to earnings before interest, taxes,
depreciation and amortization, ("EBITDA"). The interest rate for each currency's
borrowing will be a combination of the base rate for that currency plus a credit
margin spread. The base rate is different for each currency: LIBOR or prime rate
for U.S. dollars, Euro-LIBOR for euros, and a rate approximating sterling LIBOR
for British pounds. The credit margin spread is the same for each currency and
is 0.850% to 1.425% depending on debt to EBITDA ratio. Each of the Company's
domestic subsidiaries with net worth equal to or greater than $5 million has
agreed to guarantee all obligations incurred under the credit facility.
The Company's German indirect subsidiary, AMI Doduco GmbH, has obligations
outstanding under two term loan agreements. The first is with
Baden-Wurttembergische Bank for the borrowing of two loans, each in the amount
of 10 million Deutsche marks, both due in June 2003. The second is with
Sparkasse Pforzheim, for the borrowing of 10 million Deutsche marks, and is due
in August 2009. The Company and several of its subsidiaries have guaranteed the
obligations arising under these term loan agreements.
(continued)
Page 56 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(4) Long-term Debt, continued
Principal payments due within the next five years, based on terms of the
Company's debt arrangements, are as follows (in thousands):
2002 $ 122
2003 9,154
2004 75,110
2005 85
2006 95
Thereafter 4,563
-------
$89,129
=======
All outstanding borrowings under the credit agreement have been classified
as non-current because the Company has the ability and the intent to refinance
these obligations on a long-term basis.
The credit agreement contains certain covenants requiring maintenance of
minimum net worth, maximum debt to EBITDA ratio, minimum interest expense
coverage, capital expenditure limits and other customary and normal provisions.
The Company is in compliance with all such covenants.
(5) Research, Development and Engineering Expenses
Research, development and engineering expenses ("RD&E") are included in
selling, general and administrative expenses and were $20.2 million, $20.2
million and$19.6 million in 2001, 2000 and 1999, respectively, for continuing
operations. RD&E includes costs associated with new product development, product
and process improvement, engineering follow-through during early stages of
production, design of tools and dies, and the adaptation of existing technology
to specific situations and customer requirements. The research and development
component of RD&E, which generally includes only those costs associated with new
technology, new products or significant changes to current products or
processes, was $14.1 million, $14.4 million and $12.8 million in 2001, 2000 and
1999, respectively.
(6) Income Taxes
Earnings (loss) before income taxes were as follows (in thousands):
2001 2000 1999
-------- --------- -------
Domestic $ (5,235) $ (5,849) $ 934
Non-U.S 10,604 128,763 58,075
-------- --------- -------
Total $ 5,369 $ 122,914 $59,009
======== ========= =======
(continued)
Page 57 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(6) Income Taxes, continued
Income tax (benefit) expense was as follows (in thousands):
Current: 2001 2000 1999
-------- -------- -------
Federal $ (1,174) $ 3,382 $ 736
State and local 1,781 458 858
Non-U.S 2,614 24,005 9,784
-------- -------- -------
3,221 27,845 11,378
Deferred tax (benefit) expense (318) (4,239) 3,319
-------- -------- -------
$ 2,903 $ 23,606 $14,697
======== ======== =======
Amounts credited to additional paid-in capital include the tax benefit of
certain components of employee compensation related to the Company's common
stock. Such items include dividends paid on restricted stock, the change in
value from the award date to the release date of restricted stock which was
released during the period.
A reconciliation of the statutory federal income tax rate with the
effective income tax rate follows:
2001 2000 1999
---- ---- ----
Statutory federal income tax rate 35% 35% 35%
Increase (decrease) resulting from:
Tax-exempt earnings of subsidiary in Puerto
Rico (3) (1) (1)
State and local income taxes, net of federal
tax effect 21 1 1
Non-deductible expenses and other foreign
income subject to U.S. income tax 35 3 3
Foreign (13) (19) (14)
Other, net (21) -- 1
--- --- ---
Effective tax rate 54% 19% 25%
=== === ===
The effect on the effective tax rate of non-deductible expenses is due to the
nature and timing of the restructuring and other unusual and infrequent items.
The effect on the effective tax rate of other, net is attributable to
alternative minimum tax and research and development tax credits.
(continued)
Page 58 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(6) Income Taxes, continued
Deferred tax assets and liabilities included the following (in thousands):
2001 2000
-------- --------
Assets:
Inventories $ 1,982 $ 896
Plant and equipment 996 1,194
Vacation pay and other compensation 1,317 1,766
Pension expense 743 844
Stock awards 1,592 1,806
Accrued liabilities 5,029 5,519
Net operating losses 5,715 3,729
Capital losses carryover 6,582 6,582
Other 2,121 1,951
-------- --------
Total deferred tax assets 26,077 24,287
Valuation allowance (7,854) (6,582)
-------- --------
Net deferred tax assets 18,223 17,705
Liabilities:
Deferred taxes on foreign operations and acquired
intangibles 2,800 2,600
-------- --------
Total deferred tax liabilities 2,800 2,600
-------- --------
Net deferred tax assets 15,423 15,105
Less current deferred tax assets 5,924 3,870
-------- --------
Long-term deferred income taxes $ 9,499 $ 11,235
======== ========
Based on the Company's history of taxable income and its projection of
future earnings, management believes that it is more likely than not that
sufficient taxable income will be generated in the foreseeable future to realize
the net deferred tax assets.
The Company has not provided for U.S. federal income and foreign
withholding taxes on approximately $294.0 million of non-U.S. subsidiaries'
undistributed earnings (as calculated for income tax purposes) as of December
28, 2001. Such earnings include pre-acquisition earnings of foreign entities
acquired through stock purchases, and are intended to be reinvested outside of
the U.S. indefinitely. It is not practical to estimate the amount of
unrecognized deferred taxes on these undistributed earnings. Where excess cash
has accumulated in the Company's non-U.S. subsidiaries and it is advantageous
for tax reasons, subsidiary earnings may be remitted.
(continued)
Page 59 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(7) Commitments and Contingencies
The Company conducts a portion of its operations from leased premises and
also leases certain equipment under operating leases. Total rental expense
amounts for the years ended December 28, 2001, December 29, 2000 and December
31, 1999 were $7.4 million, $5.9 million and $5.4 million, respectively. The
aggregate minimum rental commitments under non-cancelable leases in effect at
December 28, 2001 were as follows (in thousands):
Year
Ending
------
2002 $ 8,819
2003 6,662
2004 4,854
2005 3,811
2006 1,733
Thereafter 4,891
-------
$30,770
=======
The Company is involved in several legal actions relating to waste disposal
sites. The Company's involvement in these matters has generally arisen from the
alleged disposal by licensed waste haulers of small amounts of waste material
many years ago. In addition, in Sinsheim, Germany, there is shallow groundwater
and soil contamination that is naturally decreasing over time. The German
environmental authorities have not required corrective action to date. As a
result of the acquisition of GTI, the Company is involved in studying and
undertaking certain remedial actions with respect to groundwater pollution and
soil contamination conditions at a facility in Leesburg, Indiana. The Company
anticipates making additional environmental expenditures in future years to
continue its environmental studies, analysis and remediation activities.
The Company is also subject to various lawsuits, claims and proceedings
which arise in the ordinary course of its business. The Company does not believe
that the outcome of any of these lawsuits will have a material adverse effect on
its financial results.
The Company accrues costs associated with environmental and legal matters
when they become probable and reasonably estimable. Accruals are established
based on the estimated undiscounted cash flows to settle the obligations and are
not reduced by any potential recoveries from insurance or other indemnification
claims. Management believes that any ultimate liability with respect to these
actions in excess of amounts provided will not materially affect the Company's
operations or consolidated financial position, liquidity or operating results.
(continued)
Page 60 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(8) Shareholders' Equity
On October 19, 2000, the Company's Board of Directors approved a
two-for-one split of the Company's common stock in the form of a 100% common
stock dividend for shareholders of record as of November 6, 2000, payable
November 27, 2000. A total of 16,618,381 shares were issued in connection with
the split. The stated par value of each share was not changed from $.125.
Relevant share and per share amounts have been restated to retroactively reflect
the stock split.
The retained earnings of the Company at December 28, 2001 include
approximately $10.0 million which has been restricted in accordance with the
laws of the People's Republic of China (PRC). This amount, which is based on the
earnings of the Company's subsidiaries in the PRC, may not be available for
distribution to the U.S. parent company or its shareholders but is not required
to be held in cash.
The Company has a Shareholder Rights Plan. The Rights are currently not
exercisable, and automatically trade with the Company's common shares. However,
after a person or group has acquired 15% or more of the common shares, the
Rights will become exercisable, and separate certificates representing the
Rights will be distributed. In the event that any person or group acquires 15%
of the common shares, each holder of two Rights (other than the Rights of the
acquiring person) will have the right to receive, for $135, that number of
common shares having a market value equal to two times the exercise price of the
Rights. Alternatively, in the event that, at any time following the date in
which a person or group acquires ownership of 15% or more of the common shares,
the Company is acquired in a merger or other business combination transaction,
or 50% or more of its consolidated assets or earning power is sold, each holder
of two Rights (other than the Rights of such acquiring person or group) will
thereafter have the right to receive, upon exercise, that number of shares of
common stock of the acquiring entity having a then market value equal to two
times the exercise price of the Rights. The Rights may be redeemed by the
Company at a price of $.005 per Right at any time prior to becoming exercisable.
Rights that are not redeemed or exercised will expire on September 9, 2006.
Effective August 1, 2001 the company adopted a new qualified,
non-compensatory employee stock purchase plan that provides substantially all
employees an opportunity to purchase common stock of the Company. The purchase
price is equal to 85% of the fair value of the common stock on either the first
day of the offering period or the last day of the purchase period, whichever is
lower. The offering periods and purchase periods are defined by the plan, but
are each generally six months in duration. In connection with this stock
purchase plan, 1,000,000 shares of common stock are reserved for issuance under
the plan. In 2001, 2000 and 1999, employees purchased approximately 398,000,
530,000 and 60,000 shares, respectively, under a predecessor plan.
(continued)
Page 61 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(9) Earnings Per Share
Basic earnings per share are calculated by dividing earnings by the
weighted average number of common shares outstanding during the year (excluding
restricted shares which are considered to be contingently issuable). The Company
has restricted shares outstanding of 361,000, 386,000 and 368,000 as of December
28, 2001, December 29, 2000 and December 31, 1999, respective, which generally
vest over a three year term. For calculating diluted earnings per share, common
share equivalents and restricted stock outstanding are added to the weighted
average number of common shares outstanding. Common share equivalents result
from outstanding options to purchase common stock as calculated using the
treasury stock method. Such amounts were approximately 24,000 in 2001, 5,500 in
2000 and 36,000 in 1999. Relevant share amounts and earnings per share have been
restated to reflect a two-for-one stock split effective on November 27, 2000.
Earnings per share calculations are as follows (in thousands, except per share
amounts):
2001 2000 1999
---- ---- ----
Net income $ 2,466 $99,308 $44,312
Basic earnings per share:
Shares 33,202 32,510 32,092
Per share amount $.07 $3.05 $1.38
Diluted earnings per share:
Shares 33,566 32,859 32,492
Per share amount $.07 $3.02 $1.36
(continued)
Page 62 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(10) Employee Benefit Plans
The Company and certain of its subsidiaries maintain defined benefit
pension plans and make contributions to multi-employer plans covering certain
union employees. Certain non-U.S. subsidiaries have varying types of retirement
plans providing benefits for substantially all of their employees.
Pension (benefit) expense was as follows (in thousands):
2001 2000 1999
------- ------- -------
Principal defined benefit plans $(395) $ 149 $(982)
Multi-employer and other employee benefit plans 221 490 295
----- ----- -----
$(174) $ 639 $(687)
===== ===== =====
The expense for the principal defined benefit pension plans include the
following components (in thousands):
2001 2000 1999
------- ------- -------
Service cost - benefits earned during the period $ 1,192 $ 1,309 $ 1,180
Interest cost on projected benefit obligation 1,667 1,566 1,399
Expected actual return on plan assets (2,818) (2,430) (2,256)
Curtailment gain -- -- (664)
Net amortization (436) (296) (641)
------- ------- -------
Net periodic pension (benefit) cost $ (395) $ 149 $ (982)
======= ======= =======
(continued)
Page 63 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(10) Employee Benefit Plans, continued
The financial status of the principal defined benefit plans at December 28, 2001
and December 29, 2000, was as follows (in thousands):
2001 2000
-------- --------
Change in benefit obligation:
Benefit obligation at beginning of year $ 24,397 $ 20,989
Service cost 1,192 1,190
Interest cost 1,667 1,566
Actuarial gain 547 (656)
Plans not previously aggregated -- 2,109
Benefits paid (1,387) (801)
-------- --------
Benefit obligation at end of year 26,416 24,397
-------- --------
Change in plan assets:
Fair value of plan assets at beginning of year 31,689 26,548
Actual return on plan assets (1,568) 5,082
Employer contributions -- --
Plans not previously aggregated -- 852
Benefits paid (1,387) (793)
-------- --------
Fair value of plan assets at end of year 28,734 31,689
-------- --------
Funded status 2,318 7,292
Unrecognized:
Net gains (4,625) (11,491)
Prior service cost 990 633
Intangible asset (407) --
Net transition obligation 72 62
-------- --------
Accrued pension costs at the end of the year $ (1,652) $ (3,504)
======== ========
(continued)
Page 64 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(10) Employee Benefit Plans, continued
Benefits are based on years of service and average final compensation. For
U.S. plans, the Company funds, annually, at least the minimum amount required by
the Employee Retirement Income Security Act of 1974. Depending on the investment
performance of plan assets and other factors, the funding amount may be zero.
Plan assets consist principally of short-term investments and listed bonds and
stocks. Assumptions used to develop data for 2001 and 2000 were as follows:
Discount rate 7.3%
Annual compensation increases 4.8%
Expected long-term rates of return on plan assets 9.0%
The Company maintains defined contribution 401(k) plans covering
substantially all U.S. employees not affected by certain collective bargaining
agreements. Under the primary 401(k) plan, the Company contributed a matching
amount equal to $1.00 for each $1.00 of the participant's contribution not in
excess of 4% of the participant's annual wages. The total contribution expense
under the 401(k) plans for employees of continuing operations was $1,469,000,
$1,529,000 and $681,000 in 2001, 2000 and 1999, respectively.
The Company does not provide any significant post-retirement benefits other
than the pension plans and 401(k) plans described above.
(11) Stock-Based Compensation
The Company has an incentive compensation plan for employees of the Company
and its subsidiaries. One component of this plan grants the recipient the right
of ownership of Technitrol, Inc. common stock, conditional on the achievement of
performance objectives and/or continued employment with the Company. A summary
of the shares under the incentive compensation plan is as follows:
Available to
be granted
----------
Shares authorized 4,900,000
Awarded during years prior to 2001, net of cancellations (2,015,874)
----------
Balance at December 29, 2000 2,884,126
Awarded during 2001, net of cancellations (39,020)
----------
Balance available at December 28, 2001 2,845,106
==========
(continued)
Page 65 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(11) Stock-Based Compensation, continued
During the years ended December 28, 2001, December 29, 2000 and December
31, 1999, the Company issued to employees, net of cancellations, incentive
compensation shares having an approximate fair value at date of issue of
$1,055,268, $2,598,000 and $1,683,000, respectively. The fair value of the
incentive compensation shares are based on fair market price of the stock at the
award date and recorded as deferred compensation. Compensation is recognized
over the vesting period which is generally three years. Shares are held by the
Company until the continued employment requirement and/or performance criteria
have been attained. For shares subject to continued employment requirements, the
market value of the shares at the date of grant is charged to expense during the
vesting period on a straight-line basis. For shares subject to performance
criteria, the expense varies with the market value of the shares until the
performance criteria are met or are deemed to be unachievable. Cash awards,
which accompany shares released under the Incentive Compensation Plan and are
intended to assist recipients with their resulting personal tax liability, are
based on the market value of the shares when restrictions lapse. Cash awards are
accrued over the restriction period, and the related expense is variable based
on the market value of the shares. Amounts charged to expense as a result of the
Incentive Compensation Plan and related expenses were $1,219,000 in 2001,
$6,990,000 in 2000 and $2,327,000 in 1999. A substantial portion of the shares
granted are subject to variable accounting, whereby the related compensation
expense is adjusted to reflect the impact of market price of the underlying
shares awarded. The shares and expense associated with variable accounting were
35,400 and $206,000 in 2001, 112,900 and $3,440,000 in 2000, and 40,000 and
$209,000 in 1999, respectively.
The Company also has a stock award plan for non-employee directors. The
Board of Directors Stock Plan was approved in 1998 to assist the Company in
attracting and retaining highly qualified persons to serve on the Company's
Board of Directors. Under the terms of the plan, 60,000 shares of the Company's
common stock are available for grant. On an annual basis, shares amounting to a
dollar value predetermined by the plan are issued to non-employee directors are
recorded as an expense at issuance. In 2001, 2000 and 1999 3,448, 5,096 and
10,848 shares, respectively, (including those deferred at the directors'
election) were issued under the plan. A total of 38,816 shares remain available
for issuance under the plan.
In connection with the 1995 acquisition of Pulse Engineering, options which
had been granted for the purchase of Pulse common shares were assumed by the
Company and converted into options to purchase Technitrol common stock. At
December 28, 2001, no options remained outstanding. No additional options are
expected to be granted under the assumed plans.
(continued)
Page 66 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(11) Stock-Based Compensation, continued
In February of 2001, the executive compensation committee of the Company
adopted a stock option plan. All employees of the Company and designated
subsidiaries are eligible to participate in the stock option plan. Except as
limited by the terms of the option plan, the committee has discretion to select
the persons to receive options and to determine the terms and conditions of the
option, including the number of shares underlying the option, the exercise
price, the vesting schedule and term. The options are granted at no cost to the
employee and cannot be granted with an exercise price less than the fair market
value at the date of grant. The options granted in 2001 vest equally over four
years and expire in seven years. During the year ended December 28, 2001 a total
of 232,700 shares, net of cancellations, were awarded to employees at a weighted
average strike price of $21.86 per share. None of the shares were vested as of
December 28, 2001.
As permitted by the provisions of FAS 123, the Company applies Accounting
Principles Board Opinion 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for its stock-based employee compensation
plans. Accordingly, no compensation cost has been recognized for the Company's
employee stock incentive plans. If compensation cost for the Company's stock
option plan and employee stock purchase plan have been determined based on the
fair value as required by FAS 123, the Company's pro forma net income (loss) and
earnings (loss) per basic and diluted share would have been $(4.6) million and
$(.14) and $(.14) for 2001, and for 2000 would have been $78.2 million, $2.41
and $2.38, respectively.
(12) Restructuring and Unusual and Infrequent Items
During the second quarter of 2001, the Company announced the closure of its
production facility in Thailand. The Company also announced the closure of our
production facility in Malaysia in the third quarter of 2001. The production at
these two facilities was transferred to other Pulse facilities in Asia. The
Company provided reserves of $3.6 million for these plant closings, comprised of
$2.5 million for severance and related payments and $1.1 million for other exit
costs. The majority of this accrual will be utilized by the end of the first
quarter of 2002.
(continued)
Page 67 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(12) Restructuring and Unusual and Infrequent Items, continued
The Company also adopted other restructuring plans during 2001. In this
regard, provisions of $6.4 million were recorded during 2001. Approximately
3,500 manufacturing personnel primarily in Asia, and approximately 200 support
personnel in North America and Europe were terminated. Approximately 75% of all
of the employee severance and related payments in connection with these actions
were completed as of December 28, 2001. Approximately $2.3 million of the
provision remains as of December 28, 2001 for severance payments and related
expenses to be paid in 2002. An additional $0.7 million remains accrued at
December 28, 2001 for other exit costs at primarily Thailand and Malaysia.
Termination costs for employees at our Thailand and Malaysian facilities have
been included in the separate provisions for exiting those facilities. In
addition to these terminations, headcount was reduced by approximately 12,300
additional personnel, net of new hires, during fiscal 2001 through voluntary
employee attrition and involuntary workforce reductions, primarily at
manufacturing facilities in the PRC where severance payments are not necessary.
Accordingly, on a consolidated basis, the Company's employee base dropped from
approximately 30,600 as of December 29, 2000 to approximately 14,800 as of
December 28, 2001.
The Company recorded pre-tax inventory provisions in cost of sales of $20.3
million for the year ended December 28, 2001. These provisions resulted from
production capacity reductions. In addition, a charge of $3.5 million was
recorded during the third quarter of 2001 to write down the value of certain
Pulse fixed assets to their disposal value. The assets are Asian-based
production equipment that became idle in 2001 due to the contraction in Pulse's
business. The assets have been marketed through the liquidation market, and the
majority has either been sold for its residual value or scrapped. The remaining
cost basis of the assets has been reclassified from fixed assets to assets held
for sale in the balance sheet as of December 28, 2001.
Total restructuring and unusual and infrequent items for the year ended
December 28, 2001 includes $3.6 million related to the Thailand and Malaysia
plant closings, $6.4 million for other restructuring plans and $3.5 million for
the write down of Pulse fixed assets.
Approximately $0.5 million for AMI Doduco restructuring actions is included
in the aggregate charge of $6.4 million noted above. The capital-intensity of
AMI Doduco makes quick changes in its cost structure more challenging than at
Pulse.
(continued)
Page 68 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(12) Restructuring and Unusual and Infrequent Items, continued
In the quarter ended March 31, 2000, AMI Doduco recorded a $5.5 million
provision for restructuring initiatives due to a reduction in employment levels
by approximately 120 people, primarily in Germany. The Company provided $3.7
million for employee severance and related payments, $0.9 million related to the
impairment of certain assets and $0.9 million for other exit costs. Offsetting
these costs was a gain of $1.4 million related to the sale of a non-strategic
European product line and a $0.8 million gain related to an insurance
settlement. As of December 29, 2000 the balance outstanding was $2.5 million.
As a result of its core business focus on both economic and operating
profit, the Company will continue to aggressively size both Pulse and AMI Doduco
so that costs are minimized during market downturns, while they plan for the
recovery in demand and pursue additional growth opportunities. The Company may
adopt additional cost reduction actions during 2002, depending on the timing and
extent of a recovery in Pulse's markets and the economy in general. If
additional actions are undertaken, the amounts will depend on specific actions
taken to reduce manufacturing capacity and improve efficiency.
The Company's restructuring charges and unusual and infrequent items are
summarized on a year-to-date basis for 2001 as follows:
AMI
Restructuring provision (in millions): Doduco Pulse Total
----------------------- ------ ----- -----
Balance accrued at December 29, 2000 $ 2.5 $ -- $ 2.5
Accrued during the year ended December 28, 2001 0.5 13.1 13.6
Severance and other cash payments (2.2) (7.2) (9.4)
Non-cash asset disposals (0.2) (3.5) (3.7)
----- ----- -----
Balance accrued at December 28, 2001 $ 0.6 $ 2.4 $ 3.0
===== ===== =====
(continued)
Page 69 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(13) Supplementary Information
The following amounts were charged directly to costs and expenses (in
thousands):
2001 2000 1999
---- ---- ----
Depreciation $21,177 $18,548 $15,678
Amortization of intangible assets 5,376 3,830 3,733
Advertising 552 662 780
Repairs and maintenance 6,668 10,382 6,480
Bad debt expense 697 1,063 116
Cash payments made:
Income taxes $11,736 $14,218 $17,604
Interest 5,470 3,530 3,528
Accumulated other comprehensive income as disclosed in the Consolidated
Statements of Changes in Shareholders' Equity consists principally of foreign
currency translation items.
(14) Segment and Geographical Information
The Company operates its business in two segments: the Pulse segment, which
operates under the name Pulse, and the AMI Doduco segment, which operates under
the name AMI Doduco. We refer to these segments as ECS or Pulse, and ECPS and
AMI Doduco, respectively. Pulse is managed by a President who reports to our
Chief Executive Officer. AMI Doduco is managed by co-Presidents, each of whom
reports to our Chief Executive Officer.
Pulse designs and manufactures a wide variety of highly-customized passive
magnetics-based electronic components. These components manage and regulate
electronic signals and power for use in a variety of devices by filtering out
radio frequency interference and adjusting and ensuring proper current and
voltage. These products are often referred to as chokes, inductors, filters and
transformers. Pulse sells its products to multinational original equipment
manufacturers, contract manufacturers and distributors.
AMI Doduco is a global manufacturer of a full range of electrical contact
products, from contact materials to completed contact subassemblies. Contact
products complete or interrupt electrical circuits in virtually every electrical
device. AMI Doduco provides its customers with a broad array of highly
engineered products and tools designed to meet unique customer needs.
(continued)
Page 70 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(14) Segment and Geographical Information, continued
Amounts are in thousands:
2001 2000 1999
--------- --------- ---------
Net sales from continuing operations
Pulse $ 253,281 $ 438,770 $ 307,351
AMI Doduco 220,918 225,608 223,085
--------- --------- ---------
Total $ 474,199 $ 664,378 $ 530,436
========= ========= =========
Operating profit before income taxes
Pulse $ 9,381 $ 110,892 $ 49,893
Pulse restructuring and other infrequent and unusual
items (13,053) -- --
AMI Doduco 6,300 12,517 11,296
AMI Doduco restructuring and other infrequent and
unusual items (541) (3,305) --
--------- --------- ---------
Total operating profit 2,087 120,104 61,189
Items not included in segment profit (1) 3,282 2,810 (2,180)
--------- --------- ---------
Earnings from continuing operations before income taxes $ 5,369 $ 122,914 $ 59,009
========= ========= =========
Assets at end of year
Pulse $ 237,237 $ 229,560 $ 173,027
AMI Doduco 114,476 112,085 111,076
--------- --------- ---------
Segment assets 351,713 341,645 284,103
Assets not included in Segment assets (2) 173,307 179,126 97,136
--------- --------- ---------
Total $ 525,020 $ 520,771 $ 381,239
========= ========= =========
Capital expenditures (3)
Pulse $ 10,302 $ 23,323 $ 10,894
AMI Doduco 10,204 8,379 12,031
--------- --------- ---------
Total $ 20,506 $ 31,702 $ 22,925
========= ========= =========
Depreciation and amortization
Pulse $ 17,183 $ 14,129 $ 12,586
AMI Doduco 9,370 8,249 6,825
--------- --------- ---------
Total $ 26,553 $ 22,378 $ 19,411
========= ========= =========
(1) Includes interest income, interest expense and other non-operating items
disclosed in the Company's Consolidated Statements of Earnings. The Company
excludes these items when measuring segment operating profit.
(2) Cash and cash equivalents are the primary corporate assets. The Company
also excludes net deferred tax assets when measuring segment assets.
(3) During the past three years, the Company has acquired several companies.
See Note 2 of Notes to Consolidated Financial Statements. The Company has
included acquired property, plant and equipment in these capital
expenditure amounts.
(continued)
Page 71 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(14) Segment and Geographical Information, continued
The Company recognizes revenue upon shipment of product and passage of
title without right of return. The Company offers customers credit terms that
are believed to be generally consistent with the terms offered in their
industries. The Company reserves for or writes off a customer account when they
no longer feel the customer can or will pay. The Company believes that the
quality of customers, which are generally large global companies, and their
extensive customer base limits their exposure to significant concentrations of
customer credit risk. For example, no customer accounted for more than 10% of
sales in 2001, 2000 or 1999. Sales to their ten largest customers accounted for
31% of sales in 2001, 36% of sales in 2000 and 32% of sales in 1999. Depending
on the amount of cash the Company may have from time to time, it may maintain
significant cash investments at financial institutions.
The Company has no significant intercompany revenue between its segments.
They do not use income taxes when measuring segment results; however, they
allocate income taxes to the segments to determine certain performance measures.
These performance measures include return on employed capital and economic
profit. The following pro forma disclosure of segment income tax expense is
based on simplified assumptions and includes allocations of corporate tax items.
These allocations are based on the proportionate share of total tax expense for
each segment, obtained by multiplying the respective segment's operating profit
by the relevant estimated effective tax rate for the year. The allocated tax
expense amounts for Pulse were, in thousands, $2,123, $18,850 and$10,834 in
2001, 2000 and 1999, respectively. For AMI Doduco, they were, in thousands,
$780, $4,756 and $3,863 in 2001, 2000 and 1999, respectively.
(continued)
Page 72 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(14) Segment and Geographical Information, continued
The Company sells its products to customers in North America, Europe, Asia
and throughout the world. The following table summarizes its sales to customers
in the United States and Germany, where sales are significant. Other countries
in which the Company's sales are not significant are grouped into regions. The
Company attributes customer sales to the country addressed in the sales invoice.
The product is usually shipped to the same country. Amounts are in thousands:
2001 2000 1999
---- ---- ----
Sales to customers in:
United States $166,237 $295,864 $226,376
Europe, other than Germany 126,736 130,611 108,339
Germany 70,792 76,279 86,174
Asia 80,691 109,784 70,589
North America, other than U.S. 25,163 46,664 36,507
Other 4,580 5,176 2,451
-------- -------- --------
Total $474,199 $664,378 $530,436
======== ======== ========
The following table includes net property, plant and equipment located in
the United States, Germany and China, where assets are significant. Other
countries in which such assets are not significant are grouped into regions.
Property, plant and equipment represents all of the relevant assets that have
long useful lives. Amounts are in thousands:
2001 2000 1999
---- ---- ----
Net property, plant and equipment located in:
United States $22,180 $23,896 $22,554
China 23,057 27,210 19,170
Germany 12,456 13,935 14,639
Asia, other than China 9,191 14,220 12,563
Europe, other than Germany 12,793 10,477 10,659
Other 3,375 2,660 3,137
------- ------- -------
Total $83,052 $92,398 $82,722
======= ======= =======
(continued)
Page 73 of 77
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(15) Quarterly Financial Data (Unaudited)
Quarterly results of operations (unaudited) for 2001 and 2000 are
summarized as follows (in thousands, except per share data):
Quarter Ended
-------------
Mar. 30 June 29 Sept. 28 Dec. 28
------- ------- -------- -------
2001:
Net sales $157,244 $112,835 $100,846 $103,274
Gross profit 50,377 24,771 22,153 17,217
Net earnings (loss) 17,994 (1,459) (9,290) (4,779)
Net earnings (loss) per share:
Basic .55 (.04) (.28) (.14)
Diluted .54 (.04) (.28) (.14)
Mar. 31 June 30 Sept. 29 Dec. 29
------- ------- -------- -------
2000:
Net sales $152,693 $163,186 $170,674 $177,825
Gross profit 54,141 62,542 68,549 69,290
Net earnings 16,832 24,884 27,784 29,808
Net earnings per share:
Basic .52 .77 .85 .91
Diluted .52 .76 .84 .90
Earnings per share amounts reflect stock splits through December 28, 2001.
(16) Subsequent Event
The Company has filed a registration statement on Form S-3, as amended, for
a proposed secondary public offering of up to 5,290,000 shares of its common
stock. The Company expects to use the net proceeds from the sale of shares for
repayment of outstanding debt, potential strategic acquisitions and general
corporate purposes. The registration statement relating to these securities was
initially filed with the Securities and Exchange Commission on January 24, 2002
and has since been amended, but it has not yet become effective. These
securities may not be sold, nor may offers to buy be accepted, prior to the time
the registration statement becomes effective.
Page 74 of 77
Technitrol, Inc. and Subsidiaries
Financial Statement Schedule II
Valuation and Qualifying Accounts
(In thousands of dollars)
Additions (Deductions)
----------------------
Charged to
Balance costs and Write-offs Balance
Description January 1 expenses and payments December 31
- ----------- --------- -------- ------------ -----------
Year ended December 28, 2001:
Reserve for obsolete and slow-moving
inventory $ 9,226 $20,295 $ (6,004) $23,517
======= ======= ======== =======
Reserve for doubtful accounts $ 1,908 $ 697 $ (45) $ 2,560
======= ======= ======== =======
Year ended December 29, 2000:
Reserve for obsolete and slow-moving
inventory $ 6,283 $ 8,129 $ (5,186) $ 9,226
======= ======= ======== =======
Reserve for doubtful accounts $ 882 $ 1,063 $ (37) $ 1,908
======= ======= ======== =======
Year ended December 31, 1999:
Reserve for obsolete and slow-moving
inventory $17,134 $ 4,483 $(15,334) $ 6,283
======= ======= ======== =======
Reserve for doubtful accounts $ 819 $ 116 $ (53) $ 882
======= ======= ======== =======
Page 75 of 77
Exhibit Index
DOCUMENT
2.1 Agreement and Plan of Merger, dated as of May 23, 2001, as amended as of
July 6, 2001, by and among Pulse Engineering, Inc., Pulse Acquisition
Corporation, Excelsus Technologies, Inc., and certain principal
shareholders of Excelsus Technologies, Inc. that are signatories thereto
(incorporated by reference to Exhibit 2 to the Company's Form 8-K dated
August 21, 2001)
3.1 Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 1 to the Company's Registration
Statement on Form 8-A/A dated April 10, 1998).
3.2 Amendment to Amended and Restated Articles of Incorporation
(incorporated by reference 3.2 to Exhibit 3(i)(a) to the Company's Form
10-Q for the quarter ended June 29, 2001).
3.3 By-laws
4.1 Rights Agreement, dated as of August 30, 1996, between the Company and
Registrar and Transfer Company, as Rights Agent (incorporated by
reference to Exhibit 3 to the Company's Registration Statement on Form
8-A dated October 24, 1996).
4.2 Amendment No. 1 to the Rights Agreement, dated March 25, 1998, between
the Company and Registrar and Transfer Company, as Rights Agent
(incorporated by reference to Exhibit 4 to the Company's Registration
Statement on Form 8-A/A dated April 10, 1998).
4.3 Amendment No. 2 to the Rights Agreement, dated June 15, 2000, between
the Company and Registrar and Transfer Company, as Rights Agent
(incorporated by reference to Exhibit 5 to the Company's Registration
Statement on Form 8-A/A dated July 5, 2000).
10.1 Technitrol, Inc. 2001 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on Form
S-8 dated June 28, 2001, File Number 333-64060).
(continued)
Page 76 of 77
Exhibit Index, continued
10.2 Technitrol, Inc. Restricted Stock Plan II, as amended and restated as of
January 1, 2001 (incorporated by reference to Exhibit C, to the
Company's Definitive Proxy on Schedule 14A dated March 28, 2001.
10.3 Technitrol, Inc. 2001 Stock Option Plan (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-8 dated
June 28, 2001, File Number 333-64068).
10.4 Technitrol, Inc. Board of Directors Stock Plan (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on Form
S-8 dated June 1, 1998, File Number 333-55751).
10.5 Revolving Credit Agreement, by and among Technitrol, Inc. and certain of
its subsidiaries, Bank of America, N.A. as Agent and Lender, and certain
other Lenders that are signatories thereto, dated as of June 20, 2001
(incorporated by reference to Exhibit 10.(a) to the Company's Form 10-Q
for the quarter ended June 29, 2001).
10.6 Lease Agreement, dated October 15, 1991, between Ridilla-Delmont and AMI
Doduco, Inc. (formerly known as Advanced Metallurgy Incorporated), as
amended September 21, 2001 (incorporated by reference to Exhibit 10.6 to
the Company's Amendment No. 1 to Registration Statement on Form S-3
dated February 28, 2002, File Number 333-81286).
10.7 Incentive Compensation Plan of Technitrol, Inc. (incorporated by
reference to Exhibit 10.7 to Amendment No. 1 to The Company's
Registration Statement on Form S-3 filed on February 28, 2002, File
Number 333-81286).
10.8 Technitrol, Inc. Supplemental Retirement Plan, Amended and Restated
January 1, 2002 (incorporated by reference to Exhibit 10.8 to Amendment
No. 1 to the Company's Registration Statement on Form S-3 filed on
February 28, 2002, File Number 333-81286).
10.9 Agreement between Technitrol, Inc. and James M. Papada, III, dated July
1, 1999, as amended April 23, 2001, relating to the Technitrol, Inc.
Supplemental Retirement Plan (incorporated by reference to Exhibit 10.9
to Amendment No. 1 to the Company's Registration Statement on Form S-3
filed on February 28, 2002, File Number 333-81286).
10.10 Letter Agreement between Technitrol, Inc. and James M. Papada, III,
dated April 16, 1999, as amended October 18, 2000 (incorporated by
reference to Exhibit 10.10 to Amendment No. 1 to the Company's
Registration Statement on Form S-3 filed on February 28, 2002, File
Number 333-81286).
10.11 Form of Indemnity Agreement
21. Subsidiaries of Registrant
23. Consent of Certified Public Accountants
Page 77 of 77