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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 31, 1999
-----------------
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 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
25, 2000 is $641,839,000 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 25, 2000.
Number of shares outstanding
Title of each class February 25, 2000
------------------- -----------------
Common stock 16,282,098
par value $.125 per share
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
DOCUMENT REFERENCE
- -------- ---------
The Registrant's definitive Proxy Statement, Part III
dated March 29, 2000, to be used in Page 29 of 61 pages
connection with Registrant's 2000 Annual Meeting
of Shareholders
Page 1 of 61
Part I
Item 1 Business
General
Technitrol, Inc. is a global manufacturer of electronic and metallurgical
components. We incorporated in Pennsylvania on April 10, 1947.
We operate two business segments: the Electronic Components Segment and the
Metallurgical Components Segment. We refer to these segments as the ECS and the
MCS. Each segment is managed by a President who reports to our Chief Executive
Officer. Prior to June 4, 1997, we operated a third segment, the Test &
Measurement Products Segment. We sold this segment to focus our resources on
designing, manufacturing and marketing electronic and metallurgical components.
Electronic Components Segment
Our Electronic Components Segment provides a variety of magnetics-based
components, miniature chip inductors and modules. These components modify or
filter electronic signals. They are used primarily in local area network,
Internet connectivity, telecommunication and power-conversion products. We
manufacture these products in the United States, Ireland, France, Malaysia,
Thailand, the Philippines and the People's Republic of China. We sometimes refer
to the People's Republic of China as the PRC.
Our strategy is to expand our electronic components business through a
combination of internal growth and acquiring companies in the electronic
components business. Acquisitions during the last several years include:
o Pulse Engineering, Inc. - In 1995, we acquired Pulse Engineering, Inc.,
with manufacturing locations in Ireland and China. The addition of Pulse
significantly increased the size of our ECS business.
o The magnetic components business of Northern Telecom, Ltd. - We completed
this acquisition on November 30, 1997. The primary assets we purchased
included manufacturing plants in Malaysia and Thailand and a design
engineering group in Canada. These assets primarily serve the
telecommunication and power markets.
o FEE Technology, S.A. - We purchased FEE on July 3, 1998. FEE designed and
manufactured magnetic components for telecommunications and power
conversion equipment. With the purchase of FEE, we acquired manufacturing
facilities in France, Thailand and Poland. We subsequently closed FEE's
Thailand and Poland facilities.
Page 2 of 61
o GTI Corporation - We completed the acquisition of GTI and its subsidiary,
Valor Electronics, on November 16, 1998. Valor designed and manufactured
magnetics-based components for signal processing and power transfer
functions primarily for local area network products and, to a much lesser
extent, telecommunication and power-conversion products. Their
manufacturing facilities were located in the People's Republic of China
and the Philippines. We closed Valor's Philippine facility and have
substantially completed the consolidation of Valor's PRC facility into
our facilities in the PRC.
Our electronic component businesses operate as a unified business
throughout the world. This unified business operates under the Pulse name.
Metallurgical Components Segment
Our Metallurgical Components Segment manufactures:
o electrical contacts and assemblies;
o contact materials;
o thermostatic bimetals;
o clad metal products; and
o precision contact subassemblies.
We also provide electroplating and refining services.
We sell these metallurgical components to a wide range of industrial and
consumer product manufacturers. Our products are used in a variety of
applications which affect daily living including:
o residential, commercial and industrial circuit breakers;
o motor controls;
o switches and relays;
o wiring devices;
o temperature controls;
o appliances;
o automobiles;
o telecommunications products; and
o various other electrical products.
Page 3 of 61
In late 1996, we acquired the assets of Doduco GmbH in Germany and Spain to
support our strategy of increasing market share and the international presence
of our metallurgical businesses. This business was then combined with our
existing metallurgical component operations in North America. All of our
metallurgical component businesses now operate globally under the name AMI
Doduco.
In July of 1998, we acquired certain assets of Metales y Contactos, S.A. de
C.V. Metales designed and manufactured precious and semi-precious metal contacts
used mainly in automobiles and other durable goods. The Metales facility is
located near Mexico City.
During the fourth quarter of 1999, we made two acquisitions and
substantially completed a third. In November of 1999, we acquired the operating
assets of the Tianjin Electrical Metal Works electrical contacts business based
in Tianjin, PRC. On December 22, 1999, we acquired the operating assets of MEC
Betras Italia S.r.l. MEC Betras, located in Italy, produced electrical contact
rivets and stamped electrical contact parts. In January of 2000, we completed an
acquisition of a tool and die design and manufacturing operation near Tallinn,
Estonia. These most recent acquisitions provide the MCS with additional
lower-cost operating locations and an enhanced market presence in key areas of
the business.
In 1999, the MCS manufactured in the United States, Germany, Spain, Puerto
Rico and Mexico. We began manufacturing metallurgical products in Italy, the PRC
and Estonia during the first quarter of 2000.
Page 4 of 61
Business Segment Financial Information. Amounts are in thousands:
1999 1998 1997
---- ---- ----
Net sales from continuing operations
Electronic Components $307,351 $218,876 $179,772
Metallurgical Components 223,085 229,663 217,295
-------- -------- -------
Total $530,436 $448,539 $397,067
======== ======== =======
Operating profit before income taxes
Electronic Components $ 49,893 $ 37,721 $ 30,865
Metallurgical Components 11,296 15,695 14,888
-------- -------- --------
Total operating profit $ 61,189 $ 53,416 $ 45,753
Items not included in Segment profit (1) (2,180) (1,073) 1,011
-------- -------- --------
Earnings from continuing operations
before income taxes $ 59,009 $ 52,343 $ 46,764
======== ======== ========
Assets at end of year
Electronic Components $173,027 $177,264 $115,467
Metallurgical Components 111,076 101,422 83,023
-------- -------- --------
Segment assets $284,103 $278,686 $198,490
Assets not included in Segment assets (2) 97,136 65,448 56,844
-------- -------- --------
Total $381,239 $344,134 $255,334
======== ======== ========
Capital expenditures (3)
Electronic Components $ 10,894 $ 27,695 $ 11,888
Metallurgical Components 12,031 14,117 5,928
Discontinued operations -- -- 322
-------- -------- --------
Total $ 22,925 $ 41,812 $ 18,138
======== ======== ========
Depreciation and amortization
Electronic Components $ 12,586 $ 9,937 $ 7,195
Metallurgical Components 6,825 6,343 5,668
Discontinued operations -- -- 284
-------- -------- --------
Total $ 19,411 $ 16,280 $ 13,147
======== ======== ========
(1) Includes interest income, interest expense and other non-operating items
disclosed in our Consolidated Statements of Earnings. We exclude these
items when measuring segment operating profit.
(2) Cash and cash equivalents are the primary corporate assets. We also
exclude net deferred tax assets when measuring segment assets.
(3) During the past three years, our segments have acquired many companies. See
Note 2 of Notes to Consolidated Financial Statements. We have included
acquired property, plant and equipment in these capital expenditure
amounts.
Page 5 of 61
Our segments generally recognize revenue when the products are shipped to
customers. We offer our customers credit terms which we believe are generally
consistent with the terms offered in our industries. We reserve for or write off
a customer account when we no longer feel the customer can or will pay us. We
believe that the quality of our customers, which are generally large global
companies, and our extensive customer base limit our exposure to significant
concentrations of customer credit risk. For example, no customer accounted for
more than 10% of sales in 1999, 1998 or 1997. Sales to our ten largest customers
accounted for 32% of sales in 1999, 36% of sales in 1998 and 24% of sales in
1997. Depending on the amount of cash we have from time to time, we may maintain
significant cash investments at financial institutions.
We do not use income taxes when measuring the segment results; however, we
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 estimated effective tax rate for the year. The allocated tax expense
amounts for the ECS were, in thousands, $10,834, $12,275 and $10,022 in 1999,
1998 and 1997, respectively. For the MCS, they were, in thousands, $3,863,
$6,759 and $7,656 in 1999, 1998 and 1997, respectively.
Geographic Information
Our sales are not concentrated in any particular geographic area. We sell
our products to customers in North America and throughout the world. The
following table summarizes our sales to customers in the United States and
Germany, where sales are significant. Other countries in which our sales are not
significant are grouped into regions. We attribute customer sales to the country
addressed in the sales invoice. The product is usually shipped to the same
country. Amounts are in thousands.
1999 1998 1997
---- ---- ----
Sales to customers in:
United States $226,376 $180,541 $177,701
Europe, other than Germany 108,339 98,892 97,122
Germany 86,174 85,860 76,026
Asia 70,589 55,914 33,375
North America, other than U.S. 36,507 24,972 9,945
Other 2,451 2,360 2,898
-------- -------- --------
Total $530,436 $448,539 $397,067
======== ======== ========
Page 6 of 61
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 our relevant assets which have
long useful lives. Amounts are in thousands.
1999 1998 1997
---- ---- ----
Net property, plant and equipment
located in:
United States $22,554 $23,469 $18,476
China 19,170 19,507 11,320
Germany 14,639 16,466 12,608
Asia, other than China 12,563 15,210 11,818
Europe, other than Germany 10,659 11,156 5,276
Other 3,137 3,260 165
------- ------- -------
Total $82,722 $89,068 $59,663
======= ======= =======
International Operations
We have significant operations outside the United States. These operations,
like all international operations, are subject to a number of risks including:
o currency fluctuations;
o capital and exchange control regulations;
o restrictive government actions; and
o expropriation and nationalization.
We believe that the risks in international operations are greatest in
developing countries. The ECS has significant manufacturing operations in
several developing countries, especially the People's Republic of China.
Although the PRC has a large and growing economy, its potential economic,
political and labor developments necessarily entail uncertainties and risks. The
risks posed to us are not unique and we believe are the same as those posed to
any U.S. company doing business in the PRC. While the PRC has been receptive to
foreign investment, we can't be certain that the current policies will continue
indefinitely into the future. If any country in which we have significant
operations adopts economic, legal, or trading policies harmful to private
industry or foreign investment, such policies could affect us significantly.
The unpredictability of economic forces and government policies in foreign
countries could cause changes to the favorable operating conditions we have
experienced in recent years. We continually monitor business conditions in all
of the regions where we operate.
Sales and Marketing
Sales managers, district managers, direct salespeople and sales agents
execute our sales and marketing activities.
Page 7 of 61
Competition
We operate in highly competitive industries. The industries are
characterized by numerous firms competing in international markets.
Backlog
Our backlog of orders at December 31, 1999 was $92.5 million compared to
$77.3 million at the end of 1998. We expect to ship the majority of the backlog
over the next six months. Our delivery times vary between segments but are
generally less than thirteen weeks. Customers can cancel orders upon payment of
cancellation charges. As more customers adopt "demand-pull" and other creative
inventory management policies, we believe backlog is a less accurate indicator
of near-term business activity than it was previously.
Raw Materials
We are not dependent on any particular source of supply. However, there are
not a lot of suppliers of certain:
o ferrite materials used in electronic components;
o powder metals used in electrical contacts; and
o specialty steel used in metal laminates.
We have not had any significant difficulties obtaining these raw materials and
do not currently anticipate we will have any significant difficulties.
The MCS uses silver and other precious metals as raw material.
Historically, these precious metals have been readily available. However, early
in 1998, the demand for silver increased significantly, and the price of silver
and associated financing costs also increased. This occurred again during the
early part of 1999, although to a lesser extent. The terms of sale within the
MCS allow us to charge customers for the current market value of silver.
However, financing and other costs cannot always be recovered. Thus far we have
been successful in managing the costs associated with our precious metals.
However, if the terms and conditions under which we obtain silver or other
precious metals change significantly in a short period of time, we may
experience a negative impact on our future operating results.
Page 8 of 61
Research and Development
We do not engage in any basic research activities. Our engineers improve
existing products and develop new products related to current or new product
lines. The amount of expenses we incurred for research and development
activities in each of the last three years is included in Note 5 of Notes to
Consolidated Financial Statements. We own numerous patents, trademarks and
tradenames, but we do not consider our earnings to be materially dependent upon
any one patent, trademark or license.
Environment
Federal, state, and local environmental laws affect most of our
manufacturing operations. These laws relate to the discharge of materials and
the protection of the environment. We will continue to make expenditures to meet
or exceed the environmental standards set by these laws. We charge to earnings
or capitalize, as appropriate, the environmental expenditures as they are
incurred.
We are studying and undertaking certain remedial action with respect to
groundwater pollution and soil contamination at a former GTI facility. The
facility is located in Leesburg, Indiana. We anticipate making additional
environmental expenditures related to this facility in future years. The
expenditures will be for continued environmental studies and analysis and, upon
mutual agreement with appropriate state agencies, implementation of a
remediation plan. Based on our current knowledge of the situation, we do not
anticipate that the future expenses associated with the environmental
remediation will have a material impact on our financial position.
We are also involved in several matters relating to superfund sites,
none of which belong to us. Our involvement has generally arisen from the
alleged disposal at these sites by licensed waste haulers of very small amounts
of waste material many years ago. While we cannot predict the future costs of
cleanup activities, capital expenditures, or operating costs for environmental
compliance at these sites, we do not believe they (alone or together) will have
a material effect on our capital expenditures, earnings or competitive position.
We have reserves which we believe are sufficient to cover the aggregate
amount of our ultimate environmental liability. These reserves are not material
to our current financial position.
Employees
At December 31, 1999, we had approximately 21,600 full time employees
compared with 21,400 at the end of 1998. Some of our ECS operations in Asia are
labor intensive.
Page 9 of 61
Energy
We did not have difficulty obtaining supplies of electricity, gas or oil in
1999, and we do not expect difficulty in 2000.
In developing countries, we may experience short interruptions of
electrical service or other utilities from time to time. Our facilities in those
countries generally maintain independent power supplies through back-up
generators. As a result, power interruptions have not had and are not expected
to have a material effect on our operations.
Products
Within each segment, the primary products sold 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. For more information on our products, see
pages 2, 3 and 4.
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 and in our 1999 annual report
to shareholders contain forward-looking statements. Forward-looking statements
give our current expectations of future events. You can identify these
statements by the fact that they do not relate strictly to historical or current
facts. They often (but not always) use words such as "anticipate", "estimate",
"expect", "project", "intend", "plan", "believe", and similar terms. From time
to time, we also provide oral or written forward-looking statements in other
materials we release to the public.
Any or all of our forward-looking statements in this report, in our 1999
annual report and in any other public statements we make may turn out to be
wrong. 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.
Consequentially, no forward-looking statement can be guaranteed. Actual future
results may, and probably will, vary materially.
We do not provide forecasts of future financial performance. We are
optimistic about our long-term prospects; however, the following issues and
uncertainties, among others, should be considered in evaluating our prospects
for the future.
Some of Our Products Are Subject to Rapid Technological Changes.
The ECS operates in an industry known for rapid change, consolidation,
uncertainty and constant new and emerging technologies. Generally, we expect
product life cycles to be very short. Changes in recent years due to the
Internet, on-line services and expansion of networking require the ECS to
maintain a strong engineering and development program. The program is necessary
to avoid product obsolescence and to meet or exceed customer expectations.
Page 10 of 61
Accordingly, we expect to continue to spend money on engineering and development
with no assurances that our efforts in these areas will continue to be
successful.
We Cannot Predict the Market Growth Rate for Our Products.
The ECS sells its products into markets that are characterized by rapidly
changing growth rates. These markets include LAN, telecommunication devices and
power-conversion products. It is often difficult for our customers or us to
assess worldwide demand for upgrades or replacement of networks, or the pace at
which telecommunication infrastructure will be deployed throughout the world.
The markets may counterbalance one another in terms of growth or they may move
in the same direction. All of these variables will impact ECS growth rates.
The growth rates of housing, construction, appliance, telecommunication
systems and auto sales, which are highly cyclical, will impact the revenue
growth of the MCS and the ECS.
We May Receive Lower Prices for Our Products.
Both the MCS and the ECS operate in businesses characterized by continually
declining average selling prices on existing products. Future prices for our
products may decrease from historical levels, depending on competition and other
factors, and we may not be able to bring our manufacturing costs down
proportionately or continue to introduce new products, each of which is
necessary to maintain average selling prices and profitability.
We May Not Be Able to Maintain Our Current Gross Margins as a Percentage of
Sales.
Cost of sales as a percentage of sales is different for each segment and
can vary greatly based on sales mix and method of distribution. Mix factors may
increase cost of sales as a percentage of sales in the future. Acquisitions that
we make may also reduce our gross margin percentages, temporarily or
permanently.
We May Not Be Able to Obtain Sufficient Quantities of Raw Materials.
If we cannot obtain sufficient quantities of raw materials, including
precious metals used by the MCS, or if the cost of those materials increases
significantly, and we cannot increase our selling prices, future operating
results could be much different from our expectations. Please refer to the
discussion of raw materials on page 8 of this report.
We May Not Successfully Identify, Integrate, or Manage Acquisitions.
We have completed several acquisitions over the past three years. The
degree of success of these acquisitions depends on our ability to:
o successfully integrate or consolidate acquired operations into our
existing segments;
Page 11 of 61
o identify and take advantage of cost reduction opportunities; and
o further penetrate the market for the products acquired.
Integration of acquisitions may take longer than expected and may never be
achieved to the extent originally anticipated. This could result in business
growth which may be less than anticipated or manufacturing costs which are
higher than anticipated. In addition, acquisitions may cause a disruption in our
ongoing business, distract our managers, unduly tax our other resources and make
it difficult or impossible to maintain our historical standards, procedures and
controls.
The timing, price, structure and success of future acquisitions are
uncertain. In addition, we may not be able to identify suitable acquisition
candidates at reasonable prices, thereby reducing the aggressive acquisition
component of our growth.
We Operate Internationally and in Developing Countries.
We are a global company subject to the risks of doing business outside of
the United States, particularly in developing countries. Please refer to the
discussion of international operations on pages 6 and 7.
The slowing of Asian economies during the latter part of the 1990s affected
portions of our business as the installation and growth of communications and
electrical infrastructure systems that utilize our components were delayed.
During the fourth quarter of 1999, we saw improvements in this market. We remain
optimistic about our prospects in the Asia Pacific region and we are committed
to our presence in Asia. We believe our widespread manufacturing presence in
Asia has been a key factor in our success. Nevertheless, we are aware of the
inherent unpredictability of the economic situation in Asia. We attempt to
carefully monitor all relevant developments throughout Asia.
Effectively Managing Our Growth May Be Difficult.
We have grown rapidly in the last five years, and we expect to continue to
grow internally and through additional acquisitions. This growth is likely to
place significant strain on our resources and systems. To manage our growth, we
must implement systems, recruit and develop additional human resources and
control our operations by continually training employees at every level.
Page 12 of 61
Other Factors
In addition to the factors discussed above, other factors which could
materially affect actual results include, but are not limited to:
o business conditions and the degree of optimism affecting the economies
throughout the world in general;
o competitive factors such as competitors seeking increased market share
based on price;
o manufacturing efficiencies and capacity;
o legal liability unknown at this time;
o risk of obsolescence due to shifts in market demand;
o information technology issues related to our computer systems or the
computer systems of our suppliers or customers (please see management's
discussion and analysis in Item 7 of Part II of this report); and
o the timing of customer product introductions.
We believe that we have the market opportunities, product offerings,
facilities, personnel and competitive and financial resources for continued
business success. However, future events, costs, margins, product mix and
profits are all subject to unpredictable factors including those discussed
above.
Item 2 Properties
We produce and market our products all over the world. At December 31,
1999, we operated 22 manufacturing plants in 12 countries. Our corporate offices
are located in Trevose, Pennsylvania where we lease approximately 11,000 square
feet of office space. The lease expires in 2006.
At December 31, 1999, the ECS had 9 manufacturing facilities, 6 of which
are owned. Principal manufacturing facilities are located in the People's
Republic of China, the Philippines, Malaysia, Thailand and Ireland. The PRC
facilities are operated under negotiated contracts with the provincial
government of China. In addition to the manufacturing space, each PRC facility
includes space for staff quarters and dormitories. The ECS also owns and leases
office and warehouse space in San Diego to serve as the segment's headquarters
and North American distribution center. Including office space for
administrative and sales functions, the ECS owns approximately 382,000 square
feet of space and leases approximately 1,774,000 square feet. The lease terms
vary by facility. See Note 7 of Notes to Consolidated Financial Statements for
additional information related to our outstanding leases.
Page 13 of 61
The MCS operates 13 manufacturing plants. The plants are located in the
United States, Europe, Puerto Rico, Mexico and China. The MCS owns the majority
of its manufacturing facilities. The only major manufacturing plant leased is
located in Export, Pennsylvania. This lease expires in 2001 but it is expected
to be renewed. Total space used by the MCS is 1,303,000 square feet, including
office space for administrative and sales functions.
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 1999 was
between 75% and 90%.
Item 3 Legal Proceedings
We have been named in several lawsuits. We consider lawsuits to be part of
what arises in the normal course of business. We do not expect the outcome of
any of these lawsuits to have a material adverse effect on our consolidated
financial condition.
Item 4 Submission of Matters to a Vote of Security Holders - None
Page 14 of 61
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. The following
table reflects the highest and lowest sales prices in each quarter of the last
two years. The dividends paid are also shown.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1999 High $32.19 $32.63 $37.19 $46.25
1999 Low $19.88 $22.63 $32.38 $31.56
1999 Dividends Paid $.0600 $.0600 $.0675 $.0675
1998 High $39.50 $44.38 $43.38 $32.50
1998 Low $27.38 $37.00 $18.00 $16.88
1998 Dividends Paid $.0525 $.0600 $.0600 $.0600
On January 7, 2000, there were approximately 1,421 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.
Page 15 of 61
Item 6 Selected Financial Data (In Thousands, Except Per Share Data)
1999(a) 1998(a) 1997(a) 1996(a) 1995(a)
---- ---- ---- ---- ----
Net sales(b) $530,436 $448,539 $397,067 $243,312 $143,662
Net earnings(b) $ 44,312 $ 33,309 $ 29,086 $ 18,138 $ 7,351
Earnings per share(b):
Basic $ 2.76 $ 2.08 $ 1.81 $ 1.14 $ .57
Diluted $ 2.73 $ 2.06 $ 1.80 $ 1.13 $ .56
Total assets $381,239 $344,134 $255,334 $218,347 $144,940
Total long-term debt $ 60,496 $ 60,898 $ 32,957 $ 41,701 $ 17,125
Shareholders' equity $215,635 $174,809 $142,375 $103,590 $ 84,761
Net worth per share $ 13.26 $ 10.81 $ 8.82 $ 6.48 $ 5.41
Working capital $141,851 $102,336 $ 87,618 $ 74,787 $ 43,242
Current ratio 2.5 to 1 2.0 to 1 2.2 to 1 2.1 to 1 2.1 to 1
Number of shares outstanding:
Weighted average,
including common stock
equivalents 16,246 16,203 16,137 16,096 13,076
Year end 16,266 16,170 16,135 15,975 15,672
Dividends declared per share $ .2625 $ .240 $ .210 $ .200 $ .198
Price range per share:
High $ 46.25 $ 44.38 $ 43.13 $ 21.88 $ 11.88
Low $ 19.88 $ 16.88 $ 17.13 $ 9.56 $ 6.63
(a) During 1999, we purchased the operating assets of Tianjin Electrical Metal
Works and MEC Betras Italia S.r.l. In 1998, we acquired FEE Technology,
Metales y Contactos and GTI Corporation. We acquired the magnetic
components business of Nortel in 1997, Doduco GmbH in 1996 and Pulse
Engineering, Inc. in 1995. See Note 2 of Notes to Consolidated Financial
Statements.
(b) Amounts reflect continuing operations. See Note 2 of Notes to Consolidated
Financial Statements.
Page 16 of 61
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. Please refer to pages 10 through 13 of this
report for a description of "forward-looking statements" and factors that may
affect future results.
We are making the statements below to inform our shareholders of our
general financial condition and our results of operations. We are not trying to
influence investors to buy or sell our securities.
Business Overview
Please refer to Part I, Item I for a description of our continuing
businesses and strategic initiatives.
In June 1997, we sold our Test & Measurement Products Segment, which
manufactured material testing systems, force measurement products and weighing
devices. We sold these businesses because they did not fit within our core
competencies and did not offer us opportunities to create significant
shareholder value. The Test & Measurement Products Segment is reported as
discontinued operations in the accompanying financial statements.
We believe that the investments, divestiture and strategies described in
Part I, Item I and in the preceding paragraph have positioned us for future
growth and the creation of additional shareholder value.
Liquidity and Capital Resources
Working capital at December 31, 1999 was $141.9 million, an increase of
$39.5 million from the working capital of $102.3 million at December 31, 1998.
Worldwide, cash on hand at December 31, 1999 was $88.2 million, approximately
$37.6 million greater than at December 31, 1998. Cash provided by operating
activities, supplemented by $4.6 million of net borrowings, was more than
adequate to pay for capital expenditures, acquisitions, and dividends.
We believe that the combination of cash on hand, cash generated by
operations and, if necessary, additional borrowings under our credit facilities
will be sufficient to satisfy our operating cash requirements for the
foreseeable future. In addition, we may use internally generated funds and
additional borrowings for acquisitions of suitable businesses or assets. At
December 31, 1999, we had approximately $146.0 million of unused lines of credit
from banks.
Page 17 of 61
Cash Flows from Operating Activities
Cash flow from operations was $69.3 million for the year ended December 31,
1999, an increase of $19.5 million from 1998. Net earnings before depreciation
and amortization, reductions in net deferred tax assets and inventory and an
increase in accounts payable contributed to cash provided by operations.
Offsetting these favorable cash flow factors were an increase in accounts
receivable due to record sales levels contributed by the ECS during the fourth
quarter of 1999 and a decrease in accured expenses due to payments for income
taxes and for acquisition related transaction and integration expenses.
Cash Flows from Investing Activities
Cash used by investing activities was $32.9 million during 1999. We used
approximately $15.3 million of cash to pay for acquisitions and $18.8 million to
pay for capital expenditures.
Cash payments for capital expenditures, excluding acquisitions, represented
approximately 3.5% of net sales during 1999 and exceeded overall depreciation by
about $3.1 million. We make capital expenditures to expand production capacity
and to improve our operating efficiency. We expect to continue making such
expenditures.
With the exception of approximately $7.2 million of retained earnings in
China which are restricted by PRC regulations, substantially all retained
earnings are free from legal or contractual restrictions. 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 such earnings were brought back to the United States, significant tax
liabilities could be incurred in the United States. This could have a material
unfavorable impact on our net income and cash position.
Cash Flows from Financing Activities
During 1999, we borrowed approximately $77.8 million and repaid
approximately $73.2 million of debt. We entered into two DM10.0 million
unsecured loan facilities in Germany in order to convert a portion of our
outstanding credit from a variable-rate revolver to a fixed-rate term debt. One
facility is due in July 2003 and bears interest at a rate of 4.85%. The second
facility terminates in August 2009 and bears interest at 5.65%. In addition, we
entered into an additional variable-rate Eurocurrency revolving credit facility.
This facility has a maximum draw of $20.0 million and is due in June 2001. We
used the proceeds of the additional debt instruments to finance acquisitions,
working capital and capital expenditures.
Page 18 of 61
We have paid dividends for the last 95 consecutive quarters. Dividends paid
in 1999 were $4.1 million compared to $3.8 million in 1998. We expect to
continue making quarterly dividend payments for the foreseeable future.
Foreign Currency Effects
During 1999, the Euro devalued approximately 14% relative to the U.S.
dollar. As a result, we incurred foreign currency losses at our ECS European
operations, as Euro denominated net assets were translated to U.S. dollars for
financial reporting purposes. In addition, we experienced a negative translation
adjustment to equity as our investment in the MCS's European operations became
worth less in U.S. dollars than it was prior to the devaluation of the Euro.
This U.S. dollar decrease in investment value for 1999 resulted in a reduction
in equity of approximately $1.8 million.
During 1998, we did not experience any significant foreign currency gains
or losses but had a positive adjustment to equity as a result of strengthening
of the Deutsche mark and the French franc during the second half of 1998.
During 1997, currencies of several of the Asian countries in which we
manufacture and/or sell products devalued significantly relative to the U.S.
dollar. The majority of our sales originating in those countries, as well as the
majority of raw material purchased, are denominated in U.S. dollars. Expenses in
those countries, particularly labor and overhead, are denominated and paid in
local currencies which devalued against the U.S. dollar. As a result, the
devaluation of these local currencies favorably affected our profitability by
reducing the manufacturing costs incurred in those countries.
We transact a significant amount of sales in currencies other than the U.S.
dollar. Therefore, changing exchange rates often impact our financial results.
This is particularly true of movements in the exchange rate between the U.S.
dollar and the Euro because AMI Doduco's European sales are denominated
primarily in Euro currencies. In the future, it is possible that an increasing
percentage of our sales will be denominated in non-U.S. currencies. This would
increase our exposure to foreign currency fluctuations.
Please see the section titled "Foreign Currency Risk" under Item 7a of this
report for a description of our strategies to manage foreign currency risks.
New Accounting Pronouncements
In June of 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. This
standard is effective for quarters of fiscal years beginning after June 15,
2000. Adoption of this standard is not expected to have a material effect on our
operating results or liquidity. The impact of this standard on our balance sheet
will depend on the amount of hedging activity outstanding on the date of
adoption.
Page 19 of 61
Results of Operations
Our results from continuing operations for 1999, 1998 and 1997 are as
follows.(1) Amounts are in thousands:
Year Ended
December 31,
1999 1998 1997
---- ---- ----
Net sales:
Electronic Components $307,351 $218,876 $179,772
Metallurgical Components 223,085 229,663 217,295
-------- -------- --------
Total $530,436 $448,539 $397,067
======== ======== ========
Earnings before income taxes:
Electronic Components $ 49,893 $ 37,721 $ 30,865
Metallurgical Components 11,296 15,695 14,888
-------- -------- --------
Operating profit 61,189 53,416 45,753
Other income (expense), net (2,180) (1,073) 1,011
-------- -------- --------
Earnings from continuing
operations before income taxes $ 59,009 $ 52,343 $ 46,764
======== ======== ========
Revenues
Our net sales from continuing operations for 1999 increased by $81.9
million, or 18.3%, from 1998. We attribute the 1999 sales increase to:
o strong demand, particularly in the second half of 1999, in the ECS for
local area networking, telecommunication and power conversion products;
and
o a full year of operating contributions by our 1998 acquisitions -
Metales, FEE and GTI.
Partially offsetting these positive sales factors was a decrease in sales
contributed by the MCS' European operations.
Our 1999 ECS sales increased $88.5 million, or 40.4%, from the prior year.
As previously noted, we experienced strong demand for our products during the
second half of the year. In addition, our 1999 results include a full year of
FEE and GTI contributions. Our 1998 results included operating FEE for
approximately six months and GTI for approximately six weeks.
Sales in the MCS decreased by $6.6 million, or 2.9%, from 1998 to 1999. The
MCS sales in 1999 were affected by:
- ---------------
(1) The results of the Test & Measurement Products Segment are reported as
discontinued operations in the accompanying financial statements. The 1997
sales of the Test & Measurement Products Segment were approximately $11.8
million prior to the divestiture on June 4, 1997.
Page 20 of 61
o generally weaker European electric power, industrial machinery and
durable goods markets;
o an average Deutsche mark-to-dollar exchange rate that was approximately
4.5% below the 1998 average; and
o the phase-out of certain non-core product lines.
During the latter part of 1999, we began to see a recovery in the European
markets as domestic demand strengthened and exports to Asia rebounded. In
addition, our 1999 sales into North American markets increased from 1998.
The increase in consolidated sales from 1997 to 1998 resulted from a full
year of operating the magnetic components business purchased from Nortel in late
1997, partial-year sales contributed by our 1998 acquisitions and strong sales
volume from the MCS's European operations.
Cost of Sales
Gross margin for 1999 was 32.4% of sales. The comparable amounts for 1998
and 1997 are 31.7% and 32.2%, respectively. Although the gross margin for both
the ECS and the MCS were lower when compared to the prior year, on a
consolidated basis the margin was higher as we realized proportionately more
higher-margin ECS sales than MCS sales.
The margin for the ECS decreased from the prior year as a result of the
ECS's 1998 acquisitions and continuing pricing pressures from ECS customers. The
FEE and Valor businesses acquired by the ECS in 1998 operated at lower margins
than the previously existing ECS business. In addition, expenses were incurred
related to the FEE and Valor integration efforts. Partially offsetting these
factors in the second half of 1999 was the positive impact on margins of volume
efficiencies and the cost control programs instituted in the first quarter of
1999.
The MCS gross margin decreased slightly from the prior year as cost
reduction efforts were more than offset by weakness in the European markets,
which caused our fixed costs to be allocated over less volume, and higher sales
of precious metals on which we realize very low margins. We assume little to no
price risk on sales of precious metals. Our cost reduction efforts continue
into 2000 in both the manufacturing and administrative areas. We are evaluating
additional ways to reduce the cost structure of the MCS and improve its
operating performance.
The decrease in gross margin from 1997 to 1998 was due to a slower LAN
market in 1998 when compared to 1997 and the acquisition by the ECS of
businesses operating at lower margins than our previously existing business.
Page 21 of 61
Operating Expenses
Our total selling, general and administrative expenses for 1999, 1998 and
1997 are as follows. Amounts are in thousands:
Year Ended
December 31,
1999 1998 1997
---- ---- ----
Selling, general &
administrative expenses $110,694 $88,827 $82,264
Percentage of net sales 20.9% 19.8% 20.7%
Selling, general and administrative expense increased both in absolute
dollars and as a percentage of sales in 1999 as compared to 1998. The increases
result from:
o higher spending required to support the higher level of ECS sales;
o significantly higher expenses incurred in 1999 associated with
implementing and optimizing a global ERP system within the MCS;
o costs associated with integrating our most recent acquisitions into the
Company;
o costs associated with reorganizing the MCS business; and
o expenses related to acquisition development activity, particularly within
the MCS.
Partially offsetting these factors was the cost reduction program instituted in
both segments in the first quarter of 1999.
The increase in total selling, general and administrative expenses from
1997 to 1998 resulted from increased spending to support more sales volume. As a
percentage of sales, selling, general and administrative expense decreased from
1997 to 1998 due to the absence of Netwave Technologies, Inc. Netwave was a
wireless local area network product line which we sold at the end of 1997.
Netwave required a high level of spending relative to its revenues. In 1998,
expenses related to integrating acquisitions partially offset the benefit of
divesting Netwave.
Page 22 of 61
We include research, development and engineering expenses within selling,
general and administrative expenses. We refer to research, development and
engineering expenses as RD&E. RD&E by segment for the past three years is as
follows. Amounts are in thousands:
Year Ended
December 31,
1999 1998 1997
---- ---- ----
ECS $13,972 $11,085 $10,560
Percentage of segment sales 4.6% 5.1% 5.9%
MCS $ 5,639 $ 5,755 $ 5,807
Percentage of segment sales 2.5% 2.5% 2.7%
RD&E spending within the ECS increased from 1998 as the ECS continues to
invest in new technologies and related improvements to respond to technology
changes in its marketplace. As a percentage of sales, the ECS spending is less
than the prior year as the ECS sales reached record levels in 1999. Although the
ECS spending in dollars on RD&E increased only slightly from 1997 to 1998, the
1997 amount included RD&E at Netwave. Excluding Netwave's high RD&E expenses in
relation to its sales, the ECS spending on RD&E increased significantly from
1997.
Neither segment anticipates any significant changes to RD&E efforts in the
near-term.
Interest
Interest income for 1999 was $1.9 million compared with $2.1 million in
1998 and $2.5 million in 1997. Although cash and cash equivalents were
substantially higher at December 31, 1999 than December 31, 1998, the majority
of the increase in cash was generated during the latter part of 1999.
For 1999, interest expense was $3.5 million as compared with $3.3 million
during 1998 and $2.4 million for 1997. The slight increase in interest expense
resulted from higher debt levels in 1999 than 1998, particularly in the early
part of 1999 as we used debt to partially finance our November 1998 acquisition
of GTI/Valor. Partially offsetting the effect of higher debt levels in 1999 was
more favorable interest rates on our European debt facilities.
Please see the section titled "Interest Rate Risk" under Item 7a of this
report for additional information regarding interest.
Page 23 of 61
Income Taxes
Our effective income tax rate during 1999 was 24.9%. This compares to 36.4%
in 1998 and 37.8% in 1997. The substantial decrease in our effective tax rate
resulted from actions initiated in the first quarter of 1999 related to a
comprehensive global review of our business operations. This comprehensive
review was aimed at ensuring that our overall tax rates are optimal and
appropriate. Also contributing to the lower overall tax rate was a decline in
the proportion of taxable income attributable to high-tax jurisdictions such as
Germany.
We have benefited over recent years from favorable offshore tax treatments;
however, there are no assurances that such treatments will continue in the
future. Developing countries and, in particular, the People's Republic of China,
may change their tax policies at any time. In addition to income tax policies,
we monitor developments relating to other business taxes.
Other Issues
Precious Metal
The MCS uses silver as well as other precious metals in the manufacturing
of electrical contacts, rivets and other products. Historically, we have leased
or held the majority of 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. In addition, the risk of a
decrease in the market price of owned precious metal can be substantial. As is
sometimes the case, during the first quarter of 1998, and to a lesser extent in
early 1999, the price of silver increased significantly. The associated leasing
costs also increased. The terms of sale within the MCS allow us to charge
customers for the current market value of silver. However, leasing costs cannot
always be recovered. Thus far we have been successful in managing the costs
associated with our precious metals. While limited amounts were purchased during
1999 for use in production, the vast 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. We believe this risk is shared
by our competitors.
Page 24 of 61
Year 2000
The popularly called "Year 2000" issues associated with the programming
code in existing computer systems revolved around whether computer systems would
properly recognize date-sensitive information when the year changed to 2000.
Information technology ("IT") and non-IT systems that did not properly recognize
such information could have generated erroneous data or caused a system to fail.
We substantially completed the required modifications to our IT and non-IT
systems. Since the inception of our efforts to address potential Year 2000
issues, we incurred approximately $.5 million of Year 2000 remediation expenses
related to our systems. These costs were expensed as SG&A as incurred. In
addition, we incurred costs to install new software. These costs have been
capitalized and will be amortized over the expected useful life of the related
software.
Following the arrival of the Year 2000, we have not experienced any
significant problems related to Year 2000 issues. We have built and delivered
product and transacted business with our customers and suppliers without
interruption. In addition, we have not received any notifications from customers
regarding Year 2000 issues related to product sold. We will, however, continue
to monitor our computer systems to ensure any latent Year 2000 issues that may
arise are addressed promptly.
Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and the Euro. We refer to the 11 countries as the participating countries and
the participating countries' sovereign currencies as the legacy currencies. The
Euro now trades on currency exchanges and is available for non-cash
transactions.
The legacy currencies are scheduled to remain legal tender in the
participating countries as denominations of the Euro between January 1, 1999 and
July 1, 2002. During this transition period, public and private parties may pay
for goods and services using either the Euro or a legacy currency. Beginning
January 1, 2002, the participating countries will issue new Euro-denominated
bills and coins for use in cash transactions. By July 1, 2002, the participating
countries will withdraw all bills and coins denominated in the legacy
currencies, so that the legacy currencies no longer will be legal tender for any
transactions. The conversion to the Euro will then be complete.
Page 25 of 61
We have developed plans to ensure, to the extent possible, our operations
will not be negatively impacted by the Euro. On a company-wide basis, those
efforts have been coordinated by the corporate Treasurer and have included
internal personnel as well as external consultants. The ECS is continually
evaluating the impact of the Euro on the operations located in Europe. The MCS
is in the renovation and implementation stages of addressing Euro conversion
related system issues so that optimal customer services relating to Euro
transactions can be provided to its European customers.
As of December 31, 1999, no significant problems related to Euro conversion
issues have occurred. The failure to correct a material Euro conversion issue
could result in an interruption in, or failure of, certain normal business
activities. Such failures could materially and adversely affect our results of
operations, liquidity and financial condition.
Item 7a Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our financial instruments exposed to changes in interest rates are
long-term debt obligations. We invest our excess cash with high-credit-rated
financial institutions. We limit our exposure to any one financial institution
to the extent practical. Our board has adopted policies relating to these risks
and the audit committee of the board continually monitors compliance with these
policies.
The majority of our 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.
Page 26 of 61
The table below presents principal amounts in equivalent U.S. dollars and
related weighted average interest rates by year of maturity for our debt
obligations. The carrying value of long-term debt approximates its fair value
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. Amounts
are in thousands:
Approx.
There- Fair
2000 2001 2002 2003 2004 after Total Value
---- ---- ---- ---- ---- ----- ----- -----
Liabilities
Long-term debt
- --------------
Fixed rate:
U.S.$ $ 27 -- -- -- -- -- $ 27 $ 27
Wt. ave. interest rate 4.50%
Euro (1) $ 140 $ 151 $ 164 $10,477 $ 147 $5,385 $16,464 $16,464
Wt. ave. interest rate 8.50% 8.50% 8.50% 5.25% 8.50% 5.77%
Variable rate:
U.S.$ $11,000 -- -- -- -- -- $11,000 $11,000
Wt. ave. interest rate 6.90%
Euro (1) -- $33,005 -- -- -- -- $33,005 $33,005
Wt. ave. interest rate 4.09%
(1) U.S. dollar equivalent
Page 27 of 61
Foreign Currency Risk
We conduct business in various foreign currencies, including those of
emerging market countries in Asia and well-developed European countries. 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.
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. At December 31, 1999, the
Company did not have any currency exchange forward contracts or currency options
outstanding.
The table below provides information about our non-derivative financial
instruments and presents the information in equivalent U.S. dollars. Amounts are
in thousands:
Approx.
There- Fair
Current 2001 2002 2003 2004 after Total Value
------- ---- ---- ---- ---- ----- ----- -----
Assets
Cash and equivalents
- --------------------
Variable rate:
Euro (1) $3,037 -- -- -- -- -- $ 3,037 $ 3,037
Other currencies (1) $2,561 -- -- -- -- -- $ 2,561 $ 2,561
Liabilities
Long-term debt
- --------------
Fixed rate:
Euro (1) $ 140 $ 151 $ 164 $10,477 $ 147 $5,385 $16,464 $16,464
Variable rate:
Euro (1) -- $33,005 -- -- -- -- $33,005 $33,005
(1) U.S. dollar equivalent
Item 8 Financial Statements and Supplementary Data
Information required by this item is incorporated by reference from the
Independent Auditor's Report found on page 32 and from the consolidated
financial statements and supplementary schedule on pages 33 through 58.
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None
Page 28 of 61
Part III
Cross Reference Index
Form 10-K
Item Number and Caption Incorporated Material
----------------------- ---------------------
Item 10 Directors and Executive Officers of the Registrant Registrant's Definitive Proxy Statement
Item 11 Executive Compensation Registrant's Definitive Proxy Statement
Item 12 Security Ownership of Certain Beneficial Owners Registrant's Definitive Proxy Statement
and Management
Item 13 Certain Relationships and Related Transactions Registrant's Definitive Proxy Statement
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 31, 1999 and 1998
Consolidated Statements of Earnings - Years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity - Years
ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Financial Statement Schedules
-----------------------------
Schedule II, Valuation and Qualifying Accounts
(b) Reports on Form 8-K
None
(c) Exhibits
(21) Subsidiaries of the Registrant
(23) Consent of Certified Public Accountants
(27) Financial Data Schedule (electronic filing only)
Page 29 of 61
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 of the Board of Directors,
Chief Executive Officer and Director
Date March 13, 2000
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/Graham Humes
----------------------- ------------------------------------
Stanley E. Basara Graham Humes
Director Director
Date March 13, 2000 Date March 13, 2000
By By /s/Edward M. Mazze
----------------------- ------------------------------------
John E. Burrows, Jr. Edward M. Mazze
Director Director
Date March 13, 2000 Date March 13, 2000
By /s/Rajiv L. Gupta By /s/Drew A. Moyer
----------------------- ------------------------------------
Rajiv L. Gupta Drew A. Moyer
Director Corporate Controller and Secretary
(Principal Accounting Officer)
Date March 13, 2000
Date March 13, 2000
By
-----------------------
J. Barton Harrison By /s/Albert Thorp, III
Director ------------------------------------
Albert Thorp, III
Date March 13, 2000 Vice President - Finance and Chief
Financial Officer
(Principal Financial Officer)
By /s/Roy E. Hock
----------------------- Date March 13, 2000
Roy E. Hock
Director
Date March 13, 2000
Page 30 of 61
Index to Financial Statements and Schedules
Financial Statements
--------------------
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Earnings - Years ended December 31, 1999, 1998 and
1997
Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998 and
1997
Consolidated Statements of Changes in Shareholders' Equity - Years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Financial Statement Schedule
----------------------------
Schedule II - Valuation and Qualifying Accounts
Page 31 of 61
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 generally accepted auditing
standards. 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 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1999, in conformity
with generally accepted accounting principles. 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
February 25, 2000
Page 32 of 61
Technitrol, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1999 and 1998
In thousands, except for share data
Assets 1999 1998
------ ---- ----
Current assets:
Cash and cash equivalents $ 88,161 $ 50,563
Trade receivables, net 77,514 71,482
Inventories 65,101 71,230
Prepaid expenses and other current assets 8,512 10,597
-------- --------
Total current assets 239,288 203,872
Property, plant and equipment 150,926 149,035
Less accumulated depreciation 68,204 59,967
-------- --------
Net property, plant and equipment 82,722 89,068
Deferred income taxes 8,615 9,296
Excess of cost over net assets acquired, net 48,666 39,249
Other assets 1,948 2,649
-------- --------
$381,239 $344,134
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt $ 167 $ 193
Accounts payable 26,186 23,270
Accrued expenses 71,084 78,073
-------- --------
Total current liabilities 97,437 101,536
Long-term liabilities:
Long-term debt, excluding current installments 60,329 60,705
Other long-term liabilities 7,838 7,084
Commitments and contingencies (Note 7)
Shareholders' equity:
Common stock: 75,000,000 shares authorized; 16,265,838 and
16,170,406 outstanding in 1999 and 1998, respectively; $.125
par value per share and additional paid-in capital 48,263 45,109
Retained earnings 171,278 131,227
Other (3,906) (1,527)
-------- --------
Total shareholders' equity 215,635 174,809
-------- --------
$381,239 $344,134
======== ========
See accompanying Notes to Consolidated Financial Statements.
Page 33 of 61
Technitrol, Inc. and Subsidiaries
Consolidated Statements of Earnings
Years ended December 31, 1999, 1998 and 1997
In thousands, except per share data
1999 1998 1997
---- ---- ----
Net sales $530,436 $448,539 $397,067
Cost of sales 358,553 306,296 269,050
-------- -------- --------
Gross profit 171,883 142,243 128,017
Selling, general and administrative expenses 110,694 88,827 82,264
-------- -------- --------
Operating profit 61,189 53,416 45,753
Other income (expense):
Interest income 1,882 2,080 2,469
Interest expense (3,477) (3,264) (2,387)
Other, net (585) 111 929
-------- -------- --------
(2,180) (1,073) 1,011
-------- -------- --------
Earnings before income taxes 59,009 52,343 46,764
Income taxes (14,697) (19,034) (17,678)
-------- -------- --------
Net earnings from continuing operations 44,312 33,309 29,086
Discontinued operations, net of income taxes:
Earnings from operations of the Test &
Measurement Products Segment -- -- 258
Gain on disposal -- -- 11,502
-------- -------- --------
Net earnings $ 44,312 $ 33,309 $ 40,846
======== ======== ========
Earnings per share from continuing operations:
Basic $ 2.76 $ 2.08 $ 1.81
======== ======== ========
Diluted $ 2.73 $ 2.06 $ 1.80
======== ======== ========
Net earnings per share:
Basic $ 2.76 $ 2.08 $ 2.54
======== ======== ========
Diluted $ 2.73 $ 2.06 $ 2.53
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
Page 34 of 61
Technitrol, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998, and 1997
In thousands
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net earnings $44,312 $33,309 $40,846
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 19,411 16,280 13,147
Deferred taxes 3,319 3,415 (748)
Gain on sale of Test & Measurement Products Segment -- -- (11,502)
Changes in assets and liabilities net of effect of
acquisitions and divestitures:
Trade receivables (9,345) (1,705) (15,440)
Inventories 5,745 (4,634) (12,329)
Accounts payable 3,788 5,191 1,633
Accrued expenses (3,028) (4,688) 9,406
Other, net 5,050 2,559 (1,279)
------- ------- -------
Net cash provided by operating activities 69,252 49,727 23,734
------- ------- -------
Cash flows from investing activities:
Proceeds from the sale of discontinued operations,
net of cash sold and expenses paid -- -- 32,362
Acquisitions, net of cash acquired (15,277) (42,804) (26,514)
Capital expenditures, exclusive of acquisitions (18,766) (20,398) (13,447)
Proceeds from sale of property, plant and equipment 1,115 368 668
------- ------- -------
Net cash used in investing activities (32,928) (62,834) (6,931)
------- ------- -------
Cash flows from financing activities:
Principal payments on long-term debt (73,185) (25,483) (19,093)
Net repayments of short-term debt -- -- (2,911)
Long-term borrowings 77,753 44,218 15,536
Dividends paid (4,133) (3,759) (3,336)
Exercise of stock options 5 97 317
Sale of stock through employee stock purchase plan 916 -- --
Purchase of Technitrol stock -- (145) --
Contributions from minority interest in subsidiary -- -- 100
------- ------- -------
Net cash provided by (used in) financing activities 1,356 14,928 (9,387)
Net effect of exchange rate changes on cash (82) (61) (2,144)
------- ------- -------
Net increase in cash and cash equivalents 37,598 1,760 5,272
Cash and cash equivalents at beginning of year 50,563 48,803 43,531
------- ------- -------
Cash and cash equivalents at end of year $88,161 $50,563 $48,803
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
Page 35 of 61
Technitrol, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1999, 1998 and 1997
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, 1997 15,975 $40,638 $ 64,339 $ (800) $ (587)
Stock options, awards and related
compensation 160 1,354 -- (378) --
Tax benefit of stock compensation -- 1,156 -- -- --
Currency translation adjustments -- -- -- -- (808) $ (808)
Net earnings -- -- 40,846 -- -- 40,846
-------
Comprehensive income -- -- -- -- -- $40,038
=======
Dividends declared ($.21 per share) -- -- (3,385) -- --
------ ------- -------- ------- -------
Balance at December 31, 1997 16,135 $43,148 $101,800 $(1,178) $(1,395)
====== ======= ======== ======= =======
Purchase of common stock (8) (145) -- -- --
Stock options, awards and related
compensation 43 1,398 -- (614) --
Tax benefit of stock compensation -- 708 -- -- --
Currency translation adjustments -- -- -- -- 1,660 $ 1,660
Net earnings -- -- 33,309 -- -- 33,309
-------
Comprehensive income -- -- -- -- -- $34,969
=======
Dividends declared ($.24 per share) -- -- (3,882) -- --
------ ------- -------- ------- -------
Balance at December 31, 1998 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 -- -- -- -- -- $42,542
=======
Dividends declared ($.2625 per share) -- -- (4,261) -- --
------ ------- -------- ------- -------
Balance at December 31, 1999 16,266 $48,263 $171,278 $(2,401) $(1,505)
====== ======= ======== ======= =======
See accompanying Notes to Consolidated Financial Statements.
Page 36 of 61
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. In addition to the inventories
included in the accompanying balance sheets, the Company has custody of
inventories under consignment-type leases from suppliers ($39.5 million at
December 31, 1999, and $40.0 million at December 31, 1998). This inventory
consists primarily of precious metals which are used in the Company's
metallurgical components manufacturing business. Included in interest expense
for the year ended December 31, 1999 are consignment interest fees of $1.4
million. These interest costs were $1.4 million and $.4 million in 1998 and
1997, 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 37 of 61
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
-------------------------------------------
Excess of Cost over Net Assets
- ------------------------------
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.
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, monetary assets and liabilities are
translated at year-end exchange rates while non-monetary items are translated at
historical rates. Income and expense accounts are translated at the average
rates in effect during the year, except for depreciation and cost of sales,
which are translated 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.
(continued)
Page 38 of 61
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
-------------------------------------------
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.
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 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.
Estimates
- ---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions may 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 from those
estimates.
(2) Acquisitions and Divestitures
-----------------------------
Acquisitions
MEC Betras Italia S.r.l. ("MEC Betras"): On December 22, 1999, the Company
----------------------------------------
acquired the operating assets of MEC Betras. MEC Betras, located in Italy,
produced electrical contact rivets and stamped electrical contact parts. The
purchase price of MEC Betras' assets was not material to the Company's
consolidated financial position. The Metallurgical Components Segment ("MCS")
did not operate these assets until January of 2000; therefore, the acquisition
had no impact on the Company's 1999 operating results. Historical proforma
results of operations would not be materially different from actual results.
Tianjin Electrical Metal Works: In November 1999, the Company, through the
-------------------------------
MCS, acquired the assets of an electrical contacts business based in Tianjin,
the People's Republic of China. The purchase price was not material to the
Company's consolidated financial position. The impact on the Company's operating
results is also immaterial. Historical proforma results of operations would not
be materially different from actual results.
(continued)
Page 39 of 61
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(2) Acquisitions and Divestitures, continued
-----------------------------
GTI Corporation ("GTI"): On November 16, 1998, the Company acquired all of
------------------------
the capital stock of GTI, whose principal operating unit was Valor Electronics,
Inc. ("Valor"). Valor designed and manufactured magnetics-based components for
signal processing and power transfer functions used primarily in local area
networking and also in telecommunications and broadband products. At the time of
acquisition, manufacturing operations were located in the People's Republic of
China and the Philippines. GTI's corporate offices were located in San Diego,
California.
The total purchase price included approximately $34.0 million paid to the
former shareholders of GTI. In addition, transaction expenses and related
acquisition costs were incurred. To complete the acquisition, the Company used
approximately $14.0 million of cash on hand, and drew down approximately $20.0
million from previously unused bank lines of credit.
The acquisition was accounted for by the purchase method of accounting. An
allocation of purchase price to the assets acquired and liabilities assumed has
been made using fair values that include values based on independent appraisals
and management estimates. The fair value of the assets acquired and liabilities
assumed approximated $45.9 million and $15.8 million, respectively. The excess
of costs over net assets acquired approximated $5.8 million. These amounts
reflect adjustments made during 1999 to reflect the final allocation of the
purchase price to the fair value of assets acquired and liabilities assumed.
The liabilities assumed included a reserve of approximately $3.7 million
for restructuring the GTI businesses. The amount was established in accordance
with Emerging Issues Task Force Issue 95-3, "Recognition of Liabilities in
Connection with a Purchase Business Combination," and is intended to cover the
estimated expenses related to integrating GTI's operations into existing
Electronic Components Segment ("ECS") facilities. Expenses have been, and are
expected to be, incurred primarily for terminating employees, leasehold
terminations and other related exit costs. Actual expenses charged to the
reserve through December 31, 1999 approximate $3.0 million.
(continued)
Page 40 of 61
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(2) Acquisitions and Divestitures, continued
------------------------------
GTI experienced significant financial difficulty prior to its acquisition
by the Company, and the Company has made significant changes in GTI's
businesses, as noted above. As a result, the Company does not believe that the
following unaudited pro forma financial information, which reflects continuing
operations only and assumes GTI was acquired on January 1, 1997, is indicative
of the results that actually would have occurred if the acquisition had been
consummated on the date indicated or which may be attained in the future (in
thousands, except for earnings per share).
Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997
------------- -------------
Net sales $489,336 $479,658
Net earnings $17,627 $29,091
Diluted earnings per share $1.09 $1.80
FEE Technology, S.A. ("FEE"): On July 3, 1998, the Company purchased all of
--------------------
the capital stock of FEE. FEE designed and manufactured magnetic components for
telecommunications and power conversion equipment. FEE is now part of the ECS.
The total purchase price including assumed debt was approximately $17.0
million and was funded by cash on hand. In addition, transaction expenses and
related acquisition costs were incurred. The approximate fair value of the net
assets acquired was $8.3 million resulting in goodwill of approximately $8.7
million. The fair value of liabilities assumed included approximately $1.7
million for restructuring the FEE businesses, which was substantially completed
by December 31, 1999. The $1.7 million was primarily for severance payments and
other related exit costs resulting from closing factories. These amounts include
adjustments made during 1999 to reflect the final allocation of the purchase
price to the fair market value of assets acquired and liabilities assumed.
The acquisition was accounted for by the purchase method of accounting and,
therefore, the financial results of FEE have been included with those of the
Company beginning on July 3, 1998. Historical pro forma results of operations
would not be materially different from actual results.
Certain Assets of Metales y Contactos, S.A. de C.V. ("Metales"): On July 3,
----------------------------------------------------------------
1998, the Company, through the MCS, acquired certain assets of Metales. The
purchase price of Metales' assets was not material to the Company's consolidated
financial position. The results of the Metallurgical Components Segment include
the results of operating the acquired assets from July 3, 1998.
(continued)
Page 41 of 61
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(2) Acquisitions and Divestitures, continued
------------------------------
The Magnetic Components Business of Northern Telecom Ltd. ("Nortel"): On
---------------------------------------------------------------------
November 30, 1997, the Company acquired the magnetic components business of
Nortel (the "Business") by purchasing all of the common stock of two Nortel
subsidiaries (one in Malaysia and one in Thailand) and certain assets in Canada
relating to design engineering support of those subsidiaries. The acquisition of
the Business was accounted for by the purchase method of accounting. The
purchase price was approximately $22.5 million including transaction expenses.
The fair value of the net assets acquired approximated $8.0 million. The
purchase price was funded by cash on hand, including cash received from the sale
of the Test & Measurement Products Segment, as explained below.
The following unaudited pro forma financial information, which reflects
continuing operations only, assumes that the Business was acquired on January 1,
1997, and is provided for comparative purposes only. It does not purport to be
indicative of the results that actually would have occurred if the acquisition
had been consummated on the date indicated or which may be attained in the
future (in thousands, except for earnings per share).
Year Ended
Dec. 31, 1997
-------------
Net sales $430,242
Net earnings $30,275
Diluted earnings per share $1.88
Divestitures
Test & Measurement Products Segment: On June 4, 1997, the Company completed
------------------------------------
the sale of those entities which formed its Test & Measurement Products Segment
to an affiliate of Ametek, Inc. for approximately $34.0 million in cash, and a
resulting gain of approximately $11.5 million (net of income taxes of
approximately $11.1 million) was realized in the second quarter of 1997.
Transaction expenses were paid by the Company from the gross proceeds of the
sale and are reflected in the net gain realized on the sale. As a result of the
foregoing, the Company discontinued its manufacturing and marketing of test and
measurement products and the Test & Measurement Products Segment is reported as
a discontinued operation in the accompanying Consolidated Statements of Earnings
and in these Notes to Consolidated Financial Statements.
(continued)
Page 42 of 61
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(2) Acquisitions and Divestitures, continued
------------------------------
For the year-ended December 31, 1997, the impact of the divestiture on
earnings per share was as follows:
Year Ended
Dec. 31, 1997
-------------
Earnings per share from continuing operations:
Basic $1.81
Diluted 1.80
Discontinued operations, net of tax:
Earnings per share from operations - basic and diluted .02
Earnings per share from gain on disposal - basic and diluted .71
Earnings per share:
Basic 2.54
Diluted 2.53
(3) Financial Statement Details
---------------------------
The following provides details for certain financial statement captions at
December 31, 1999 and 1998 (in thousands):
1999 1998
---- ----
Inventories:
Finished goods $ 21,916 $ 27,376
Work in progress 13,624 14,926
Raw materials and supplies 29,561 28,928
-------- --------
$ 65,101 $ 71,230
======== ========
Property, plant and equipment, at cost:
Land $ 4,226 $ 4,549
Buildings and improvements 30,951 30,431
Machinery and equipment 115,749 114,055
-------- --------
$150,926 $149,035
======== ========
Accrued expenses:
Income taxes payable $ 20,868 $ 32,301
Dividends payable 1,098 970
Accrued compensation 15,552 14,977
Other accrued expenses 33,566 29,825
-------- --------
$ 71,084 $ 78,073
======== ========
(continued)
Page 43 of 61
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(4) Long-term Debt
--------------
At December 31, 1999 and 1998, long-term debt was as follows (in thousands):
1999 1998
---- ----
Bank Loans
- ----------
Variable-rate (U.S. LIBOR plus .40%), multi-currency revolving
credit facility with $125.0 million maximum draw, due June
30, 2000 (6.90% rate at December 31, 1999) $11,000 $26,000
Variable-rate (EURIBOR plus .50%), Eurocurrency revolving credit
facility with $20.0 million maximum draw, due June 19,
2001 (4.04% rate a December 31, 1999) 13,954 --
Variable-rate (German LIBOR plus 0.625%), multi-currency bank
loan facility with $40.0 million maximum draw, due
December 31, 2001 (4.13% rate at December 31, 1999) 19,051 27,568
Fixed-rate (5.57% and 4.85%), unsecured debt in Germany
(denominated in Deutsche marks) due June 26, 2003 10,298 5,993
Fixed-rate (5.65%), unsecured debt in Germany (denominated in
Deutsche marks) due August 2, 2009 5,150 --
------- -------
Total bank loans 59,453 59,561
Mortgage Notes, secured by mortgages on land, buildings, and certain equipment:
- ---------------
4.5% - 10.32% mortgage notes, due in monthly installments until 2007 1,043 1,337
------- -------
Total long-term debt 60,496 60,898
Less current installments 167 193
------- -------
Long-term debt excluding current installments $60,329 $60,705
======= =======
(continued)
Page 44 of 61
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(4) Long-term Debt, continued
---------------
At the Company's option, interest on the $125.0 million multi-currency
revolving credit facility may be based on the prime rate or on LIBOR.
The facility expiring on June 30, 2000 is secured by a pledge of the stock
of certain of the Company's domestic subsidiaries. All outstanding borrowings on
that facility are denominated in U.S. dollars. The borrowings 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 Company entered into the Eurocurrency revolving credit facility during
the fourth quarter of 1999. The facility is unsecured and outstanding borrowings
are denominated in the Euro.
The multi-currency facility terminating on December 31, 2001 is unsecured.
All outstanding borrowings are denominated in Deutsche marks.
The Company has two fixed-rate term loans due on June 26, 2003. Each is for
approximately $5.1 million as of December 31, 1999. The interest rates are 5.57%
and 4.85%. The 4.85% term loan was entered into during 1999.
The Company also entered into a third fixed-rate term loan during 1999.
This 5.65% term loan is due August 2, 2009.
The proceeds from the additional debt instruments entered into during 1999
were used to reduce the amounts outstanding under the previously existing
revolving credit facilities and to finance acquisitions, working capital and
capital expenditures.
Principal payments due within the next five years are as follows (in
thousands):
2000 $11,167
2001 33,156
2002 164
2003 10,477
2004 147
The bank loan facilities contain certain covenants requiring maintenance of
minimum net worth and other customary and normal provisions. The Company is in
compliance with all such covenants.
(continued)
Page 45 of 61
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(5) Research, Development and Engineering Expenses
----------------------------------------------
Research, development and engineering expenses ("RD&E") are included in
selling, general and administrative expenses and were $19.6 million, $16.8
million and $16.4 million in 1999, 1998 and 1997, 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 $12.8 million, $12.5 million and $7.2 million in 1999, 1998 and
1997, respectively.
(6) Income Taxes
------------
Earnings before income taxes were as follows (in thousands):
1999 1998 1997
---- ---- ----
Domestic $ 934 $ 5,984 $23,306
Non-U.S. 58,075 46,359 46,537
------- ------- -------
Total $59,009 $52,343 $69,843
======= ======= =======
Earnings attributable to continuing operations were (in thousands) $59,009,
$52,343 and $46,764 in 1999, 1998 and 1997, respectively.
Income tax expense was as follows (in thousands):
Current: 1999 1998 1997
---- ---- ----
Federal $ 736 $ 4,420 $14,080
State and local 858 688 2,214
Non-U.S. 9,784 10,511 13,451
------- ------- -------
11,378 15,619 29,745
Deferred expense (benefit) 3,319 3,415 (748)
------- ------- -------
$14,697 $19,034 $28,997
======= ======= =======
(continued)
Page 46 of 61
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(6) Income Taxes, continued
-------------
Income tax expense amounts attributable to continuing operations were (in
thousands) $14,697, $19,034 and $17,678 in 1999, 1998 and 1997, respectively.
Income tax expense of $11,319 (in thousands) for 1997 is included in the results
of discontinued operations. 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, and employee compensation related to
the exercise of stock options.
A reconciliation of the statutory federal income tax rate with the
effective income tax rate follows:
1999 1998 1997
---- ---- ----
Statutory federal income tax rate 35% 35% 35%
Increase (decrease) resulting from:
Tax-exempt earnings of
subsidiary in Puerto Rico (1) (1) (1)
State and local income taxes, net
of federal tax effect 1 1 2
Non-deductible expenses and
other foreign income subject
to U.S. income tax 3 10 5
Foreign (14) (10) (3)
Other, net 1 1 4
--- --- ---
Effective tax rate 25% 36% 42%
=== === ===
For continuing operations, the Company's effective tax rate was
approximately 38% in 1997. The effective tax rate of 42% for all operations of
the Company in 1997 reflects significant taxes attributable to the gain on the
sale of discontinued operations.
(continued)
Page 47 of 61
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(6) Income Taxes, continued
-------------
Deferred tax assets and liabilities included the following at December 31
(in thousands):
1999 1998
---- ----
Assets:
Inventories $ 1,064 $ 1,098
Plant and equipment 355 126
Vacation pay and other compensation 886 892
Pension expense 776 785
Stock awards 1,411 1,247
Accrued liabilities 4,387 5,186
Net operating losses 4,483 4,774
Capital losses carryover 6,582 6,582
Other 227 100
------- -------
Total deferred tax assets 20,171 20,790
Valuation allowance (6,582) (6,582)
------- -------
Net deferred tax assets 13,589 14,208
Liabilities:
Deferred taxes on foreign operations 2,600 --
Other 123 23
------- -------
Total deferred tax liabilities 2,723 23
------- -------
Net deferred tax assets 10,866 14,185
Less current deferred tax assets 2,251 4,889
------- -------
Long-term deferred income taxes $ 8,615 $ 9,296
======= =======
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 $235.3 million of non-U.S. subsidiaries'
undistributed earnings (as calculated for income tax purposes) as of December
31, 1999. 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 or foreign exchange reasons, subsidiary earnings may be remitted.
(continued)
Page 48 of 61
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 31, 1999, 1998 and 1997 were $5.4 million,
$4.5 million and $3.6 million, respectively. The aggregate minimum rental
commitments under non-cancelable leases in effect at December 31, 1999 were as
follows (in thousands):
Year ending
December 31
-----------
2000 $ 6,102
2001 4,964
2002 3,784
2003 3,357
2004 2,820
Thereafter 4,405
-------
$25,432
=======
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, 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 and analysis.
Upon mutual agreement with a certain state agency, the Company will implement a
remediation plan. Based on current knowledge, the Company does not believe that
any future expenses associated with environmental remediation will have a
material impact on the financial position of the Company.
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.
(continued)
Page 49 of 61
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(8) Shareholders' Equity
--------------------
On January 22, 1997, 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 February 7, 1997. A total of
10,925,774 shares were issued in connection with the split. The stated par value
of each share was not changed from $.125. All relevant share and per share
amounts have been restated to retroactively reflect the stock split.
The retained earnings of the Company at December 31, 1999 include
approximately $7.2 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 September 1, 1999 and subject to shareholder approval, the
Company adopted a qualified, non-compensatory employee stock purchase plan to
provide substantially all U.S. 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 generally 24 and six months in
duration, respectively. In connection with this stock purchase plan, 500,000
shares of common stock are reserved for issuance under the plan. In 1999,
employees purchased approximately 30,000 shares.
(continued)
Page 50 of 61
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(8) Shareholders' Equity, continued
---------------------
As permitted by the provisions of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" (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 purchase plan. If compensation cost
for the Company's employee stock purchase plan had been determined based on the
fair value as required by FAS 123, the Company's pro forma net income and
earnings per basic and diluted share for 1999 would have been $43.9 million,
$2.74 and $2.70, respectively.
(9) Earnings Per Share
------------------
Basic earnings per share are calculated by dividing earnings by the
weighted average number of common shares outstanding (excluding restricted
shares) during the year. 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 36,000 in 1999 and 1998
and 44,000 in 1997. Earnings per share calculations are as follows (in
thousands, except per share amounts):
1999 1998 1997
---- ---- ----
Net income $44,312 $33,309 $40,846
Basic earnings per share:
Shares 16,046 15,981 16,093
Per share amount $2.76 $2.08 $2.54
Diluted earnings per share:
Shares 16,246 16,203 16,137
Per share amount $2.73 $2.06 $2.53
(continued)
Page 51 of 61
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. During 1999,
a non-U.S. defined benefit pension plan was terminated.
Pension expense (benefit) was as follows (in thousands):
1999 1998 1997
---- ---- ----
Principal defined benefit plans $(982) $(176) $420
Multi-employer and other employee benefit plans 295 206 40
----- ----- ----
$(687) $ 30 $460
===== ===== ====
The expense for the principal defined benefit pension plans include the
following components (in thousands):
1999 1998 1997
---- ---- ----
Service cost - benefits earned during the
period $1,180 $1,093 $1,172
Interest cost on projected benefit obligation 1,399 1,376 1,332
Expected actual return on plan assets (2,256) (2,290) (1,927)
Curtailment gain (664) -- --
Net amortization (641) (355) (157)
------ ------ ------
Net periodic pension cost $ (982) $ (176) $ 420
====== ====== ======
(continued)
Page 52 of 61
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 31, 1999
and 1998, was as follows (in thousands):
1999 1998
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $20,910 $20,486
Service cost 1,180 1,093
Interest cost 1,399 1,376
Actuarial gain (880) (984)
Plan termination (900) --
Benefits paid (720) (1,061)
------- -------
Benefit obligation at end of year 20,989 20,910
Change in plan assets:
Fair value of plan assets at beginning of year 25,951 26,379
Actual return on plan assets 3,189 620
Employer contributions -- 13
Plan termination (1,872) --
Benefits paid (720) (1,061)
------- -------
Fair value of plan assets at end of year 26,548 25,951
------- -------
Funded status 5,559 5,041
Unrecognized:
Net gains (9,496) (8,124)
Prior service cost 654 728
Net transition obligation 17 21
------- -------
Accrued pension costs at December 31 $(3,266) $(2,334)
======= =======
(continued)
Page 53 of 61
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 1999 and 1998 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 $.50 for each $1.00 of the participant's contribution not in
excess of 3% of the participant's annual wages. Beginning September 1, 1999, the
Company increased its contribution amount to a matching amount equal to $1.00
for each $1.00 of the participants contribution not in excess of 3% of the
participant's annual wages. The total contribution expense under the 401(k)
plans for employees of continuing operations was $681,000, $586,000 and $524,000
in 1999, 1998 and 1997, 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 continued
employment with the Company. A summary of the shares under the incentive
compensation plan is as follows:
Available to
be granted
----------
Shares authorized 1,200,000
Awarded during years prior to 1999, net of cancellations (902,055)
---------
Balance at December 31, 1998 297,945
Awarded during 1999, net of cancellations (60,526)
---------
Balance available at December 31, 1999 237,419
=========
(continued)
Page 54 of 61
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(11) Stock-Based Compensation, continued
-------------------------
During the years ended December 31, 1999, 1998 and 1997 the Company issued
to employees, net of cancellations, incentive compensation shares having an
approximate fair value at date of issue of $1,683,000, $1,210,000 and
$1,037,000, respectively. Shares are held by the Company until the continued
employment requirement has been attained. The market value of the shares at the
date of grant is charged to expense during the vesting period on a straight-line
basis. Amounts charged to expense as a result of the incentive compensation plan
and related expenses were $2,327,000 in 1999, $1,186,000 in 1998 and $912,000 in
1997.
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, 30,000 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. In
1999 and 1998, 5,424 and 2,896 shares, respectively, (including those deferred
at the directors' election) were issued 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 31, 1999, approximately 43,000 options remained outstanding. No
additional options are expected to be granted under the assumed plans.
The Company has not issued any stock options to employees, except for those
options assumed in connection with the acquisition of Pulse. The fair value of
those options was included in the purchase price of the acquisition, and,
accordingly, is amortized as part of the goodwill associated with the
acquisition. The options have no additional impact on the earnings of the
Company under the provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation."
(continued)
Page 55 of 61
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(12) Supplementary Information
-------------------------
The following amounts were charged directly to costs and expenses (in
thousands, for continuing operations):
1999 1998 1997
---- ---- ----
Depreciation $15,678 $13,933 $11,874
Amortization of intangible assets 3,733 2,347 1,379
Advertising 780 799 1,510
Repairs and maintenance 6,480 6,472 5,868
Bad debt expense 116 632 328
Cash payments made (in thousands,
for all operations):
Income taxes $17,604 $11,813 $13,668
Interest 3,528 3,344 2,353
Accumulated other comprehensive income as disclosed in the Consolidated
Statements of Changes in Shareholders' Equity consists principally of foreign
currency translation items. In 1997, as a result of the Company's sale of its
Test & Measurement Products Segment (which included Lloyd Instruments, Ltd., a
U.K. Company), a reclassification adjustment was made as follows:
Unrealized currency translation loss arising during period $(1,341)
Less: Reclassification adjustment for losses included in
the gain on the sale of the Test & Measurement
Products Segment 533
--------
Net currency translation adjustment $ (808)
========
(13) Segment Information
-------------------
The "Business Segment Financial Information" and "Geographic Information"
sections on pages 5 through 7 of this Form 10-K are integral parts of the
Company's consolidated financial statements.
(continued)
Page 56 of 61
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(14) Quarterly Financial Data (Unaudited)
-----------------------------------
Quarterly results of operations (unaudited) for 1999 and 1998 are
summarized as follows (in thousands, except per share data):
Quarter Ended
-------------
Apr. 2 July 2 Oct. 1 Dec. 31
------ ------ ------ -------
1999:
Net sales $125,230 $127,857 $137,032 $140,317
Gross profit 38,139 40,028 44,052 49,664
Net earnings 8,736 10,275 12,218 13,083
Net earnings per share:
Basic .55 .64 .76 .81
Diluted .54 .63 .75 .80
Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- -------
1998:
Net sales $110,748 $104,888 $113,349 $119,554
Gross profit 36,142 33,159 34,946 37,996
Net earnings 9,378 8,413 7,442 8,076
Net earnings per share:
Basic .58 .53 .47 .51
Diluted .58 .52 .46 .50
Page 57 of 61
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 and Balance
Description January 1 expenses payments Other (1) December 31
- ----------- --------- -------- -------- --------- -----------
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
======= ====== ======== ======= =======
Year ended December 31, 1998:
Reserve for obsolete and slow-moving
inventory $ 3,720 $3,541 $ (4,280) $14,153 $17,134
======= ====== ======== ======= =======
Reserve for doubtful accounts $ 202 $ 632 $ (416) $ 401 $ 819
======= ====== ======== ======= =======
Year ended December 31, 1997:
Reserve for obsolete and slow-moving
inventory $ 4,671 $6,536 $ (7,487) $ -- $ 3,720
======= ====== ======== ======= =======
Reserve for doubtful accounts $ -- $ 328 $ (126) $ -- $ 202
======= ====== ======== ======= =======
(1) Primarily relates to acquisitions
Page 58 of 61
Exhibit Index
DOCUMENT
- --------
3. (a) Articles of Incorporation Incorporated by reference to Form 8-A/A dated April 10,
1998
(b) By-laws Incorporated by reference to Form 10-Q for the quarter
ended July 2, 1999
4. Instruments defining rights of security holders Incorporated by reference to Form 10-Q for the quarter
ended July 2, 1999, and to Form 8-A/A dated
April 10, 1998
21. Subsidiaries of Registrant Page 60
23. Consent of Certified Public Accountants Page 61
27. Financial Data Schedule Electronic Filing Only
Page 59 of 61