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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, 1995
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 American 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 15, 1996 is $199,314,000 computed by reference to the closing price
on the American Stock Exchange on such date.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of February 15, 1996.
Number of shares outstanding
Title of each class February 15, 1996
------------------- -----------------
Common stock 7,928,010
par value $.125 per share
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT REFERENCE
- --------- --------------------
The Registrant's definitive Proxy Statement, dated Part III
April 15, 1996, to be used in connection with Page 14 of 38 pages
Registrant's 1996 Annual Meeting of Shareholders
Page 1 of 38
PART I
------
ITEM I BUSINESS
- ----------------
Technitrol, Inc. and its consolidated subsidiaries (collectively the
"Company") segments its business into three industry areas: Electronic
Components, Metallurgical Products and Test & Measurement Products. The
industry segments are described in further detail below.
Additional information on the Company's foreign operations is shown in
the geographic segment information immediately following the industry segment
information below.
Industry Segment Information
- ----------------------------
* The Electronic Components Segment includes Pulse Engineering, Inc.
("Pulse"), the Fil-Mag Group ("Fil-Mag") and the Components Division of the
Company. Pulse was acquired by the Company on September 29, 1995 and
significantly increased the size of this segment. The Electronic Components
Segment designs, manufactures and markets electronic components and modules
primarily for manufacturers of local area networks and telecommunications
systems.
* The Metallurgical Products Segment includes the operations of Advanced
Metallurgy, Inc. ("AMI") and Chace Precision Metals, Inc. ("Chace"). AMI
manufactures electrical contacts and assemblies for a wide range of industrial
customers. Separately, Chace produces thermostatic and clad metal products
for a broad market of industrial and consumer product manufacturers.
* The Test & Measurement Products Segment includes Lloyd Instruments,
Ltd. ("Lloyd Instruments"), John Chatillon & Sons, Inc. ("Chatillon") and the
Products Division. Lloyd Instruments manufactures a comprehensive range of
material testing systems and markets its products throughout the world.
Chatillon manufactures force measurement products and weighing devices and in
each case markets these products both domestically and internationally. Until
its sale in February 1996, the Products Division manufactured document
counters and dispensers, and marketed its products internationally through
distributors and on an OEM basis. (See Note 14 of Notes to Consolidated
Financial Statements.) This Segment was previously called the End
User/Finished Products Segment.
Identifiable assets are those assets that are utilized in each Segment to
provide the respective products. Corporate assets are principally cash and
cash equivalents.
The Company's products are sold primarily to industrial customers through
the three Segments described above. All business Segments' revenues are
generally recognized when products are shipped. The majority of the Company's
sales are subject to credit terms prevalent in the industries it serves.
Receivables are written off when an account is considered to be doubtful of
collection. Management believes there are no significant concentrations of
credit risk.
Page 2 of 38
Industry Segment Financial Information (in thousands of dollars)
- -------------------------------------
Net sales 1995(a) 1994 1993
-------- -------- --------
Electronic Components ............... $ 68,358 $ 41,173 $ 9,375
Metallurgical Products .............. 75,304 76,534 63,935
Test & Measurement Products(b)....... 32,757 28,737 27,147
-------- -------- --------
Total ............................. $176,419 $146,444 $100,457
======== ======== ========
Operating profit before income taxes
Electronic Components ............... $ 10,698 $ 5,023 $ 1,678
Metallurgical Products .............. 1,846 4,792 2,058
Test & Measurement Products(b)....... 2,945 2,746 1,639
-------- -------- --------
Total operating profit ............ $ 15,489 $ 12,561 $ 5,375
Other income (expense), net ......... (948) (1,172) (210)
-------- -------- --------
Earnings before income taxes ...... $ 14,541 $ 11,389 $ 5,165
======== ======== ========
Assets at end of year
Electronic Components ............... $ 80,109(c) $ 25,054(d) $ 3,841
Metallurgical Products .............. 35,659 37,054 34,317
Test & Measurement Products(b)....... 15,009 14,086 12,432
-------- -------- -------
Identifiable assets ............... $130,777 $ 76,194 $ 50,590
Corporate assets .................... 14,163 8,561 7,982
-------- -------- -------
Total ............................. $144,940 $ 84,755 $ 58,572
======== ======== ========
Capital expenditures
Electronic Components ............... $ 23,953(c) $ 7,933(d) $ 238
Metallurgical Products .............. 2,248 2,288 2,191
Test & Measurement Products(b)....... 846 569 226
-------- -------- --------
Total ............................. $ 27,047 $ 10,790 $ 2,655
======== ======== ========
Depreciation and amortization
Electronic Components ............... $ 2,430(c) $ 1,502(d) $ 646
Metallurgical Products .............. 3,149 3,205 3,692
Test & Measurement Products(b)....... 666 564 653
-------- -------- --------
Total ............................. $ 6,245 $ 5,271 $ 4,991
======== ======== ========
(a) Includes three months of operations of Pulse Engineering, Inc. which
was acquired on September 29, 1995. See Note 2 of Notes to
Consolidated Financial Statements.
(b) Formerly End User/Finished Products Segment
(c) Includes property, plant and equipment acquired as part of the
acquisition of Pulse Engineering, Inc.
(d) Includes property, plant and equipment acquired as part of the
acquisition of the Fil-Mag Group. See Note 2 of Notes to Consolidated
Financial Statements.
In 1995 and in 1994, one customer accounted for slightly more than 10%
of consolidated sales. The customer is a Fortune 150 entity principally
doing business with the Metallurgical Products Segment. Another customer,
then a Fortune 50 entity principally doing business with the Metallurgical
Products Segment, produced revenues slightly exceeding 10% of total sales
in 1993. Sales to the Company's ten largest customers accounted for 38% of
sales in both 1995 and 1994 and 42% in 1993.
Export sales from the United States totalled $15.3 million in 1995,
$14.0 million in 1994 and $11.5 million in 1993. There has been no
concentration of sales to any particular domestic or international
geographic area. The Company's operations are divided into three
geographic areas: North America, Far East, and Europe.
Page 3 of 38
Geographic Information (in thousands of dollars)
- ----------------------
Sales to unaffiliated customers, from 1995 1994 1993
---- ---- ----
North America ...................... $139,455 $121,051 $ 92,976
Far East ........................... 16,936 16,036 --
Europe ............................. 20,028 9,357 7,481
-------- -------- --------
Total ............................ $176,419 $146,444 $100,457
======== ======== ========
Affiliate sales or transfers, from
North America ...................... $ 415 $ 62 $ 122
Far East ........................... 41,424 10,141 --
Europe ............................. 1,310 629 615
-------- -------- --------
Total ............................ $ 43,149 $ 10,832 $ 737
======== ======== ========
Operating Profit
North America ...................... $ 4,075 $ 9,032 $ 4,814
Far East ........................... 10,103 2,473 --
Europe ............................. 1,317 901 603
Eliminations ....................... (6) 155 (42)
-------- -------- --------
Total ............................ $ 15,489 $ 12,561 $ 5,375
======== ======== ========
Identifiable assets
North America ...................... $80,255 $ 52,084 $ 45,619
Far East ........................... 35,497 17,439 --
Europe ............................. 15,025 6,671 4,971
-------- -------- --------
Total ............................ $130,777 $ 76,194 $ 50,590
======== ======== ========
Global Activities
- -----------------
As a diversified global enterprise engaged in manufacturing
activities, certain risks are inherent to the Company's business. One such
risk is its operations in developing countries. The majority of the
Electronic Components Segment's manufacturing is performed in the People's
Republic of China (the "PRC"), Taiwan and the Philippines. Although the
PRC is one of the world's fastest growing economies, its potential
economic, political and labor developments provide a number of
uncertainties and risks. While the current Philippine government has been
quite receptive to foreign investment for manufacturing, there are no
assurances that these receptive policies will continue and, if they do not
continue, that they will not be replaced by economic, tax and/or labor
policies which are less favorable to a foreign manufacturing presence than
are the current policies. If the government of a country noted above (or
any other country in which the Company has significant operations) should
adopt economic, legal, or trading policies harmful to private industry or
foreign investment, or, if a country should take any other action that
would jeopardize the value of foreign investments, it could have a material
adverse effect on the Company. The current tension between the PRC and
Taiwan, if escalated, could lead to such action or to an American response
which makes importation of product from the region difficult.
Sales and Marketing
- -------------------
Sales and marketing are accomplished by sales management, district
managers, direct salesmen, representatives, agents, dealers and
distributors. Within the Electronic Components Segment, the Company's
products are sold primarily by the Company's field sales force to customers
in the computer, local area network (LAN) and telecommunication markets.
The field sales personnel are technically trained and actively involved in
product development. Customers of the Metallurgical Products Segment,
which include manufacturers of circuit protection, power control and power
distribution equipment, purchase the Company's products primarily through
sales personnel employed by the Company. Customers of the Company's Test &
Measurement Products Segment include virtually every industry in performing
inspection and in-process testing. The Company's Test & Measurement
Products are sold through independent agents, dealers and distributors.
Competition
- -----------
The business of the Company is highly competitive, and with respect to
each of its products, it faces competition from numerous firms, some of
which are larger and possess greater financial resources.
Page 4 of 38
Backlog
- -------
As of December 31, 1995, the Company's backlog of orders was $55.9
million compared to $28.7 million at the end of 1994. Substantially all
of the current backlog is scheduled for completion during the first six
months of 1996. Most orders are subject to cancellation upon payment of
normal cancellation charges. Normal delivery time for the Company's
products is less than thirteen weeks. No material portion of the Company's
business is seasonal in nature.
Raw Materials
- -------------
In its diverse manufacturing operations, the Company is not dependent
upon any particular source of supply. However, there are relatively few
suppliers of ferrite materials used in electronic components, powder metals
used in electrical contacts, and specialty steel used in metal laminates.
The Company has not encountered any significant difficulties in
obtaining adequate supplies of these raw materials for manufacture of its
products. During the second half of 1996, some significant price changes
occurred relative to certain nonprecious metals used by the Company. Sales
prices for many products that include these materials have been adjusted to
include metal factors which reflect changes in these metals markets. One
of the Company's subsidiaries engages in a business which utilizes silver
as a raw material component. This material has been readily available and
is anticipated to remain so.
Patents and Licenses
- --------------------
Although the Company possesses several patents and many trademarks and
tradenames which are used in the conduct of its businesses, the Company
does not consider its consolidated earnings to be materially dependent upon
any one patent, trademark or license.
Research and Development
- ------------------------
The Company does not engage in any basic research activities.
Development activity is conducted principally by the Company's engineering
personnel and is directed primarily toward the development of new products
related to its current product lines and the improvement and enhancement of
existing products.
Environment
- ----------
Expenditures required for the Company to meet or exceed Federal, state
and local provisions regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment,
are not expected to have any material effect on capital expenditures,
earnings or competitive position.
The Company is involved in several matters relating to superfund
sites. The Company's involvement has generally arisen from the alleged
disposal by licensed waste haulers of small amounts of waste material many
years ago at these sites. The Company has established reserves which it
believes to be sufficient to cover the aggregate amount of the ultimate
liability, if any, which the Company believes to be reasonably probable at
this time.
Employees
- ---------
At December 31, 1995, the Company had approximately 9,300 full time
employees compared with 3,100 at the end of 1994. Certain operations of
the Company, particularly in the Far East, are labor intensive.
Energy
- ------
The Company did not experience any curtailment of supplies of
electricity, gas or oil in 1995, and does not expect any curtailment in
1996.
Products
- --------
The Company's business is grouped into three industry segments and,
within each segment, the primary products sold are similar in design,
material content, application and customer base. Each Segment is
continually changing its individual product offerings in response to
customer needs and changes within the markets served. Further delineation
of its product lines is not meaningful in gaining an understanding of the
Company's business
Page 5 of 38
risks and opportunities. The Electronic Components Segment primarily
produces magnetic-based electronic components for use in local area
networks and communication applications. The Metallurgical Products
Segment's main product offerings are electrical contacts and contact
materials. The principal product line of the Test & Measurement Products
Segment consists of products used in material testing and measurement,
including hand-held force measurement gauges and tensile testing systems.
These three industry Segments provide the framework with which to
understand the Company's product lines and business taken as a whole.
ITEM 2 PROPERTIES
- ------------------
The following properties were owned or leased by the Company at
December 31, 1995. The Trevose and Philadelphia locations are used in more
than one business segment. All other properties are used exclusively in
one segment, as identified.
Approx. Owned/ Lease % Used
Location Square Ft. Leased Ending for Mfg. Comments
- --------------------- ----------- ------ ------- -------- -------------------------------
Trevose, PA 4,400 Leased 2001 0 Corporate headquarters
Philadelphia, PA 70,000 Owned 40 Location houses Products
Division assets which were sold
in 1996.
Electronic Components
- -----------------------
Greensboro, MD 20,000 Owned 95
San Diego, CA 50,000 Owned 0
Tuam, Ireland 60,000 Owned 35
Hong Kong 13,000 Leased 1997 0
Dongguan, Peoples
Republic of China 215,000 Leased 2007 95
Cavite, Philippines 50,000 Owned 75 Building is owned; land is
leased through 2007
Kaohsiung, Taiwan 51,000 Owned 55 Building is owned; land is
leased through 2003
Metallurgical Products
- ------------------------
Export, PA 115,000 Leased 2001 80
McKeesport, PA 23,000 Leased 2004 100
Delmont, PA 30,000 Owned 90
Lancaster, PA 15,000 Leased 1996 85
Cedar Knolls, NJ 48,000 Owned 65
Reidsville, NC 250,000 Owned 70
Luquillo, P.R. 32,000 Owned 80
Luquillo, P.R. 12,000 Leased 1998 40
Test & Measurement Products
- ---------------------------
Feasterville, PA 2,000 Leased 1996 0 Lease assumed in 1996 by
purchaser of Products Division
assets.
Kew Gardens, NY 67,000 Owned 75
Greensboro, NC 23,000 Owned 60
Fareham, England 22,000 Leased 2004 50
Wuppertal, Germany 20,000 Leased 2005 60
Versailles, France 2,000 Leased 1997 0
The Company believes its facilities to be adequate for its present needs.
Page 6 of 38
ITEM 3 PENDING LEGAL PROCEEDINGS
- ---------------------------------
The Company is a defendant in several lawsuits which it considers to
be in the normal course of business, none of which is expected to have a
material adverse effect on the Company.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NONE
- -------------------------------------------------------------------
PART II
ITEM 5 MARKET PRICE OF REGISTRANT'S COMMON STOCK AND RELATED SECURITY MATTERS
- ------------------------------------------------------------------------------
Technitrol Inc.'s common stock is traded on the American Stock
Exchange. The following table reflects the high and low sales prices on
such Exchange and the dividends paid to shareholders in each quarterly
period during Technitrol's last two fiscal years.
QUARTER 1ST 2ND 3RD 4TH
------- ------- ------- -------
1995 HIGH $15.625 $15.000 $18.000 $23.750
1995 LOW $13.375 $13.250 $14.000 $15.875
1995 DIVIDENDS PAID $ 0.095 $ 0.095 $ 0.100 $ 0.100
1994 HIGH $11.792 $12.917 $14.500 $16.000
1994 LOW $ 9.875 $10.875 $11.583 $12.000
1994 DIVIDENDS PAID $ .093 $ .093 $ .093 $ .095
The approximate number of holders of record of the common stock, Technitrol
Inc.'s only class of stock outstanding, as of January 12, 1996 was:
TITLE OF CLASS NUMBER OF SHAREHOLDERS
-------------- ----------------------
Common Stock 745
par value $.125 per share
Page 7 of 38
ITEM 6 SELECTED FINANCIAL DATA LAST 5 YEARS (in thousands, except per share data)
1995(a) 1994(a) 1993 1992 1991
-------- -------- -------- -------- --------
Net sales $176,419 $146,444 $100,457 $ 98,554 $ 81,169
Net earnings $ 9,340 $ 6,944 $ 3,356(b) $ 2,838 $ 2,767
Earnings per share $ 1.43 $ 1.15 $ .56(b) $ .48 $ .47
Total assets $144,940 $ 84,755 $ 58,572 $ 55,708 $ 52,512
Total long-term debt $ 17,125 $ 15,146 $ 5,167 $ 6,887 $ 4,965
Shareholders' equity $ 84,761 $ 45,757 $ 40,294 $ 38,657 $ 38,303
Net worth per share $ 10.82 $ 7.60 $ 6.73 $ 6.48 $ 6.46
Working capital $ 43,242 $ 32,676 $ 24,056 $ 23,178 $ 23,161
Working capital ratio 2.1 to 1 2.5 to 1 2.8 to 1 3.3 to 1 3.0 to 1
Number of shares outstanding:
Weighted average, including
common stock equivalents 6,538 6,015 5,989 5,961 5,920
Year end 7,836 6,021 5,986 5,970 5,929
Dividends declared per share $ .395 $ .376 $ .373 $ .373 $ .373
Price range per share:
High $ 23.750 $ 16.000 $ 10.125 $ 11.000 $ 9.875
Low $ 13.250 $ 9.875 $ 7.583 $ 6.625 $ 8.080
(a) The Company acquired Pulse Engineering, Inc. in 1995 and the Fil-Mag Group
in 1994. See Note 2 to Consolidated Financial Statements.
(b) Excludes cumulative effect of a change in accounting for income taxes.
(See Note 6 to the Consolidated Financial Statements.)
Page 8 of 38
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
----------------------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents totalled $13.9 million at December 31, 1995,
compared to $8.7 million a year earlier. Working capital was $43.2 million,
compared to $32.7 million at December 31, 1994. The financial performance
during the fourth quarter of 1995, which included the operations of Pulse
Engineering, Inc. ("Pulse"), contributed to the year-to-year increase in
working capital. Pulse was acquired at the end of September 1995 and the
large increases in consolidated accounts receivable and inventory were due
primarily to the Pulse balances acquired. Pulse had a favorable working
capital ratio prior to the acquisition and it remained strong subsequent to
the acquisition. Additional information regarding the Pulse acquisition is
included in Note 2 of Notes to the Consolidated Financial Statements.
Cash provided by 1995 operating activities was $18.2 million. The
positive cash flow was composed mainly of net earnings of $9.3 million,
depreciation and amortization of $6.2 million, and increases in accounts
payable and accrued expenses of $1.2 million and $1.7 million, respectively.
Depreciation and amortization amounts included three months of depreciation on
the Pulse assets and three months of amortization of the goodwill resulting
from the Pulse acquisition. Significant decreases in prepaid expenses and
other assets (excluding amounts acquired from Pulse) also provided cash during
the year. Cash was provided by a decrease in accounts receivable of $1.3
million while cash of $2.8 million was consumed by an increase in inventories.
The increase in inventories includes amounts produced by the Electronic
Components Segment, which includes Pulse, in anticipation of the Chinese
New Year holiday in February 1996. The Company's production operations in
the Peoples Republic of China (the "PRC") and in Taiwan are typically closed
for one to two weeks for this holiday and inventory is built in anticipation
of the lost production time.
Investing activities consumed $11.6 million during 1995. Capital
expenditures constituted $5.9 million, excluding acquisitions. Separately,
cash of $5.9 million was paid for the capital stock of Pulse stockholders, net
of cash acquired. The cash portion of the purchase price, including the cash
paid to the former stockholders of Pulse and related acquisition costs, was
approximately $27.6 million. Cash acquired from Pulse and used to partially
fund the acquisition was approximately $21.7 million. Additional financing
for the acquisition was provided by bank borrowings as described below.
Projected 1996 capital expenditures are expected to be financed by internally
generated funds.
Cash used in financing activities was a net $1.3 million. Cash consumed
by financing activities was due to combined debt reduction of $7.8 million and
$2.5 million of dividend payments. It is expected that dividends will continue
to be paid on a quarterly basis during 1996. Proceeds from long-term
borrowings were $9.0 million. The proceeds included $5.0 million which was
used to finance the May 1995 purchase of warrants for Pulse common stock. In
connection with the September 1995 closing of the Pulse acquisition, an
additional $4.0 million was borrowed under a bank syndicated credit facility
which authorized Technitrol to borrow up to $50 million on an unsecured basis.
Technitrol used approximately $18.0 million of this credit facility to
refinance existing indebtedness (including the $5.0 million which had been
borrowed to fund the Pulse warrant purchase in May 1995) and, separately,
approximately $4.0 million of the credit facility to partially fund the
acquisition costs and cash payments to former shareholders of Pulse. On
December 29, 1995, the credit facility was amended in conjunction with a
partial repayment and the total facility was reduced to $45.0 million.
Further payments in advance of the due date were made in February and March of
1996 in amounts of $6.0 million and $1.0 million, respectively. Approximately
$3.6 million (before payment of related transaction expenses and costs) was
received at the end of February 1996 from the sale of the Products Division as
explained in Note 14 of Notes to the Consolidated Financial Statements. A
portion of these funds were applied in March, as aforementioined, to pay off
all amounts outstanding under the line of credit. The balance of the funds
received will be used for general working capital purposes.
Page 9 of 38
The Company's foreign sales are conducted primarily through its foreign
subsidiaries, principally in the Far East and Europe. In the Far East, the
Company's sales are denominated primarily in U.S. dollars. In Europe, sales
are denominated in local currencies (consisting mainly of English pounds and
French francs) and in U.S. dollars. Since a very significant portion of the
Company's foreign sales are denominated in U.S. dollars, the Company does not
believe that its potential exposure to currency fluctuations is material to
its business. During 1994, the Company did not purchase any currency exchange
forward contracts or similar instruments generally utilized to reduce the risk
of currency fluctuations. During 1995, a limited number of short-term forward
contracts were purchased by a Pulse subsidiary in Europe. All such contracts
were closed prior to the end of the year. These contracts are purchased in
order to guarantee a predetermined currency exchange rate at the time the
contract is purchased by transferring the risk or benefit of currency
fluctuations to a third party.
Slightly more than one-quarter of the Company's identifiable assets are
located in the Far East and significant sales and operating profits are
generated in that region. (See the geographic segment data included in Note
13 of Notes to the Consolidated Financial Statements.) The Company's
operations in the region include manufacturing plants in the PRC, Taiwan and
the Philippines. If unfavorable political, economic or other events occur in
that region, they could have a material adverse effect on the Company's
liquidity and capital resources. Management monitors events in the region and
takes steps to reduce the risk of uncertainty when possible.
Balance Sheet Composition at December 31:
1995 1994 1995 1994
---- ---- ---- ----
Cash and cash equivalents 10% 10% Current liabilities 28% 25%
Other current assets 47% 53% Long-term debt excluding
current installments 10% 18%
Property, plant, and equipment 31% 29% Other non-current liabilities 4% 3%
Other assets 12% 8% Shareholders' equity 58% 54%
---- ---- ---- ----
Total 100% 100% Total 100% 100%
RESULTS OF OPERATIONS
- ---------------------
1995 and 1994
- -------------
Revenues
- --------
Consolidated sales for the Company were $176.4 million in 1995, an
increase of 20.5% from 1994. The increase was largely due to the sales of
Pulse, acquired at the end of September 1995. The Pulse sales included in
the consolidated results of the Company were approximately $25.4 million.
The sales increases of the Electronic Components Segment (which includes
Pulse) and the Test & Measurement Products Segment exceeded a sales
decrease experienced by the Metallurgical Products Segment. The Company's
backlog at December 31, 1995 was $55.9 million, including $28.2 million for
Pulse.
Page 10 of 38
The sales of the Electronic Components Segment increased from $41.2
million in 1994 to $68.4 million in 1995. The Fil-Mag Group and Pulse,
along with the Components Division of the Company, have been combined into
one world-wide operation serving the needs of the local area network (LAN)
and telecommunications marketplaces. In addition to the Pulse sales noted
above, sales of the Fil-Mag Group increased during the year. The lower
sales level of the Components Division, which was caused by a decline in
domestic demand for that Division's products, was more than offset by
increased demand for products manufactured by Fil-Mag and Pulse. The strong
demand of these markets for products produced by Pulse and the Fil-Mag Group
continued into the beginning of 1996, as evidenced by solid backlog and order
levels at the end of 1995. Operating profits for the Segment in 1995 were
$10.7 million compared to $5.0 million in 1994. The sales and operating
profits of the Segment included three months of Pulse activity.
The Metallurgical Products Segment experienced a number of challenges
during 1995 and the sales and operating profits of this Segment were lower
than the 1994 levels. Sales in 1995 were $75.3 million, down from $76.5
million in 1994. A sales decrease at Advanced Metallurgy, Inc. ("AMI")
exceeded a sales increase at Chace Precision Metals, Inc. ("Chace"). The
sales of AMI and, to a lesser extent, Chace are affected by general trends
in the domestic economy, particularly those in housing, automotive,
appliances and capital equipment markets. During the second half of 1995,
there was a softening in demand for the products of this Segment. In
addition, the Segment's operating profits were negatively impacted by increased
price competition and rapidly escalating raw material costs, particularly in
the nonprecious metals markets. Management has focused significant
attention on attaining increased manufacturing efficiencies and has
implemented a partial pass-through of the raw material price changes by
way of both a price increase and a metals factor. Operating profits of the
Segment were $1.8 million in 1995, down from $4.8 million in 1994.
In the Test & Measurement Products Segment, sales increases at John
Chatillon & Sons, Inc. ("Chatillon") and Lloyd Instruments, Inc. ("Lloyd")
exceeded a sales decrease at the Products Division. That sales decrease
was primarily caused by weak domestic demand for the currency counters and
dispensers manufactured by the Products Division. The February 1996 sale of
the Products Division evidenced management's intention to focus on the test and
measurement product lines within this Segment. Relative to the 1995
results, Lloyd in particular contributed to the higher sales and operating
profits of the Segment. The 1995 Lloyd sales included a full year of the
sales of Erichsen, a German subsidiary acquired late in 1994. Chatillon's
sales benefited from recent product development efforts. Sales for the Segment
increased from $28.7 million in 1994 to $32.8 million in 1995 while operating
profits increased from $2.7 million to $2.9 million.
Cost of Sales
- -------------
In 1995, the Company's gross margin increased by 6%, from 29.6% of sales
in 1994 to 31.5% in 1995. This margin increase was driven primarily by the
strong product demand and increased manufacturing efficiencies within the
Electronic Components Segment. These gains offset the lower gross profits
of the Metallurgical Products Segment which experienced significant decreases
in gross profits versus the prior year, with the majority of the gross profit
decline occurring at AMI. The softer demand, increased price competition and
rising metal costs noted above caused this decline.
Operating Expenses
- ------------------
The Company's selling, general and administrative expenses increased
to $40.2 million in 1995 from $30.8 million in 1994. This represented
22.8% of sales in 1995 and 21.0% of sales in 1994. The increase was
primarily caused by the addition of Pulse for the fourth quarter.
Interest
- --------
Interest expense increased from $1.1 million in 1994 to $1.4 million
in 1995 reflecting the incremental borrowing related to the Pulse acquisition.
Page 11 of 38
Income Taxes
- ------------
The Company's effective income tax rate declined to 36% in 1995 from
39% in 1994. During 1995, proportionately higher taxable income was earned
by the Company's foreign operations, which generally have lower tax rates
than the domestic operations.
During 1995, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation
("FAS123"). Under the new standard, companies have the option of including
certain stock-based compensation in the company's statement of earnings or,
alternately, providing disclosure of the related compensation amounts in a
note to the financial statements. The new disclosures apply to financial
statements for years beginning after December 15, 1995. The Company
intends to adopt the disclosure alternative and does not expect FAS123 to
have a material impact on its pro forma results of operations. During
1995, the Company did not grant incentive stock options to employees.
However, in connection with the acquisition of Pulse on September 29, 1995
(see Note 2 to Consolidated Financial Statements), outstanding options to
purchase Pulse common stock were assumed by the Company and converted into
options to purchase Technitrol common stock. The difference between the
exercise price and the market value of Technitrol stock at the date of
acquisition was capitalized as part of the purchase price. No additional
options are expected to be issued under the assumed plans. See Note 11 to
the Consolidated Financial Statements for additional information regarding
stock-based compensation provided by the Company.
The Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of, is effective for fiscal years beginning after December 15,
1995. The adoption of this standard is not expected to have a material
impact on the Company.
1994 and 1993
- -------------
Revenues
- --------
In 1994, consolidated sales were $146.4 million compared to $100.5
million in 1993. The 45.7% increase was due to the $30.8 million sales of
the Fil-Mag Group, acquired in January 1994, and a combined sales increase
of $15.1 million realized by the other businesses of the Company. All
three of the Company's segments experienced increased sales in 1994 from
1993.
The December 31 backlog was $28.7 million in 1994 and $14.9 million in
1993. Contributing to the increase was the Fil-Mag Group's backlog.
The increase in sales of the Electronic Components Segment to $41.2
million included the sales of the Fil-Mag Group as noted above. Operating
profit of the Electronics Components Segment increased to $5.0 million in 1994,
compared to $1.7 million in the prior year. The increase reflected the
fifty weeks of profits of the Fil-Mag Group since its acquisition in
January 1994. As a percentage of sales, this segment's annual operating
profits equaled 12.2% which was the highest of the Company's three product
segments. Year end backlog and order volumes indicated a softening in the
segment's domestic markets, while offshore demand remained relatively
strong.
The Metallurgical Products Segment produced increased sales, operating
profit and operating profit as a function of sales in 1994 as compared to
1993. AMI experienced its largest sales and profit improvements to the
product line which was acquired from Engelhard Corporation in 1991.
Housing starts continued to have an eventual impact on demand for various
AMI products. Management monitored the indirect effect that interest rate
increases had on AMI backlog levels which were stable entering the first
quarter of 1995. Separately, Chace sales and operating profits also grew
year-to-year. On-going efforts aimed at cost containment and quality
improvements contributed to the growth in sales volume and profits. Chace's
proven ability to compete in a demanding industrial market was reflected by
a strong backlog position as it began 1995.
Page 12 of 38
Two of the three operating units within the Test & Measurement
Products Segment experienced an increase in sales and operating profits.
Chatillon sales volume and profitability improved in its primary product
families, as the improved economic climate contributed to more favorable
market conditions. Lloyd's year-to-year sales increase reflected
incremental unit sales and the absence of the unfavorable currency
translation which negatively impacted 1993 results. Lower sales and
operating profit occurred at the Company's Products Division. Domestic
demand for currency counters and dispensers decreased during 1994, which
was also the first full year subsequent to the Division withdrawing as a
provider of engineering services on a prime contract basis to an agency of
the U.S. Government.
Cost of Sales
- -------------
In 1994, the Company's overall gross margin increased to 29.6% of
sales from 26.9% in 1993. Improvements were made in each of the Company's
three business segments. The addition of the Fil-Mag Group within the
Electronic Components Segment, cost containment and quality improvements
within the Metallurgical Products Segment and the higher sales of Chatillon
and Lloyd included in the Test & Measurement Products Segment all
contributed to a higher gross margin in 1994.
Operating Expense
- -----------------
The Company's selling, general and administrative expenses increased to
$30.8 million in 1994 from $21.6 million in 1993. The key reason for the
increase was the addition of the Fil-Mag Group.
Interest
- --------
Interest expense grew to $1.1 million, caused by the $10 million
increase in outstanding debt to fund the Fil-Mag Group acquisition and
rising interest rates during the year.
Income Taxes
- ------------
1994 income tax expenses increased as a function of pre-tax earnings.
The 1994 effective income tax rate rose to 39% from 35% in 1993 as a result
of proportionately higher taxable income being earned by the Company's
domestic operations. Effective income tax rates of the domestic operations
generally exceed those of the Company's offshore operations.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
The Company's consolidated financial statements, notes to the
consolidated financial statements, together with the opinion of the
Company's independent auditors and the supplementary financial information
required by this item are attached hereto and made part hereof.
ITEM 9 DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - NONE
- -------------------------------------------------------------------
Page 13 of 38
PART III
CROSS REFERENCE INDEX
FORM 10-K
ITEM NUMBER AND CAPTION INCORPORATED MATERIAL
------------------------------ ------------------------------
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, REGISTRANT'S DEFINITIVE PROXY
PROMOTERS & CONTROL PERSONS STATEMENT
ITEM 11 EXECUTIVE COMPENSATION REGISTRANT'S DEFINITIVE PROXY
STATEMENT
ITEM 12 SECURITY OWNERSHIP OF CERTAIN REGISTRANT'S DEFINITIVE PROXY
BENEFICIAL OWNERS AND STATEMENT
MANAGEMENT
ITEM 13 CERTAIN RELATIONSHIPS AND REGISTRANT'S DEFINITIVE PROXY
RELATED TRANSACTIONS 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, 1995 and 1994
Consolidated Statements of Earnings and Retained Earnings -
Years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows - Years ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Financial Statement Schedules
-----------------------------
Schedule II, Valuation and Qualifying Accounts
(b) The Company filed a report on Form 8-K on October 13, 1995
regarding the acquisition of Pulse Engineering on
September 29, 1995.
(c) Exhibits
(11) Computation of Primary and Fully Diluted Earnings Per Share
(21) Subsidiaries of the Registrant
(23) Consent of Certified Public Accountants
(27) Financial Data Schedule (electronic filing only)
Page 14 of 38
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/Thomas J. Flakoll
-------------------------------------
Thomas J. Flakoll
Chief Executive Officer and Director
Date March 20, 1996
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 /s/Stanley E. Basara By /s/Drew A. Moyer
------------------------------- ------------------------------
Stanley E. Basara Drew A. Moyer
Director Corporate Controller
(Principal Accounting Officer)
Date March 20, 1996 Date March 20, 1996
By /s/John E. Burrows, Jr. By /s/James M. Papada, III
------------------------------- ------------------------------
John E. Burrows, Jr. James M. Papada, III
Director Chairman of the Board of Directors
Date March 20, 1996 Date March 20, 1996
By /s/J. Barton Harrison By /s/James J. Rafferty, Jr.
------------------------------- ------------------------------
J. Barton Harrison James J. Rafferty, Jr.
Director Vice President and Director
Date March 20, 1996 Date March 20, 1996
By /s/Roy E. Hock By /s/Albert Thorp, III
------------------------------- ------------------------------
Roy E. Hock Albert Thorp, III
Director Vice President - Finance and
Treasurer (Principal Financial
Officer)
Date March 20, 1996 Date March 20, 1996
By /s/Graham Humes
-------------------------------
Graham Humes
Director
Date March 20, 1996
By /s/Edward M. Mazze
------------------------------
Edward M. Mazze
Director
Date March 20, 1996
Page 15 of 38
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements
--------------------
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1995 and 1994
Consolidated Statements of Earnings and Retained Earnings -
Years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows - Years ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Financial Statement Schedules
-----------------------------
Schedule II - Valuation and Qualifying Accounts
Page 16 of 38
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 at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995 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.
As discussed in Note 6 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1993 to adopt
the provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
March 1, 1996
Page 17 of 38
TECHNITROL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1994
In thousands of dollars, except for share data
Assets 1995 1994
------ -------- -------
Current Assets:
Cash and cash equivalents $ 13,894 $ 8,716
Receivables:
Trade 33,431 22,614
Other 308 139
Inventories 32,962 21,714
Prepaid expenses and other current assets 2,019 851
-------- -------
Total current assets 82,614 54,034
Property, plant and equipment 81,063 55,180
Less accumulated depreciation 35,935 30,809
-------- -------
Net property, plant and equipment 45,128 24,371
Deferred income taxes 4,132 2,409
Excess of cost over net assets acquired 10,957 2,320
Other assets 2,109 1,621
-------- -------
$144,940 $84,755
======== =======
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt $ 2,023 $ 22
Short-term debt -- 756
Accounts payable 8,359 5,841
Accrued expenses 28,990 14,739
-------- -------
Total current liabilities 39,372 21,358
Long-term liabilities:
Long-term debt, excluding current installments 15,102 15,124
Accrued pension expense 2,237 2,516
Other long-term liabilities 3,468 --
Commitments and contingencies (Note 7)
Shareholders' equity:
Common stock, $.125 par. 30,000,000 shares
authorized and 10,733,832 issued in 1995;
10,000,000 shares authorized and 8,943,960
issued in 1994. 1,342 1,118
Additional paid-in capital 36,907 4,329
Retained earnings 52,517 45,923
-------- -------
90,766 51,370
Less: Cost of treasury stock (2,897,963 shares
in 1995, and 2,922,508 in 1994) (4,535) (4,573)
Unearned compensation under stock award plan (697) (560)
Cumulative translation adjustment (773) (480)
-------- -------
Total shareholders' equity 84,761 45,757
-------- -------
$144,940 $84,755
======== =======
See accompanying Notes to Consolidated Financial Statements.
Page 18 of 38
TECHNITROL, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings and Retained Earnings
Years ended December 31, 1995, 1994 and 1993
In thousands, except per share data
1995 1994 1993
-------- -------- --------
Net sales $176,419 $146,444 $100,457
Cost of sales 120,765 103,096 73,480
-------- -------- --------
Gross profit 55,654 43,348 26,977
Selling, general and administrative expenses 40,165 30,787 21,602
-------- -------- --------
Operating profit 15,489 12,561 5,375
Other income (expense):
Interest income 374 140 108
Interest expense (1,383) (1,130) (389)
Other, net 61 (182) 71
-------- -------- --------
(948) (1,172) (210)
-------- -------- --------
Earnings before income taxes 14,541 11,389 5,165
Income taxes 5,201 4,445 1,809
-------- -------- --------
Net earnings before cumulative effect of a
change in accounting for income taxes $ 9,340 $ 6,944 $ 3,356
Cumulative effect on prior years
(to January 1, 1993) of a change in
accounting for income taxes (Note 6) -- -- 261
-------- -------- --------
Net earnings $ 9,340 $ 6,944 $ 3,617
======== ======== ========
Earnings per share:
Before cumulative effect of a change in
accounting for income taxes $ 1.43 $ 1.15 $ .56
Cumulative effect of a change in accounting
for income taxes $ -- $ -- $ .04
-------- -------- --------
Total earnings per share $ 1.43 $ 1.15 $ .60
======== ======== ========
Average outstanding common and
equivalent shares 6,538 6,015 5,989
======== ======== ========
Retained earnings:
Balance at beginning of year $ 45,923 $ 41,993 $ 40,614
Net earnings for the year 9,340 6,944 3,617
-------- -------- --------
$ 55,263 $ 48,937 $ 44,231
200% Common stock dividend -- 745 --
Cash dividends declared:
($.395 per share in 1995, $.376 in
1994 and $.373 in 1993) 2,746 2,269 2,238
-------- -------- --------
Balance at end of year $ 52,517 $ 45,923 $ 41,993
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
Page 19 of 38
TECHNITROL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994, and 1993
In thousands of dollars
Cash flows from operating activities: 1995 1994 1993
------- ------- -------
Net earnings $ 9,340 $ 6,944 $ 3,617
Cumulative effect of a change in accounting
for income taxes -- -- (261)
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 6,245 5,271 4,991
Loss (gain) on disposal of equipment (40) 88 (60)
Changes in assets and liabilities net of
effect of acquisitions:
Increase in deferred tax benefits (1,711) (1,019) (492)
Increase in accounts payable 1,216 1,082 689
Increase in accrued expenses 1,704 4,967 1,779
(Increase)decrease in accounts receivable 1,346 (4,626) 142
(Increase)decrease in inventories (2,769) (2,482) 1,031
Other, net 2,848 (606) 112
------- ------- -------
Net cash provided by operating activities 18,179 9,619 11,548
------- ------- -------
Cash flows from investing activities:
Acquisition of capital stock of the Fil-Mag
Group, net of cash acquired -- (8,805) --
Acquisition of Pulse, net of cash acquired (5,872) -- --
Capital expenditures, exclusive
of acquisitions (5,864) (4,429) (2,655)
Proceeds from sale of property, plant
and equipment 158 282 71
------- ------- -------
Net cash used in investing activities (11,578) (12,952) (2,584)
------- ------- -------
Cash flows from financing activities:
Repayment of Fil-Mag Group
funded indebtedness -- (1,014) --
Principal payments on long-term debt (7,022) (21) (8,421)
Net repayments of short term debt (756) (2,504) --
Proceeds of long-term borrowings 9,000 10,000 6,700
Dividends paid (2,534) (2,255) (2,237)
------- ------- -------
Net cash provided by (used in)
financing activities (1,312) 4,206 (3,958)
------- ------- -------
Net effect of exchange rate changes
on cash (111) 122 (33)
Net increase in cash and
cash equivalents 5,178 995 4,973
Cash and cash equivalents at beginning of year 8,716 7,721 2,748
------- ------- -------
Cash and cash equivalents at end of year $13,894 $ 8,716 $ 7,721
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
Page 20 of 38
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 on consignment from suppliers ($11,118,000 at December 31, 1995
and $14,063,000 at December 31, 1994). This inventory consists primarily
of silver which is used in the Company's metal contact manufacturing
business.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost. Depreciation is based
upon the estimated useful life of the assets and has been provided for on
both the accelerated and the straight line methods. The estimated useful
lives 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.
Excess of Cost over Net Assets
- ------------------------------
Excess of cost over net assets acquired (which the Company believes has
continuing value) is being amortized on a straight-line basis over 15
years. The recoverability of its carrying value is evaluated on a recurring
basis by determining whether the amortization of its remaining balance can
be recovered through future operating cash flows of the acquired operation.
Earnings per Share
- ------------------
Earnings per share are calculated by dividing earnings by the weighted
average number of common shares outstanding during the year, including
common share equivalents. Common share equivalents are incremental shares
attributed to outstanding options to purchase common stock. Relevant
earnings per share amounts have been restated to reflect a 200% stock
dividend recorded on September 18, 1994.
Foreign Currency Translation
- ----------------------------
Most foreign subsidiaries' functional currency is the U.S. dollar; those
entities translate monetary assets and liabilities at year-end exchange
rates while nonmonetary 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. The remaining entities
use the local currency as the functional currency and translate net assets
at year-end rates while income and expense accounts are translated at
average exchange rates. Adjustments resulting from these translations are
reflected in the shareholders' equity section titled "Cumulative
translation adjustment."
Fair Value of Financial Instruments
- -----------------------------------
The carrying value of cash and cash equivalents, receivables, other current
assets, accounts payable and accrued expenses approximates fair value
because of the short maturity of those instruments. The carrying value of
long term debt approximates fair value after taking into consideration
current rates offered to the Company for similar debt instruments of
comparable maturities.
Page 21 of 38
2
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
------------------------------------------
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 and 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.
Reclassifications
- -----------------
Certain amounts in the prior year financial statements have been
reclassified to conform with the current year presentation.
(2) Acquisitions
------------
On September 29, 1995, the Company completed the acquisition of Pulse
Engineering, Inc. ("Pulse"), pursuant to an Agreement and Plan of Merger
dated May 23, 1995. As a result of the merger, Pulse became a wholly-owned
subsidiary of the Company. Pulse, headquartered in San Diego, California,
and with operations in Hong Kong, the People's Republic of China and
Ireland, designs, manufactures and markets electronic components and
modules primarily for manufacturers of local area networks and
telecommunications systems.
The total purchase price approximated $61.5 million and consisted of cash
paid to the former Pulse stockholders, stock issued to the former Pulse
stockholders, stock options assumed, and related acquisition costs. The
fair value of the assets acquired and liabilities assumed approximated
$66.5 million and $14.0 million, respectively. The excess of cost over net
assets acquired approximated $9.0 million.
Approximately 1,785,000 shares of Technitrol common stock at a fair market
value of $16.375 per share were issued to former holders of Pulse common
stock. The cash portion of the purchase price, including cash paid to the
former stockholders of Pulse and related acquisition costs, was
approximately $27.6 million. In addition, all outstanding options to
purchase Pulse common stock were assumed by the Company. At the date of
acquisition, approximately 269,000 shares of Technitrol common stock were
issuable upon exercise of such options and, except for approximately 33,000
options which were not yet vested, all assumed options were exercisable
immediately at prices ranging from $1.73 to $15.61. The options have
various expiration dates, the latest of which is in April 2001. The shares
issued and the options outstanding were included in the weighted average
shares outstanding used for calculating earnings per share for the quarter
and the year ended December 31, 1995.
In conjunction with the Pulse acquisition, Technitrol established a credit
facility with a group of banks which authorized Technitrol to borrow up to
$50 million on an unsecured basis. Technitrol initially used approximately
$18 million of this credit facility to refinance existing indebtedness and,
separately, approximately $4 million of the credit facility to partially
fund the cash portion of the merger consideration. On December 29, 1995,
the credit facility was amended in conjunction with a partial repayment and
the total facility was reduced to $45 million.
(continued)
Page 22 of 38
3
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(2) Acquisitions, continued
------------
Since the shares issued to the former holders of Pulse common stock and the
options assumed in connection with the acquisition were outstanding for the
entire fourth quarter (but only for a portion of the entire year), the
weighted average shares outstanding were considerably different for the
year than for the fourth quarter alone. As a result, the earnings per
share for the year will not equal the sum of the four quarterly earnings
per share amounts.
The acquisition has been accounted for by the purchase method of
accounting. Had Pulse been acquired on January 1, 1994, unaudited
consolidated pro forma results of operations would have been (in thousands,
except for earnings per share):
Year Ended Year Ended
Dec. 31, 1995 Dec. 31, 1994
------------- -------------
Sales $252,104 $177,913
Net earnings $16,825 $8
Earnings per share $2.10 $0.00
This unaudited information 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 obtained in the future. The pro forma earnings per share
amounts include the effect of shares issued and stock options assumed in
connection with the merger.
On January 17, 1994, the Company, through its wholly-owned subsidiary,
Technitrol International, Inc., a Delaware corporation, acquired from FEE
Technology, S.A. all of the issued and outstanding capital stock of FEE
Fil-Mag Taiwan Corporation ("FFT"), FEE Fil-Mag Singapore Pte. Corporation
("FFS") and Fil-Mag, Inc. ("FMI"). FFT, FFS and FMI are referred to below
as the "Fil-Mag Group". The Fil-Mag Group is a supplier of magnetic
components to domestic and international manufacturers of PCs, network
interface cards, network controllers and other devices that are connected
to data communications networks such as Token Ring and Ethernet. The Fil-
Mag Group conducted manufacturing operations in its plants in Taiwan and
the Philippines; engineering activities at its San Diego, California
location; and sales operations through offices in France, Singapore and San
Diego.
The purchase price of the Fil-Mag Group was $9,082,000 (net of
expenses). In addition, the Company caused FMI to repay to FEE Technology,
S.A. approximately $1 million of indebtedness. FFT was indebted to local
banks in the amount of approximately $3.3 million, all of which has been
retired since the acquisition. The assets acquired and liabilities assumed
approximated $15.5 million and $8.6 million, respectively. The excess of
cost over net assets acquired approximated $2.5 million. The purchase
price and the $1 million debt repayment were financed by borrowing $10
million under a temporary acquisition line of credit and cash on-hand of
approximately $400,000.
(continued)
Page 23 of 38
4
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(2) Acquisitions, continued
------------
Subsequent to the acquisition, eight key employees of the Fil-Mag
Group entered into a covenant against competition with the Company in
exchange for which the Fil-Mag Group paid them, in the aggregate, $1
million during the twelve months subsequent to the acquisition. The $1
million was financed by cash on-hand and is being amortized on a straight-
line basis over the life of the agreement.
The purchase price for Pulse and the purchase price for the Fil-Mag
Group were arrived at pursuant to arms-length negotiations, taking into
account all pertinent factors including, but not limited to, the nature,
monetary and strategic value of the assets being acquired, business
prospects of Pulse and each member of the Fil-Mag Group and the synergies
of the businesses with the current operations of the Company.
(3) Financial Statement Details
---------------------------
The following provides details for certain financial statement
captions at December 31, 1995 and 1994:
1995 1994
------- -------
Inventories
Finished goods $12,926 $ 5,471
Work in progress 8,888 8,420
Raw materials and supplies 11,148 7,823
------- -------
$32,962 $21,714
======= =======
Property, plant and equipment
Land $ 2,152 $ 1,044
Buildings and improvements 23,026 15,074
Machinery and equipment 55,885 39,062
------- -------
$81,063 $55,180
======= =======
Accrued expenses
Income taxes payable $ 7,082 $ 1,916
Dividends payable 784 572
Accrued compensation 5,980 3,118
Current portion of accrued pension expense 2,321 2,073
Other accrued expenses 12,823 7,060
------- -------
$28,990 $14,739
======= =======
(continued)
Page 24 of 38
5
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(4) Long-term Debt
--------------
Long-term debt was as follows (in thousands):
1995 1994
---- ----
Bank Loans
- ----------
Fixed rate term loan (6.65%) due December 29, 2000 $10,000 $ --
Variable rate revolving credit facility with $35.0
million maximum draw, due September 29, 1998 $ 7,000 --
Variable-rate (LIBOR plus 0.75%) bank loan facility
with $20.0 million maximum draw, due March 1997
(6.97% rate at December 31, 1994) $ -- $15,000
------- -------
Total bank loans $17,000 $15,000
Mortgage Notes, secured by mortgages on land, buildings,
and certain equipment:
4.5% mortgage notes, due in monthly installments
until 2000 125 146
------- -------
Total long-term debt 17,125 15,146
Less current installments 2,023 22
------- -------
Long-term debt excluding current installments $15,102 $15,124
======= =======
At the Company's option, interest on the revolving credit facility at
December 31, 1995 may be based on the prime rate or on the LIBOR rate plus
0.625%. At December 31, 1995, $5 million was outstanding under the prime rate
(then 8.5%) and $2 million was outstanding under the LIBOR rate alternative
(then 6.5%).
Principal payments due within the next five years are as follows (in
thousands):
1996 $ 2,023
1997 2,024
1998 9,025
1999 2,026
2000 2,027
The Bank Loan facilities are unsecured and 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 25 of 38
6
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(5) Research and Development Expense
--------------------------------
Research and development expense is included in selling general and
administrative expenses and has not exceeded 11% of such expenses in 1995, 1994
and 1993.
(6) Income Taxes
------------
During 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). FAS 109 required a change from the deferred method of accounting for
income taxes of Accounting Principles Board Opinion 11 to the asset and
liability method of accounting for income taxes. Under the asset and liability
method of FAS 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. The change in these deferred tax assets or liabilities,
including the effect of a change in tax rates, if any, from the beginning to
the end of the period generally is recognized as deferred tax expense or
benefit. Effective January 1, 1993, the Company adopted FAS 109 and has
reported the cumulative effect of that change in the method of accounting for
income taxes in the consolidated statement of earnings for the year ended
December 31, 1993.
Earnings before income taxes were as follows (in thousands):
1995 1994 1993
------- ------- ------
Domestic $ 1,941 $ 8,406 $4,540
Foreign 12,600 2,983 625
------- ------- ------
Total $14,541 $11,389 $5,165
======= ======= ======
Income tax expense was as follows (in thousands):
Current: 1995 1994 1993
------- ------- ------
Federal $ 2,019 $ 2,837 $1,394
State and local 651 898 630
Foreign 3,629 1,390 277
------- ------- ------
6,299 5,125 2,301
Deferred (benefit) (1,098) (680) (492)
------- ------- ------
$ 5,201 $ 4,445 $1,809
======= ======= ======
For the year ended December 31, 1995, approximately $24,000 was credited
to Additional Paid-In Capital to record the tax benefit of dividends paid on
restricted stock. Additional Paid-In Capital was also credited for
approximately $36,000 for the tax effect of the change in value from the award
date to the release date of restricted stock which was released during the
period.
(continued)
Page 26 of 38
7
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(6) Income Taxes, continued
-------------
A reconciliation of the statutory Federal income tax rate with the
effective income tax rate follows:
1995 1994 1993
---- ---- ----
Statutory Federal income tax rate 34% 34% 34%
Increase(decrease) resulting from:
Tax exempt earnings of subsidiaries in
Puerto Rico (2) (5) (14)
State and local income taxes, net of
federal benefit 3 6 10
Non-deductable expenses 1 1 2
Foreign (3) (1) 1
Other, net 3 4 2
-- -- --
Effective tax rate 36% 39% 35%
== == ==
Deferred tax assets and liabilities included the following (in thousands):
Assets: 1995 1994
Inventories, principally due to additional costs
valued for tax purposes $ 596 $ 500
Vacation pay and other compensation 396 162
Pension expense 573 1,158
Stock awards 845 637
Accrued liabilities 2,187 549
Other 97 131
------ ------
Total deferred tax assets $4,694 $3,137
====== ======
Liabilities:
Plant and equipment, principally due to
differences in depreciation $ 109 $ 194
Local tax on Puerto Rico-sourced income 36 74
Other 417 460
------ ------
Total deferred tax liabilities $ 562 $ 728
------ ------
Net deferred tax asset $4,132 $2,409
====== ======
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 deferred tax assets.
(continued)
Page 27 of 38
8
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(7) Commitments and Contingencies
-----------------------------
Lease Commitments
The Company conducts a portion of its operations from leased premises and
also leases certain equipment under operating leases.
Total rental expense for the years ended December 31, 1995, 1994 and 1993
was $1,795,000, $1,483,000 and $1,183,000, respectively. The aggregate minimum
rental commitments under non-cancellable leases in effect at December 31, 1995
are as follows (in thousands):
Year ending
December 31
-------------
1996 $ 3,083
1997 2,808
1998 2,277
1999 2,176
2000 2,014
Thereafter 9,227
-------
$21,585
=======
Environment
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. The Company has established reserves which it
believes are adequate for its expected future liability in these matters.
(continued)
Page 28 of 38
9
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(8) Shareholders' Equity
--------------------
Changes were as follows (in thousands):
Additional
Common paid-in Treasury Unearned
stock capital stock compensation
------- ----------- -------- ------------
Balance at December 31, 1992 $ 373 3,784 4,658 632
Stock award of 18,630 shares, net of forfeitures -- 129 (30) 159
Compensation under Restricted Stock Plan -- -- -- (306)
Net tax benefit of dividends paid on restricted stock
and the difference in value between grant date and
date of vesting -- 13 -- --
------ ------ ----- ---
Balance at December 31, 1993 $ 373 3,926 4,628 485
Stock award of 34,985 shares, net of forfeitures -- 360 (55) 414
Compensation under Restricted Stock Plan -- -- -- (339)
Net tax benefit of dividends paid on restricted stock
and the difference in value between grant date
and date of vesting -- 43 -- --
200% stock dividend recorded on
September 18, 1994. 745 -- -- --
------ ------ ----- ---
Balance at December 31, 1994 $1,118 4,329 4,573 560
Stock issued in connection with the acquisition
of Pulse 223 29,009 -- --
Stock options assumed -- 3,105 -- --
Stock options exercised 1 68 -- --
Stock award of 24,545 shares, net of forfeitures -- 336 (38) 375
Compensation under Restricted Stock Plan -- -- -- (238)
Net tax benefit of dividends paid on restricted stock
and the difference in value between grant date and
date of vesting -- 60 -- --
------ ------ ----- ---
Balance at December 31, 1995 $1,342 36,907 4,535 697
====== ====== ===== ===
On August 3, 1994, the Company's Board of Directors approved a three-
for-one split of the Company's common stock in the form of a 200% common
stock dividend for shareholders of record as of August 18, 1994. A total
of 5,962,640 shares were issued in connection with the split. The stated
par value of each share was not changed from $.125. A total of $745,000
was reclassified from the Company's retained earnings account to the
Company's common stock account. All relevant share and per share amounts
have been restated to retroactively reflect the stock split.
The cumulative translation adjustment was $773,000, $480,000, and
$885,000 at December 31, 1995, 1994 and 1993, respectively.
(continued)
Page 29 of 38
10
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(9) Employee Benefit Plans
The Company and its subsidiaries maintain defined benefit pension
plans and make contributions to multi-employer plans covering certain union
employees. Certain non-U.S. subsidiaries have varying types of retirement
plans providing benefits for substantially all of their employees.
Pension expense was as follows (in thousands):
1995 1994 1993
------ ------ ------
Principal defined benefit plans $1,449 $1,310 $ 932
Contributions to multi-employer and other plans 176 201 170
Other non-U.S. plans 34 160 --
------ ------ ------
$1,659 $1,671 $1,102
====== ====== ======
The expense for the principal defined benefit pension plans include
the following components (in thousands):
1995 1994 1993
------ ------ ------
Service cost - benefits earned during the period $1,369 $1,286 $ 963
Interest cost on projected benefit obligation 1,319 1,206 991
Actual return on plan assets (3,867) (124) (1,585)
Net amortization and deferral 2,628 (1,058) 563
------ ------ ------
Net periodic pension cost $1,449 $1,310 $ 932
====== ====== ======
The financial status of the principal defined benefit plans at
December 31, was as follows (in thousands):
1995 1994
------- -------
Actuarial present value of obligations:
Accumulated benefit obligation (including vested
benefits of $11,990,000 in 1995 and $10,863,000
in 1994) $13,653 $12,401
------- -------
Projected benefit obligation for services to date 20,404 18,499
Plan assets at fair value 20,261 15,446
------- -------
Plan assets (less than) projected benefit obligation (143) (3,053)
Unrecognized net (gain) from past experience different
from that assumed. (3,661) (1,206)
Prior service costs not yet recognized 559 612
Unrecognized net obligation at January 1, 1987 being
recognized over 18 years 31 35
------- -------
Accrued pension costs at December 31 $(3,214) $(3,612)
======= =======
(continued)
Page 30 of 38
11
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(9) 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. Plan
assets consist principally of short-term investments and listed bonds and
stocks. Assumptions used to develop data for 1995 and 1994 were as
follows:
Discount rates 7.25 to 7.5%
Annual compensation increases 4.75 to 7.0%
Expected long-term rates of return on plan assets 7.50 to 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
contributes 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. The total contribution expense under the 401(k) plans was $319,000,
$165,000 and $177,000 in 1995, 1994, and 1993, respectively.
The Company does not provide any significant post-retirement benefits
other than the pension plans and 401(k) plans described above.
(10) Quarterly Financial Data (Unaudited)
------------------------------------
Quarterly results of operations (unaudited) for 1995 and 1994 are
summarized as follows (in thousands, except per share data):
Quarter ended
-------------
Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- -------
1995:
Net sales $40,043 $39,394 $35,940 $61,042
Gross profit 11,390 12,657 10,446 21,161
Net earnings 1,692 2,020 1,673 3,955
Net earnings per share .28 .33 .28 .49
1994:
Net sales $34,960 $37,816 $36,591 $37,077
Gross profit 10,329 11,206 10,850 10,963
Net earnings 1,370 1,742 1,884 1,948
Net earnings per share .23 .29 .31 .32
The shares issued and options assumed in connection with the Pulse
acquisition affected the weighted average shares outstanding used for
calculating earnings per share in 1995. Refer to Note 2 for additional
information.
(continued)
Page 31 of 38
12
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(11) Stock-Based Compensation
The Company has an incentive compensation plan for key employees of
the Company and its subsidiaries. The Plan grants the recipient the right
of ownership of Technitrol, Inc. common stock, conditional on the
attainment of defined performance goals and/or continued employment with
the Company. A summary of the shares under the incentive compensation plan
is as follows:
Awarded,
Available to Not Yet
be Granted Released
------------ --------
Shares authorized 600,000
Awarded during years prior to 1995 (377,510) 377,510
Shares released to recipients prior to 1995 (197,810)
------- --------
Balance at December 31, 1994 222,490 179,700
Awarded during 1995, net 24,545
Shares released to recipients during 1995 (41,955)
------- -------
Balance at December 31, 1995 197,945 137,745
======= =======
During the years ended December 31, 1995, 1994 and 1993, the Company
issued to employees, net of cancellations, Incentive Compensation Shares
having an approximate fair value at date of issue of $375,000, $414,000 and
$159,000, respectively. Shares are held by the Company until the defined
performance goals and/or continued employment requirement have 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 $1,517,000 in 1995, $994,000 in 1994 and $658,000 in
1993.
Separately, in connection with the Pulse acquisition, 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.
Additional information about the options assumed is provided in Note 2. At
December 31, 1995, 265,000 options remained outstanding. No additional
options are expected to be granted under the assumed plans.
(continued)
Page 32 of 38
13
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(12) Supplementary Information,
--------------------------
Charged directly to costs and expenses (in thousands):
1995 1994 1993
------ ----- ------
Depreciation $5,828 $5,016 $4,901
Amortization of intangible assets 417 255 90
Advertising 1,118 1,159 1,117
Repairs and maintenance 2,540 1,936 1,162
Bad debt expense 109 114 76
Cash payments made (in thousands):
Income taxes $3,559 $3,663 $1,320
Interest 1,428 1,058 389
(13) Segment Information
-------------------
The "Industry Segment Information" and "Geographic Information"
sections on pages 2, 3 and 4 of this Form 10-K is an integral part of the
Company's financial statements.
(14) Subsequent Event
----------------
On February 27, 1996 the Company sold certain assets of the Products
Division to an unrelated party. As a result of the sale, the Company will
discontinue its production and marketing of document counters and dispensers,
the sales of which approximated $4.9 million in 1995. The consideration
received approximated $3.6 million and the pre-tax gain realized on the sale
(after recognition of related costs and expenses) approximated $1.5 million.
Page 33 of 38
TECHNITROL, INC. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)
Additions (Deductions)
---------------------------------------
Charged to Write-offs
Balance costs and & Balance
Description January 1 expenses payments Other December 31
- ----------------------------- --------- ---------- ----------- -------- -----------
Year Ended December 31, 1995:
Reserve for obsolete and
slow-moving inventory $ -- $ 441 $ (384) $2,955(1) $3,012
====== ======= ======= ====== ======
(1) This amount represents the acquired reserve of Pulse Engineering, Inc.
The additions and deductions to the reserve represents Pulse's 1995
activity subsequent to its acquisition by Technitrol.
Doubtful accounts are written-off as identified.
Page 34 of 38
EXHIBIT INDEX
DOCUMENT
- --------
3. (a) Articles of Incorporation Filed herewith
(b) By-laws Filed herewith
4. Instruments defining rights of Incorporated by reference to
security holders Form 10-K for the year ended
December 31, 1982.
11. Computation of Primary and Fully
Diluted Earnings Per Share Page 36
21. Subsidiaries of Registrant Page 37
23. Consent of Certified Public
Accountants Page 38
27. Financial Data Schedule Electronic Filing Only
Page 35 of 38