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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, 1996
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
March 3, 1997 is $315,586,000 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 March 3, 1997.
Number of shares outstanding
Title of each class March 3, 1997
------------------- -----------------------------
Common stock 16,014,070
par value $.125 per share
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
DOCUMENT REFERENCE
- -------- ---------
The Registrant's definitive Proxy Statement, dated March Part III
28, 1997, to be used in connection with Registrant's Page 18 of 43
1997 Annual Meeting of Shareholders pages
Page 1 of 43
PART I
ITEM I BUSINESS
Technitrol, Inc. and its consolidated subsidiaries (collectively
the "Company") segments its business into three areas: Electronic
Components, Metallurgical Products and Test & Measurement Products. The
business 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 business
segment information below.
Business Segment Information
The Electronic Components Segment includes Pulse Engineering, Inc.
("Pulse") and Netwave Technologies, Inc. ("Netwave"). Pulse was
acquired by the Company on September 29, 1995 and significantly
increased the size of this segment. Subsequent to the acquisition of
Pulse, the existing operations of the Electronic Components Segment were
combined with Pulse to form a unified business throughout the world.
Netwave, a majority-owned subsidiary, began operations on August 30,
1996 at which time Netwave acquired all of the wireless local area
network ("LAN") business assets of Xircom, Inc. 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"), Doduco GmbH ("Doduco," acquired on
October 31, 1996) and Chace Precision Metals, Inc. ("Chace"). AMI
manufactures electrical contacts and assemblies for a wide range of
industrial customers. Doduco produces electrical contacts, contact
materials, thermostatic bimetals and precision contact sub-assemblies.
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"), and John Chatillon & Sons, Inc.
("Chatillon"). 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 Company's
Products Division was also included in this segment. That division
manufactured document counters and dispensers, and marketed its products
internationally through distributors and on an OEM basis. In January
1997, the Company announced a possible divestiture of the Test &
Measurement Products Segment. See Note 2 of Notes to Consolidated
Financial Statements.
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 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 related to its accounts receivable.
Depending on its level of cash reserves, the Company may maintain
significant cash investments at certain financial institutions.
Management of the Company believes that the credit risk associated with
such deposits and invested balances is not significant, due in part to
the Company's investment policy requiring cash reserves to be invested
only at institutions receiving the highest independent credit ratings.
Page 2 of 43
Business Segment Financial Information (in thousands of dollars)
1996 1995 1994
---- ---- ----
Net sales
Electronic Components $142,791 $ 68,358 $ 41,173
Metallurgical Products 100,521 75,304 76,534
Test & Measurement Products(a) 30,763 32,757 28,737
-------- -------- --------
Total $274,075 $176,419 $146,444
======== ======== ========
Operating profit before
income taxes
Electronic Components $ 22,536 $ 10,698 $ 5,023
Metallurgical Products 4,983 1,846 4,792
Test & Measurement Products(a) 2,506 2,945 2,746
-------- -------- --------
Total operating profit $ 30,025 $ 15,489 $ 12,561
Other income (expense), net 991 (948) (1,172)
-------- -------- --------
Earnings before income taxes $ 31,016 $ 14,541 $ 11,389
======== ======== ========
Assets at end of year
Electronic Components $ 80,868(b) $ 80,109(b) $ 25,054(b)
Metallurgical Products 80,802(c) 35,659 37,054
Test & Measurement Products(a) 12,814 15,009 14,086
-------- -------- --------
Identifiable assets $174,484 $130,777 $ 76,194
Corporate assets 43,863 14,163 8,561
-------- -------- --------
Total $218,347 $144,940 $ 84,755
======== ======== ========
Capital expenditures
Electronic Components $ 5,568(b) $ 23,953(b) $ 7,933(b)
Metallurgical Products 12,664(c) 2,248 2,288
Test & Measurement Products(a) 710 846 569
-------- -------- --------
Total $ 18,942 $ 27,047 $ 10,790
======== ======== ========
Depreciation and amortization
Electronic Components $ 5,384 $ 2,430 $ 1,502
Metallurgical Products 3,160 3,149 3,205
Test & Measurement Products(a) 579 666 564
-------- -------- --------
Total $ 9,123 $ 6,245 $ 5,271
======== ======== ========
(a) See Note 2 of Notes to Consolidated Financial Statements regarding the
Company's possible divestiture of the Test & Measurement Products Segment.
In 1995 and 1994, a full year of operations of the Products Division was
included in this Segment.
(b) Includes property, plant and equipment acquired as part of the
acquisitions of Netwave, Pulse Engineering, Inc. and the Fil-Mag Group
in 1996, 1995 and 1994, respectively. See Note 2 of Notes to
Consolidated Financial Statements.
(c) Includes property, plant and equipment acquired as part of the
acquisition of Doduco GmbH.
In 1996, no customer accounted for more than 10% of the Company's
consolidated sales. 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. Sales to the Company's ten largest customers accounted for 36%
of sales in 1996 and 38% of sales in both 1995 and 1994.
Export sales from the United States totalled $19.9 million in 1996,
$15.3 million in 1995 and $14.0 million in 1994. 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. The Company's
operations in North America are located entirely in the United States,
including Puerto Rico. The Company's operations in Europe are primarily
located in England, Ireland, Germany and Spain. The Company's
operations in the Far East are primarily located in the Philippines,
Taiwan and the Peoples Republic of China.
Page 3 of 43
Geographic Information (in thousands of dollars)
1996 1995 1994
---- ---- ----
Sales to unaffiliated customers, from
North America $188,490 $139,455 $121,051
Far East 16,671 16,936 16,036
Europe 68,914 20,028 9,357
-------- -------- --------
Total $274,075 $176,419 $146,444
======== ======== ========
Affiliate sales or transfers, from
North America $ 4,204 $ 415 $ 62
Far East 95,870 41,424 10,141
Europe 4,682 1,310 629
-------- -------- --------
Total $104,756 $ 43,149 $ 10,832
======== ======== ========
Operating profit
North America $ 7,621 $ 4,075 $ 9,032
Far East 19,450 10,103 2,473
Europe 2,941 1,317 901
Eliminations 13 (6) 155
-------- -------- --------
Total $ 30,025 $ 15,489 $ 12,561
======== ======== ========
Identifiable assets
North America $ 79,417 $ 80,255 $ 52,084
Far East 31,138 35,497 17,439
Europe 63,929 15,025 6,671
-------- -------- --------
Total $174,484 $130,777 $ 76,194
======== ======== ========
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 vast majority
of the Electronic Components Segment's manufacturing is performed in the
People's Republic of China (the "PRC") 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 PRC and Philippine
governments have 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 the PRC or the Philippines (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.
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, products are
sold primarily by the Segment'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 and customer applications. 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 this Segment's direct sales
employees. Customers of the Test & Measurement Products Segment (which
may be divested) include virtually every industry which performs
inspection and in-process testing. This Segment's products are sold
through independent agents, dealers and distributors.
Competition
The businesses of the Company are highly competitive, and with
respect to each of its Segment's products, it faces competition from
numerous firms. For most of the Company's products, the markets are
international in nature and its competition is worldwide.
Page 4 of 43
Backlog
As of December 31, 1996, the Company's backlog of orders was $84.8
million compared to $55.9 million at the end of 1995. Approximately
$32.8 million of the backlog at December 31, 1996 was attributable to
Doduco, acquired by the Company on October 31, 1996. Substantially all
of the current backlog is scheduled for completion during the first six
months of 1997. Most orders are subject to cancellation upon payment of
normal cancellation charges. Normal delivery time for the Company's
products varies from Segment to Segment, but is generally less than
thirteen weeks. No material portion of the Company's business is
seasonal in nature.
Raw Materials
None of the Company's Segments is dependent upon any particular
source of supply. However, there are relatively few suppliers of the
ferrite materials used in electronic components, powder metals used in
electrical contacts, and the 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. The Metallurgical Products Segment engages in a business
which utilizes silver and other precious metals as raw material
components. These materials have been readily available and are
anticipated to remain so.
Research and Development
The Company does not engage in any basic research activities.
Development activity is conducted within each Segment principally by
that Segment'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. Although the
Company possesses numerous patents, 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.
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 at these sites by licensed waste haulers of small amounts of
waste material many years ago. 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
Certain operations of the Company, particularly in the Far East,
are labor intensive. At December 31, 1996, the Company had
approximately 11,200 full time employees compared with 9,300 at the end
of 1995. The higher number of employees in 1996 includes approximately
1,100 Doduco employees in Europe.
Energy
The Company did not experience any curtailment of supplies of
electricity, gas or oil in 1996, and does not expect any curtailment in
1997.
Products
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 risks and opportunities. The Electronic Components
Segment primarily produces magnetic-based electronic components and modules
for use in local area networks, telecommunication, and wireless network
applications. The Metallurgical Products Segment's main product offerings
are electrical contacts, contact materials, thermostatic bimetals,
precision contact subassemblies and thermostatic clad metal
Page 5 of 43
products. The principal product line of the Test & Measurement Products
Segment (which may be divested during 1997) consists of products used in
material testing and measurement systems and force measurement products.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOUR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
Outlook: Issues and Uncertainties
The Company does not provide forecasts of future financial
performance. While the Company's management is optimistic about the
Company's long term prospects, the following issues and uncertainties,
among others, should be considered in evaluating its growth outlook.
Rapid Technological Changes
The industry in which the Company's Electronic Components Segment
operates is characterized by rapid change, consolidation, uncertainty and
constant new and emerging technologies. Generally, product life cycles are
short. The pace of change has accelerated in recent years due to the
Internet, on-line services and expansion of networking. This makes it
necessary for the Company to maintain a strong engineering and development
program to continue to succeed. Accordingly, engineering and development
expenses are expected to grow in 1997 over 1996 and there are no assurances
that the Company's efforts in these areas will continue to be successful.
Local Area Network Growth Rate
The growth rate of local area networks and the rate at which networks
are upgraded or replaced may be slower or faster in the future. This will
affect the Electronic Component Segment's revenue growth.
Housing, Construction and Auto Sales
The growth rates of housing, construction and auto sales, which are
highly cyclical in the United States and Europe, will impact the revenue
growth of the Metallurgical Products Segment.
Prices
Future prices which the Company can obtain for its products may
decrease from historical levels, depending on competition and costs.
Costs of Sales
Although cost of sales as a percentage of sales decreased in 1996 over
1995, it varies among Segments and within each Segment based on product mix
and channel of distribution (sales made through distributors have higher
proportionate costs of sales on average due to lower selling prices). Mix
factors may increase costs of sales as a percentage of sales in the future.
Global Integration of Metallurgical Products Segment
The Company completed the acquisition of Doduco GmbH in October 1996.
The degree of success of this acquisition depends on the Company's ability
to successfully integrate all of its Metallurgical Products Segment's
operations in Europe and North America and to take advantage of more
rapidly growing markets in the Far East. Penetration of and participation
in the Far Eastern marketplace is essential to enable this Segment to grow
in excess of its anticipated internal growth rate in Europe and North
America. This integration may take longer than expected and may never be
fully achieved, resulting in growth opportunities which may be less than
anticipated.
Page 6 of 43
Continued Acquisition Success
From 1993 through 1996, the Company completed the acquisition of the
Fil-Mag Companies (1994), Pulse Engineering, Inc. (1995) and Doduco GmbH
(1996), each of which added substantially to the Company's revenue growth
and, in the case of Fil-Mag and Pulse, to the Company's net income.
Sustained growth in excess of the internal growth rate of the Electronic
Components Segment will require continued acquisitions. The timing, price,
structure and success of all acquisitions are inherently uncertain and
unpredictable.
Other Factors
In addition to the factors discussed above, among other factors which
could cause actual results to differ materially are the following:
business conditions and the general economy; competitive factors such as
rival manufacturers (particularly in the Electronic Components Segment and
Metallurgical Products Segment) seeking increased market share based on
price; availability of raw materials at reasonable prices; manufacturing
efficiencies and capacity; the risks associated with foreign operations;
the risk of obsolescence due to shifts in market demand; the timing of
customer hardware and software introductions.
The Company believes that it has the product offerings, facilities,
personnel and competitive and financial resources for continued business
success, but future events, costs, margins, product mix and profits are all
influenced by inherently unpredictable factors such as are discussed above.
ITEM 2 PROPERTIES
The following properties were owned or leased by the Company at
December 31, 1996. Except for the corporate headquarters in Trevose, PA,
all properties are used exclusively in one Segment, as identified. The
properties used by the Test & Measurement Products Segment may be sold (or,
if leased, the lease may be assigned) to unrelated parties in connection
with the possible divestiture of the Segment. Certain small locations of
the Company, such as regional sales offices, have been excluded from this
listing.
Page 7 of 43
ITEM 2 PROPERTIES, continued
Approx. Owned/ Lease % Used
Location Square Ft. Leased Ending for Mfg. Comments
- ----------------------------------------------------------------------------------------------
Trevose, PA 6,000 Leased 2001 0 Corporate headquarters
Electronic Components
---------------------
Dongguan, Peoples
Republic of China 215,000 Leased 2007 95
Philadelphia, PA 70,000 Owned 0
Tuam, Ireland 60,000 Owned 35
Kaohsiung, Taiwan 45,000 Owned 20 Building is owned; land is
leased through 2003
Cavite, Philippines 59,000 Owned 75 Buildings are owned; land
is leased through 2007
San Diego, CA 50,000 Owned 0
Pleasanton, CA 15,000 Leased 2001 10
Greensboro, MD 20,000 Owned 95
Hong Kong 13,000 Leased 1997 0
Metallurgical Products
----------------------
Pforzheim, Germany 490,000 Owned 65
Reidsville, NC 250,000 Owned 70
Sinsheim, Germany 222,000 Owned 55
Export, PA 115,000 Leased 2001 80
Cedar Knolls, NJ 48,000 Owned 65
Luquillo, P.R. 32,000 Owned 80
Madrid, Spain 32,000 Owned 90
Delmont, PA 30,000 Owned 90
McKeesport, PA 23,000 Leased 2004 100
Huchenfeld, Germany 16,000 Leased 1997 100
Lancaster, PA 15,000 Leased 1997 85
Luquillo, P.R. 12,000 Leased 1998 40
Test & Measurement
Products
------------------
Kew Gardens, NY 67,000 Owned 75
Greensboro, NC 23,000 Owned 60
Fareham, England 22,000 Leased 2004 50
Wuppertal, Germany 17,000 Leased 2005 60
Versailles, France 2,000 Leased 1997 0
The Company believes its facilities to be adequate for its present
needs, although additional manufacturing capacity may be pursued for
certain products.
Page 8 of 43
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 commenced trading on the New York Stock
Exchange on November 4, 1996 and previously was traded on the American
Stock Exchange. The following table reflects the high and low sales prices
on the relevant Exchange and the dividends paid to shareholders in each
quarterly period during Technitrol's last two fiscal years. The amounts
have been adjusted to reflect the two-for-one stock split effective on
February 28, 1997.
QUARTER 1ST 2ND 3RD 4TH
--- --- --- ---
1996 HIGH $14.56 $21.88 $20.81 $20.31
1996 LOW $9.56 $13.56 $12.50 $13.69
1996 DIVIDENDS PAID $.0500 $.0500 $.0500 $.0500
1995 HIGH $7.81 $7.50 $9.00 $11.88
1995 LOW $6.69 $6.63 $7.00 $7.94
1995 DIVIDENDS PAID $.0475 $.0475 $.0500 $.0500
The approximate number of holders of record of the common stock,
Technitrol Inc.'s only class of stock outstanding, as of January 10, 1997
was:
TITLE OF CLASS NUMBER OF SHAREHOLDERS
-------------- ----------------------
Common Stock 706
par value $.125 per share
Page 9 of 43
ITEM 6 SELECTED FINANCIAL DATA LAST 5 YEARS
(in thousands, except per share data)
1996(a) 1995(a) 1994(a) 1993 1992
---- ---- ---- ---- ----
Net sales $274,075 $176,419 $146,444 $100,457 $ 98,554
Net earnings $ 20,427 $ 9,340 $ 6,944 $ 3,356(b) $ 2,838
Earnings per share $ 1.27 $ .72 $ .58 $ .28(b) $ .24
Total assets $218,347 $144,940 $ 84,755 $ 58,572 $ 55,708
Total long-term debt $ 41,701 $ 17,125 $ 15,146 $ 5,167 $ 6,887
Shareholders' equity $103,590 $ 84,761 $ 45,757 $ 40,294 $ 38,657
Net worth per share $ 6.48 $ 5.41 $ 3.80 $ 3.37 $ 3.24
Working capital $ 74,787 $ 43,242 $ 32,676 $ 24,056 $ 23,178
Working capital ratio 2.1 to 1 2.1 to 1 2.5 to 1 2.8 to 1 3.3 to 1
Number of shares outstanding:
Weighted average, including
commonstock equivalents 16,096 13,076 12,030 11,978 11,922
Year end 15,975 15,672 12,042 11,972 11,940
Dividends declared per share $ .200 $ .198 $ .188 $ .187 $ .187
Price range per share:
High $ 21.88 $ 11.880 $ 8.000 $ 5.06 $ 5.50
Low $ 9.56 $ 6.63 $ 4.94 $ 3.79 $ 3.31
(a) The Company acquired Doduco in 1996, 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.)
Information relating to shares outstanding and per share amounts have
been restated to reflect the two-for-one stock split effective February 28,
1997.
Page 10 of 43
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Technitrol, Inc. ("Technitrol" or the "Company") is a diversified
manufacturer of electronic components, metallurgical products and test and
measurement equipment.
The Company's businesses are operated in those business segments. The
Electronic Components Segment provides a broad array of magnetics-based
components, miniature chip inductors, modules and wireless network products
for use primarily in local area network and telecommunication products.
Manufacturing occurs in the United States, Ireland, Taiwan, the Philippines
and the People's Republic of China.
The Metallurgical Products Segment is a broad based manufacturer of
precious metal electrical contacts, bonded or clad metals and contact
bearing components. These products are used in a variety of applications
which include residential, commercial and industrial circuit breakers,
motor controls, relays, wiring devices, temperature controls, appliances
and various electronic products. This Segment also produces sophisticated
electroplating and metal refining services and produces certain components
for the automotive industry. Manufacturing takes place in the United
States, Puerto Rico, Germany and Spain.
The Test & Measurement Products Segment produces a variety of force
measurement products, complementary measurement equipment and mechanical
scales. Principal uses of these products are the determination of weight,
force, tension, compression and torque as well as the density and flow
characteristics of plastics and other liquids. Manufacturing occurs in the
United States and Great Britain. In early 1997, the Company announced its
decision to explore the divestiture of the Test & Measurement Products
Segment if an acceptable transaction can be arranged.
In 1993, the Company adopted a strategy which focused on expansion of
the Company's electronics business by acquiring companies serving markets
characterized by significant growth opportunities. In 1994, the Company
acquired the Fil-Mag companies with manufacturing capabilities in Taiwan
and the Philippines. In late 1995, the Company acquired Pulse Engineering,
Inc. ("Pulse") with manufacturing capabilities in Ireland and China. In
1996, these businesses, together with the Components Division of the
Company, were combined to form the Electronic Components Segment which
provides an array of products for solving problems of customers engaged in
designing and manufacturing local area network and telecommunications
products. The Company believes that the Electronic Components Segment is a
global market leader in the development and sale of components for local
area network products.
In 1996, the Company also acquired a majority equity interest in
Netwave Technologies, Inc. ("NTI"). NTI was organized in 1996 to acquire
the assets of the wireless local area network business formerly conducted
by Xircom, Inc. The Company made a capital contribution to NTI of cash and
the assets which comprised the wireless local area network business
formerly conducted by the Electronic Components Segment. The minority
interest in NTI is owned by a group of employees.
In late 1996, in furtherance of its strategy of creating significant
critical mass in and further geographical penetration of its metallurgical
businesses, the Company acquired the assets of Doduco GmbH which is engaged
in the manufacture in Germany and Spain of precious metal contacts, bimetal
products and certain contact product modules. These operations were
combined with the Company's Advanced Metallurgy, Inc. ("AMI") companies and
Chace Precision Metals, Inc. ("Chace") to form the Metallurgical Products
Segment. The Company believes that the Metallurgical Products Segment now
possesses the critical mass necessary to enable this Segment to capitalize
on advantages in the global markets for metallurgical contact, bimetal and
related products.
Page 11 of 43
During the first quarter of 1996, the Company sold the assets of its
Products Division (part of the Test & Measurement Products Segment) which
manufactured currency counters and dispensers. In early 1997, the Company
announced its intention to sell the remainder of its Test & Measurement
Products Segment if an appropriate transaction can be arranged. Formal
decisions, including the method of sale, the timing of the sales and the
expected selling price, have not yet been made. Since this Segment is
profitable, the Company may continue to operate it if appropriate value
cannot be obtained.
In management's opinion, the investments and strategies described
above have positioned the Company for future growth and the creation of
additional shareholder value.
This Management Discussion and Analysis of 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) with respect to the Company's
results of operations, financial condition and other operational matters.
Words or phrases denoting the anticipated results of future events - such
as "anticipate," "believe," "estimate," "expect," "will likely," "are
expected to," "will continue," "project," and similar expressions that
denote uncertainty - are intended to identify such forward-looking
statements. Actual results may differ materially: (1) as a result of
risks and uncertainties identified in connection with those forward-looking
statements, including those factors identified in the section captioned
"Commitments and Contingencies" in the Notes to Consolidated Financial
Statements and those factors set forth elsewhere in this Report under the
caption "Cautionary Statement For Purposes of the `Safe Harbor' Provisions
of the Private Securities Litigation Reform Act of 1995"; (2) as a result
of factors over which the Company has no control, including the strength of
domestic and foreign economies, sales growth, competition and certain cost
increases; or (3) if the factors on which the Company's expectations are
based do not prove to be correct. The data herein is published solely for
the information of the Company's shareholders. No statement in this Report
is made for the purpose of inducing the purchase or sale of any security
issued by the Company.
Liquidity and Capital Resources
At December 31, 1996, the Company's cash balance was approximately
$43.5 million. This represents an increase of $29.6 million from the end
of 1995. The cash on-hand at the end of 1996 included approximately $6.4
million that was used to repay debt in January 1997 and, separately,
approximately $7.7 million that was also used early in 1997 for the
purchase of real estate in Germany pertinent to Doduco. Although the
acquisition of Doduco was completed on October 31, 1996 as more fully
explained below, a portion of the real estate acquired was not transferred
until early in 1997 as a result of legal proceedings and documentation
activities that are customary in Germany. Total working capital was $74.8
million at the end of the year and, after adjustments for the two items
related to cash and noted above, was $68.4 million.
The positive cash flow from operations in 1996 enabled the Company to
increase cash in addition to reducing approximately $9.0 million of long-
term debt. Plans implemented by the Metallurgical Product Segment's
management to reduce overhead and lower break even points had a positive
impact on cash flow during the year, as did the improved operating margins
within the Electronic Components Segment. Accounts receivable increased by
$10.8 million during the year as a result of the record sales level. There
were no receivables acquired in connection with the acquisition of Doduco,
except for those receivables of the Doduco subsidiary in Spain. The
funding of Doduco's accounts receivable, along with other elements of
Doduco's working capital requirements, occurred after the October 31, 1996
acquisition date. Excluding inventory acquired in connection with the NTI
and Doduco acquisitions, inventories decreased by $7.0 million from the end
of 1995. The total inventory level is related to a backlog of
approximately $84.8 million at December 31, 1996, including approximately
$32.8 for Doduco. The backlog at December 31, 1995 was $55.9 million.
Inventories decreased significantly in the Metallurgical Products Segment
as a result of inventory management procedures implemented in connection
with efforts to improve the Segment's operating performance and cash flow.
In addition, certain precious metal inventories which were previously owned
by Doduco are now held on consignment under a leasing arrangement.
Accounts payable and accrued expenses increased commensurate with the
higher sales volume.
Page 12 of 43
Cash used by investing activities was $15.3 million during the year.
The acquisition of Doduco was completed on October 31, 1996 and $10.5
million of cash related to the acquisition was paid during 1996. The
payment for real estate in Pforzheim, Germany (approximately $7.7 million)
and certain transaction expenses related to the acquisition were paid
subsequent to December 31, 1996. The total purchase price for Doduco was
approximately $20.5 million and, as noted above, significant elements of
working capital (including accounts receivable) were not acquired.
Additional working capital will be funded in 1997. The purchase price for
the NTI transaction, including related expenses, was approximately $1.2
million (including amounts paid by minority shareholders). In addition to
the Doduco and Netwave acquisitions, capital expenditures totaled $7.8
million during the year. Such expenditures were generally made for the
purposes of expanding production capacity and improving efficiency.
Projected 1997 capital expenditures are expected to be financed by
internally generated funds.
The cash received from the sale of the Company's Products Division
approximated $3.7 million. The funds received were used to repay debt and
for transaction expenses.
Debt repayments totaled $9.0 million during the year, and total new
borrowings were $30.8 million. The Company's domestic credit facility of
$45.0 million includes a revolving credit portion and a term loan. The
$7.0 million that was outstanding under the revolver at December 31, 1995
was repaid in its entirety and $2.0 million was repaid under the term loan
during the year. In connection with the acquisition of Doduco, the Company
obtained a $40.0 million multi-currency credit facility. Initially, the
funds for the purchase of the assets of Doduco were obtained under a
temporary acquisition facility. Those borrowings were refinanced under the
$40.0 million multi-currency credit facility. As of December 31, 1996, all
borrowings under the multi-currency facility were denominated in Deutsche
marks. The borrowings are expected to be repaid from the eventual cash
flows of Doduco and, since the functional currency of the primary Doduco
operation is Deutsche marks, the Company does not believe that it has
significant foreign currency exposure related to this facility.
The Company received $2.1 million from the exercise of stock options
during 1996. The options exercised were among those assumed in connection
with the acquisition of Pulse in 1995. No new options have been granted.
Financial Accounting Standard No. 123, "Accounting for Stock Based
Compensation" did not affect the Company's results of operations or related
disclosures as no new options have been granted.
During the third quarter of 1996, the Company paid, as a part of its
previously announced stock repurchase program, $1.0 million for the
purchase of 36,600 shares of common stock. The stock repurchase plan was
formally rescinded in November 1996. Dividends of $3.2 million were paid
during 1996 and it is expected that quarterly dividend payments will
continue to be made during 1997.
The Company believes that cash from operations and, if necessary,
additional borrowings under its credit facilities will be sufficient to
satisfy the Company's requirements for the foreseeable future. Significant
cash may be received in connection with the possible divestiture of the
Test & Measurement Products Segment. If the divestiture plan is
successful, the Company ultimately expects to invest the funds received
into the remaining business Segments. In addition, internally generated
funds and additional borrowings may be used for acquisitions of suitable
businesses or assets upon terms acceptable to the Board of Directors.
Prior to 1994, substantially all of the Company's operations were in
the U.S. Since 1994, an increasing percentage of the Company's revenues
are earned outside of the U.S. 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 in U.S.
dollars. In Europe, sales are denominated principally in local currencies.
In 1996, approximately 43% of the Company's international sales (including
the sales of Doduco) were made in local currencies and the remainder in
U.S. dollars. The Company anticipates that in 1997 (primarily as a result
of the acquisition of Doduco) and beyond, the percentage of the Company's
sales that are made in local currencies will increase. This increase in
sales denominated in currencies other than U.S. dollars will increase the
Company's potential exposure to currency fluctuations, which can adversely
affect results. The Company has not experienced any material exchange
losses through 1996.
Page 13 of 43
In order to reduce the Company's exposure resulting from currency
fluctuations, the Company may purchase currency exchange forward contracts
on a regular basis. These contracts guarantee a predetermined exchange
rate at the time the contract is purchased. This allows the Company to
shift the risk, whether positive or negative, of currency fluctuations from
the date of the contract to a third party. At December 31, 1996 and 1995,
the Company did not have any outstanding currency exchange forward
contracts. When used, the contracts are primarily in European currencies.
The Company will consider increasing the use of currency exchange forward
contracts during fiscal year 1997 and beyond depending on the amount of
sales and purchases made in local currencies and the type of currency. In
addition, the Company will evaluate the use of currency options in order to
reduce the impact that exchange rate fluctuations have on the Company's
gross margins for sales made by the Company's foreign operations. The
combination of currency exchange forward contracts and currency options
should result in reducing the Company's risks associated with significant
exchange rate fluctuations.
Approximately 18% 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 Item 1 of Part 1
of this report on Form 10-K.) The Company's operations in the region
include manufacturing plants in the Peoples Republic of China and in 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 continually monitors events in
the region and takes steps to reduce the risk of uncertainty when possible.
A material portion of the Company's liquid assets are offshore and, in
general, are unlikely to be repatriated to the U.S. As has been the case
in recent years, management expects that a significant portion of the
Company's opportunities for growth in the coming years will be outside of
the U.S. Accordingly, the Company's policy with regard to foreign earnings
is generally to invest them abroad. If such earnings were repatriated,
significant tax liabilities could be incurred in the U.S. In the event
that a substantial amount of foreign earnings were repatriated, the related
tax liabilities could have a material unfavorable impact on the Company's
liquidity and cash flow.
Results of Operations
1996 and 1995
Revenues
Consolidated sales for the Company in 1996 were $274.1 million, an
increase of 55.4% over 1995. The Electronic Components Segment, which
includes Pulse (acquired in September 1995), experienced significant demand
from its customers in the computer, local area network (LAN) and
telecommunication markets during the first half and the fourth quarter of
1996. However, as expected, the sales level in this Segment declined
somewhat in the third quarter reflecting the lower order rate in the second
and part of the third quarter. The decline in orders (occurring primarily
in the United States and to a lesser extent in Asia) was the result of
widely observed inventory level adjustments and project deferrals occurring
within the industry. Order entry for this Segment improved significantly
during the fourth quarter of the year.
Sales of the Metallurgical Products Segment were significantly higher
than the sales of the Segment in 1995. The higher level of sales in 1996
reflected Doduco's sales of approximately $22.7 million for the two-month
period subsequent to the acquisition. Volume increases at AMI more than
offset a decrease in sales at Chace relative to 1995. Higher market prices
for metals, which are factored in customer prices for certain products of
the Segment, also contributed to the sales increase. In 1996, more
favorable domestic economic conditions affecting the manufacturers of
circuit protection, power control and power distribution equipment
continued to have a significant impact on the sales volume of the Segment.
Total sales for the Test & Measurement Products Segment in 1996 were
lower than the prior year as a result of the sale of the Products Division
during the first quarter of 1996. The sales of that Division were
approximately $4.9 million for the full year of 1995. Without the effect
of the Products Division sales, the Test & Measurement Products Segment
experienced a sales increase in 1996. This increase included higher sales
of systems which provide for automatic testing within manufacturing
processes.
Page 14 of 43
Cost of Sales and Operating Expenses
During 1996, the Company's consolidated gross margin was 33.5%, an
increase from 31.5% in 1995. The higher gross margin was primarily the
result of improved manufacturing efficiencies and higher shipments within
the Electronic Components Segment. The relocation of a major portion of
that Segment's manufacturing capacity from Taiwan to the Philippines
contributed positively to the improved margins during 1996. Total costs of
approximately $2.1 million associated with that relocation were included in
general and administrative expenses during 1996. The majority of these
costs were incurred during the first half of 1996 and the realization of
the cost savings began during the last half of the year. Manufacturing
efficiencies in Pulse's operations in China, which had begun to be realized
during the second half of 1995, continued during 1996.
The significant improvement in the Metallurgical Products Segment also
contributed to the improved gross margin and operating performance in 1996
as this Segment successfully addressed the increased price competition and
raw material cost increases which negatively impacted the last half of
1995. As a result, overhead spending was reduced and break-even points
lowered. These actions had a favorable impact on the profitability of the
Segment, particularly with the higher volume in 1996.
Earnings of the Test & Measurement Products Segment, including the
gain realized on the sale of the Products Division, increased significantly
from the comparable prior year period. Without that gain, the results of
the Segment in 1996 were lower than in the prior year as the prior year
included a full year of the operating profit of the Products Division. The
results of Lloyd Instruments during 1996 included certain one time
reorganization expenses incurred in Germany, primarily during the first
quarter of 1996. These expenses offset the favorable impact of more
service and repair work in 1996, which typically has a higher gross margin
than sales of products.
Total selling, general and administrative expenses for 1996 were $61.7
million compared to $40.2 million for 1995. This represents an increase of
53.5%. The increase included the effect of the acquisition of Pulse, as
well as approximately $2.1 million of restructuring charges associated with
the relocation of a portion of the manufacturing capacity of the Company's
Electronic Components Segment from Taiwan to the Philippines.
Administrative costs also reflected the higher spending required to support
the higher level of sales and increased complexity of the Company.
Research, development & engineering expenses ("RD&E") were $10.5
million during 1996 and are included in general and administrative
expenses. RD&E was $6.6 million, $2.4 million, and $1.5 million for the
Electronic Components Segment, the Metallurgical Products Segment and the
Test & Measurement Products Segment, respectively. These amounts include
expenditures for new product development and for product and process
improvement. The Company stresses the importance of RD&E spending and
believes that it is critical to the future growth and business prospects of
each Segment.
Interest
Interest expense of approximately $1.2 million slightly exceeded
interest income of approximately $1.0 million during the year. In 1995,
interest expense was $1.4 million and interest income was $0.4 million.
Prior to the acquisition of Doduco during the fourth quarter of 1996, the
level of debt outstanding had been reduced significantly from the amount
outstanding at the end of 1995. The cash flow that was generated also
provided the Company with higher levels of cash reserves which are invested
in short-term deposit instruments. The earnings on these investments
provides interest income and reduces the amount of net interest expense
incurred by the Company. In connection with the acquisition of Doduco and
the initial working capital requirements of the acquired business,
additional borrowings occurred late in 1996. In general, the interest
rates that the Company has received on its credit facilities are quite
favorable. The rate on the term debt balance of $8.0 million at December
31, 1996 is fixed at 6.65%. The Company's other credit facilities have
variable interest rates.
Page 15 of 43
Income Taxes
The effective income tax rate for 1996 was 34.3%, a decrease from the
effective rate of 35.8% during 1995. The decrease was caused by
proportionately more taxable income earned by the Company's offshore
operating units, which generally incur lower tax rates than those
experienced by the Company's domestic operations. Although a significant
portion of the Company's manufacturing facilities are located offshore, the
consolidated effective income tax rate is affected by many non-recurring
items. Certain reorganization expenses incurred by Lloyd Instruments
during the year are not presently deductible for income tax purposes.
Additionally, the sale of the Product Division during the first quarter of
1996 provided a significant gain for U.S. tax purposes. The Doduco
operations will likely produce profits in higher tax rate jurisdictions and
the Company believes that its 1997 effective tax rate will exceed that
experienced in 1996.
In March 1995, the Financial Accounting Standards Board issued
Financial Accounting Standard No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, ("FAS121").
FAS121 requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amounts. FAS121 has not had a material impact on
the Company's financial statements.
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.
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, were 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 slightly from
$76.5 million in 1994. A sales decrease at AMI exceeded a sales increase
at 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 focused
significant attention on attaining increased manufacturing efficiencies and
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.
Page 16 of 43
In the Test & Measurement Products Segment, sales increases at
Chatillon and Lloyd Instruments 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. 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 and Operating Expenses
In 1995, the Company's gross margin increased 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.
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 included
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.
Income Taxes
The Company's effective income tax rate declined to 35.8% in 1995 from
39.0% 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.
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 17 of 43
PART III
--------
CROSS REFERENCE INDEX
---------------------
FORM 10-K
ITEM NUMBER AND CAPTION INCORPORATED MATERIAL
----------------------- ---------------------
ITEM 10 DIRECTORS, EXECUTIVE REGISTRANT'S DEFINITIVE
OFFICERS, PROMOTERS & PROXY STATEMENT
CONTROL PERSONS
ITEM 11 EXECUTIVE COMPENSATION REGISTRANT'S DEFINITIVE
PROXY STATEMENT
ITEM 12 SECURITY OWNERSHIP OF REGISTRANT'S DEFINITIVE
CERTAIN BENEFICIAL OWNERS PROXY STATEMENT
AND MANAGEMENT
ITEM 13 CERTAIN RELATIONSHIPS AND REGISTRANT'S DEFINITIVE
RELATED TRANSACTIONS 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, 1996 and 1995
Consolidated Statements of Earnings - Years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years ended December 31,
1996, 1995 and 1994
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 November 8, 1996 and
a report on Form 8-K/A on January 7, 1997, both of which
pertained to the acquisition of Doduco on October 31, 1996.
(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 18 of 43
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 19, 1997
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 and Secretary
(Principal Accounting Officer)
Date March 19, 1997
Date March 19, 1997
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 19, 1997 Date March 19, 1997
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 19, 1997 Date March 19, 1997
By /s/Roy E. Hock By /s/Albert Thorp, III
----------------------- ------------------------------
Roy E. Hock Albert Thorp, III
Director Vice President - Finance and Chief
Financial Officer
Date March 19, 1997 (Principal Financial Officer)
Date March 19, 1997
By /s/Graham Humes
-----------------------
Graham Humes
Director
Date March 19, 1997
By /s/Edward M. Mazze
-----------------------
Edward M. Mazze
Director
Date March 19, 1997
Page 19 of 43
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements
--------------------
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Earnings - Years ended December 31, 1996, 1995
and 1994
Consolidated Statements of Cash Flows - Years ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
Financial Statement Schedules
-----------------------------
Schedule II - Valuation and Qualifying Accounts
Page 20 of 43
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, 1996 and 1995, and
the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1996 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 Peat Marwick LLP
Philadelphia, Pennsylvania
February 28, 1997
Page 21 of 43
TECHNITROL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
In thousands of dollars, except for share data
Assets 1996 1995
------ ---- ----
Current Assets:
Cash and cash equivalents $ 43,531 $ 13,894
Trade receivables 46,537 33,431
Inventories 48,028 32,962
Prepaid expenses and other current assets 4,530 2,327
-------- --------
Total current assets 142,626 82,614
Property, plant and equipment 96,792 81,063
Less accumulated depreciation 42,654 35,935
-------- --------
Net property, plant and equipment 54,138 45,128
Deferred income taxes 6,834 4,132
Excess of cost over net assets acquired, net 13,851 10,957
Other assets 898 2,109
-------- --------
$218,347 $144,940
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt $ 2,024 $ 2,023
Notes payable 2,911 --
Accounts payable 11,694 8,359
Accrued expenses 51,210 28,990
-------- --------
Total current liabilities 67,839 39,372
Long-term liabilities:
Long-term debt, excluding current installments 39,677 15,102
Other long-term liabilities 7,203 5,705
Minority interest in subsidiary 38 --
Commitments and contingencies (Note 8)
Shareholders' equity:
Common stock: 30,000,000 shares
authorized; 15,974,918 and 7,835,869
outstanding in 1996 and 1995,
respectively; $.125 par value per
share and additional paid in capital 40,638 38,130
Retained earnings 64,339 48,101
Other (1,387) (1,470)
-------- --------
Total shareholders' equity 103,590 84,761
-------- --------
$218,347 $144,940
======== ========
See accompanying Notes to Consolidated Financial Statements.
Page 22 of 43
TECHNITROL, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended December 31, 1996, 1995 and 1994
In thousands, except per share data
1996 1995 1994
---- ---- ----
Net sales $274,075 $176,419 $146,444
Cost of sales 182,330 120,765 103,096
-------- -------- --------
Gross profit 91,745 55,654 43,348
Selling, general and administrative expenses 61,720 40,165 30,787
-------- -------- --------
Operating profit 30,025 15,489 12,561
Other income (expense):
Interest income 997 374 140
Interest expense (1,165) (1,383) (1,130)
Gain on sale of Products Division assets 1,471 -- --
Other, net (312) 61 (182)
-------- -------- --------
991 (948) (1,172)
-------- -------- --------
Earnings before income taxes 31,016 14,541 11,389
Income taxes (10,651) (5,201) (4,445)
Minority interest in net loss of subsidiary 62 -- --
-------- -------- --------
Net earnings $ 20,427 $ 9,340 $ 6,944
======== ======== ========
Earnings per share $ 1.27 $ .72 $ .58
======== ======== ========
Average outstanding common and equivalent
shares 16,096 13,076 12,030
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
Page 23 of 43
TECHNITROL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995, and 1994
In thousands of dollars
Cash flows from operating activities: 1996 1995 1994
---- ---- ----
Net earnings $20,427 $ 9,340 $ 6,944
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 9,123 6,245 5,271
Provision (benefit) for deferred taxes (2,702) (1,098) (680)
Gain on sale of Products Division assets (1,471) -- --
Changes in assets and liabilities net
of effect of acquisitions and
divestitures:
(Increase) decrease in accounts
receivable (10,777) 1,346 (4,626)
(Increase) decrease in inventories 6,991 (2,769) (2,482)
Increase in accounts payable 2,634 1,216 1,082
Increase in accrued expenses 1,734 1,704 4,967
Other, net (332) 2,195 (857)
------- ------- -------
Net cash provided by operating
activities 25,627 18,179 9,619
------- ------- -------
Cash flows from investing activities:
Proceeds from the sale of Products
Division assets 3,671 -- --
Acquisitions: Doduco and Netwave in
1996, Pulse in 1995, and Fil-Mag
in 1994 (11,677) (5,872) (8,805)
Capital expenditures, exclusive of
acquisitions (7,775) (5,864) (4,429)
Proceeds from sale of property, plant
and equipment 466 158 282
------- ------- -------
Net cash used in investing activities (15,315) (11,578) (12,952)
------- ------- -------
Cash flows from financing activities:
Principal payments on long-term debt (9,023) (7,022) (1,035)
Net borrowings (repayments) of short
term debt 520 (756) (2,504)
Proceeds of long-term borrowings 30,233 9,000 10,000
Dividends paid (3,182) (2,534) (2,255)
Proceeds from exercise of stock options 2,090 -- --
Purchase of Technitrol stock (1,022) -- --
Contributions from minority interest
in subsidiary 100 -- --
------- ------- -------
Net cash provided by (used in)
financing activities 19,716 (1,312) 4,206
------- ------- -------
Net effect of exchange rate changes
on cash (391) (111) 122
Net increase in cash and cash equivalents 29,637 5,178 995
Cash and cash equivalents at beginning
of year $13,894 8,716 7,721
------- ------- -------
Cash and cash equivalents at end of year $43,531 $13,894 $ 8,716
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
Page 24 of 43
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 ($34,391,000 at
December 31, 1996 and $11,118,000 at December 31, 1995). This inventory
consists primarily of precious metals which are used in the Company's
electrical 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 related to acquisitions within the Electronic
Components Segment and is 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 undiscounted 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 share
amounts and earnings per share have been restated to reflect a two-for-one
stock split effective on February 28, 1997.
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 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. For entities using the 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.
(continued)
Page 25 of 43
2
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
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 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.
As a result of the Company's worldwide operating activities, it is
exposed to changes in foreign currency exchange rates which affect its
results of operations and financial condition. Periodically, the Company
enters into forward foreign exchange contracts with varying terms. These
contracts, when used, hedge certain foreign currency denominated
receivables and payables and foreign currency commitments. Gains and
losses on these contracts are deferred and recognized as part of the cost
of the underlying transaction being hedged. There were no such contracts
open at December 31, 1996 or 1995.
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 and Divestitures
Acquisitions
Doduco GmbH: On October 31, 1996, the Company acquired certain
operating assets of the metallurgical business of Doduco GmbH located in
Germany, as well as all of the capital stock of Doduco Espana located in
Madrid, Spain. Doduco produces electrical contacts, contact materials,
thermostatic bimetals, and precision contact sub-assemblies made from
precious and non-precious metals by wrought as well as powdered
metallurgical processes. Its contact producing operations are complemented
by broad capabilities in electroplating and precious metals refining.
(continued)
Page 26 of 43
3
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(2) Acquisitions and Divestitures, continued
The assets purchased consist of real property in Pforzheim and
Sinsheim, Germany and Madrid, inventories, fixed assets and intangibles.
The liabilities assumed consisted of vacation and bonus payments due to
employees. The acquisition of Doduco was accounted for by the purchase
method of accounting. The purchase price for the assets acquired was
approximately $20.5 million, including transaction expenses. In addition,
the Company entered into consignment-type leases with third party leasing
companies for approximately $19.0 million of precious metals previously
owned by Doduco and used in its operations. The conditions of the leases
are essentially the same as those of the leases previously in effect
elsewhere within the Company's Metallurgical Products Segment. The fair
value of the net assets acquired approximated $96 million. The purchase
price was funded primarily by bank credit provided under a $30.0 million
multi-currency temporary acquisition facility which was substantially
refinanced with a $40.0 million permanent multi-currency facility. The
total purchase price is subject to adjustment as the expenses and details
of the transaction are finalized.
Doduco experienced significant financial difficulty for a number of
years and entered into bankruptcy during June of 1996 and Receivership in
August of 1996. The assets of Doduco which were acquired by the Company
were acquired from a Receiver and, prior to the Company's purchase of those
assets, other isolated assets and product lines of Doduco were sold or
abandoned by Doduco or the Receiver. In addition, significant
restructuring occurred after December 31, 1995 which related to both the
product lines acquired by the Company as well as those otherwise disposed
of or abandoned by the Receiver. The net assets acquired by the Company
relate to product lines and operations which were not operated as a
separate business entity but rather were an integral part of Doduco GmbH &
Co. and its subsidiary, Doduco Espana. As a result, management of the
Company does not believe that the following unaudited pro forma financial
information, which assumes that Doduco was acquired on January 1, 1995, 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, 1996 Dec. 31, 1995
------------- -------------
Sales $407,475 $352,311
Net earnings $23,567 $10,152
Earnings per share $1.46 $.78
Netwave Technologies, Inc.: On August 30, 1996, a majority-owned
subsidiary of the Company, Netwave Technologies, Inc. ("NTI"), completed
the purchase of all of the wireless LAN business assets of Xircom, Inc.
The Company's ownership interest of NTI is currently 90%, however its
interest is expected to decrease to approximately 80% as additional
contributions are received from minority investors. The fair value of the
assets acquired, which included equipment, inventory and certain
intangibles, is not material to the Company's financial position.
Pulse Engineering, Inc.: On September 29, 1995, the Company completed
the acquisition of Pulse Engineering, Inc. ("Pulse"). Pulse, headquartered
in San Diego, California, and with operations in Hong Kong, the People's
Republic of China, Taiwan, the Philippines and Ireland, designs,
manufactures and markets electronic components and modules primarily for
manufacturers of local area networks and telecommunications systems.
(continued)
Page 27 of 43
4
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(2) Acquisitions and Divestitures, continued
The total purchase price approximated $60.6 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
$65.5 million and $17.4 million, respectively. The excess of cost over net
assets acquired approximated $12.5 million reflecting final purchase price
allocation adjustments. Approximately 3,570,000 shares of Technitrol
common stock at a fair market value of $8.19 per share were issued to
former holders of Pulse common stock. (These amounts are restated to
reflect the two for one stock split on February 28, 1997). 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 538,000 shares of Technitrol common stock were issuable upon
exercise of such options and, except for approximately 66,000 options which
were not yet vested, all assumed options were exercisable immediately at
prices ranging from $.87 to $7.81. At December 31, 1996, there were
180,844 options which remained outstanding. The options have various
expiration dates, the latest of which is in April 2001.
In conjunction with the Pulse acquisition, the Company established a
credit facility with a group of banks which authorized Technitrol to borrow
up to $50.0 million on an unsecured basis. The Company initially used
approximately $18.0 million of this credit facility to refinance existing
indebtedness and, separately, approximately $4.0 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 $45.0 million
including $10.0 million under a fixed rate term loan and a $35.0 million
variable-rate revolving credit facility.
The acquisition was accounted for by the purchase method of
accounting. Had Pulse been acquired on January 1, 1995, unaudited
consolidated pro forma results of operations would have been (in thousands,
except for earnings per share):
Year Ended
Dec. 31, 1995
-------------
Sales $252,104
Net earnings $16,825
Earnings per share $2.10
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.
Divestitures
Products Division: On February 27, 1996, the Company sold certain
assets of its Products Division to an unrelated party. As a result of the
sale, the Company discontinued its production and marketing of document
counters and dispensers, the sales of which approximated $4.9 million in
1995. The consideration received approximated $3.7 million and the pre-tax
gain of approximately $1.5 million that was realized on the sale (after
recognition of related costs and expenses) was included in earnings for the
quarter ended March 31, 1996.
(continued)
Page 28 of 43
5
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(2) Acquisitions and Divestitures, continued
Test & Measurement Products Segment: In January 1997, the Board of
Directors determined that it would be in the best long-term interest of the
shareholders to divest the Test & Measurement Products Segment. Although
this Segment constitutes a very valuable asset and has contributed
positively to the Company's earnings and would be expected to continue to
do so in the future, the Company believes that long-term shareholder value
is best served by redeploying the capital invested in this Segment into the
Company's other two segments because of their rapid growth and market
leadership positions. The Company has retained an investment banking firm
to advise it in this matter; however, a formal divestiture plan has not
been adopted, nor have final decisions been made regarding the expected
method of sale or the timing of the sale. The Company expects to realize a
gain on the proposed sale; however, the sales price has not been determined
and the Company may continue to operate the Segment if appropriate value
cannot be obtained. As a result of uncertainty surrounding the eventual
divestiture, the Segment is reported as a part of the continuing operations
of the Company in these financial statements. The net assets of the
Segment at December 31, 1996 consist primarily of accounts receivable,
inventories and fixed assets, net of accounts payable and other accrued
operating expenses.
(3) Financial Statement Details
The following provides details for certain financial statement
captions at December 31, 1996 and 1995:
1996 1995
---- ----
Inventories
Finished goods $16,513 $12,926
Work in progress 14,641 8,888
Raw materials and supplies 16,874 11,148
------- -------
$48,028 $32,962
======= =======
Property, plant and equipment, at cost
Land $ 3,714 $ 2,152
Buildings and improvements 25,036 23,026
Machinery and equipment 68,042 55,885
------- -------
$96,792 $81,063
======= =======
Accrued expenses
Income taxes payable $ 9,853 $ 7,082
Dividends payable 799 784
Accrued compensation 5,759 5,980
Current portion of accrued pension expense 8 2,321
Accrual for purchase of Doduco real estate 7,720 --
Other accrued expenses 27,071 12,823
------- -------
$51,210 $28,990
======= =======
(continued)
Page 29 of 43
6
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(4) Notes Payable and Long-term Debt
The Company's majority-owned subsidiary, Netwave Technologies, Inc.
has established a $3.0 million line of credit with a domestic bank. The
interest rate on this facility is variable at LIBOR + 5/8. The line of
credit is a demand discretionary line, and, accordingly, does not have an
expiration date. At December 31, 1996, a total of $520,000 was outstanding
under the line of credit, which borrowings are expected to increase in 1997
to the full extent of the facility. The Company has guaranteed the
borrowings under this facility.
At December 31, 1996, the Company's subsidiary in Spain, which was
acquired in connection with the Doduco acquisition on October 31, 1996, had
the equivalent of approximately $2.4 million outstanding under various
short-term local credit facilities in Spain. The interest rates on these
facilities vary from 8.0% to 9.85% and all borrowings under the facilities
were repaid in 1997.
Long-term debt was as follows (in thousands):
1996 1995
---- ----
Bank Loans
Fixed rate term loan (6.65%) due December 29, 2000 $ 8,000 $10,000
Variable rate revolving credit facility with $35.0
million maximum draw, due September 29, 1998 6,439 7,000
Variable-rate (LIBOR plus 0.625%) multi-currency
bank loan facility with $40.0 million maximum
draw, due December 31, 2001 (4.75% rate at
December 31, 1996) 24,028 --
Long-term debt in Spain (denominated in pesetas)
incurring interest at 8.4% and due on
October 24, 2003 3,132 --
------- -------
Total bank loans 41,599 $17,000
Mortgage Notes, secured by mortgages on land,
buildings, and certain equipment:
4.5% mortgage notes, due in monthly installments
until 2000 102 125
------- -------
Total long-term debt 41,701 17,125
Less current installments 2,024 2,023
------- -------
Long-term debt excluding current installments $39,677 $15,102
======= =======
At the Company's option, interest on the revolving credit facility may
be based on the prime rate or on the LIBOR rate plus 0.625%. At December
31, 1996, the outstanding balance of the equivalent of $6.4 million
incurred interest under the LIBOR rate alternative (then 3.9375%). At
December 31, 1995, $5.0 million was outstanding under the prime rate (then
8.5%) and $2.0 million was outstanding under the LIBOR rate alternative
(then 6.5%). Outstanding borrowings under the Company's multi-currency
facility consist entirely of Deutsche marks.
(continued)
Page 30 of 43
7
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(4) Notes Payable and Long-term Debt, continued
Principal payments due within the next five years are as follows (in
thousands):
1997 $ 2,024
1998 8,458
1999 2,026
2000 2,027
2001 23,802
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.
(5) Research, Development and Engineering Expenses
Research, development and engineering expenses ("RD&E") are
included in selling, general and administrative expenses and were $10.5
million, $5.8 million, and $4.6 million in 1996, 1995, and 1994,
respectively. 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
$7.2 million, $4.4 million, and $3.5 million in 1996, 1995, and 1994,
respectively.
(6) Restructuring Charges
Restructuring and related costs were recognized in accordance with
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." During the second
quarter of 1996, the Company initiated a restructuring plan aimed at
reducing the costs of manufacturing within its Electronic Components
Segment. Accordingly, reserves were established for employee separation
costs related to the relocation of a majority of the production capacity of
the Company's production facility in Taiwan to the Company's production
facility in the Philippines. Charges of $2,108,000 were included in
selling, general and administrative expenses for 1996. Substantially all
required payments were made prior to December 31, 1996 and no material
provision existed at the end of the year. A total of 263 direct and 46
indirect employees were included in the restructuring plan.
(7) Income Taxes
Earnings before income taxes were as follows (in thousands):
1996 1995 1994
---- ---- ----
Domestic $ 8,350 $ 1,941 $ 8,406
Non U.S. 22,666 12,600 2,983
------- ------- -------
Total $31,016 $14,541 $11,389
======= ======= =======
(continued)
Page 31 of 43
8
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(7) Income Taxes, continued
Income tax expense was as follows (in thousands):
1996 1995 1994
---- ---- ----
Current:
Federal $ 7,310 $ 2,019 $ 2,837
State and local 1,029 651 898
Non U.S. 5,014 3,629 1,390
------- ------- -------
13,353 6,299 5,125
Deferred (benefit) (2,702) (1,098) (680)
------- ------- -------
$10,651 $ 5,201 $ 4,445
======= ======= =======
For the year ended December 31, 1996, approximately $1,545,000 was
credited to Additional Paid-In Capital to record 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:
1996 1995 1994
Statutory Federal income tax rate 35% 34% 34%
Increase(decrease) resulting from:
Tax exempt earnings of subsidiaries
in Puerto Rico (2) (2) (5)
State and local income taxes,
net of federal benefit 2 3 6
Non-deductible expenses and
other foreign income subject
to U.S. income tax 5 1 1
Foreign (7) (3) (1)
Other, net 1 3 4
--- --- ---
Effective tax rate 34% 36% 39%
=== === ===
(continued)
Page 32 of 43
9
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(7) Income Taxes, continued
Deferred tax assets and liabilities included the following (in
thousands):
1996 1995
---- ----
Assets:
Inventories, principally due to
additional costs valued for tax
purposes $ 746 $ 596
Vacation pay and other compensation 868 396
Pension expense 1,288 573
Stock awards 853 845
Accrued liabilities 3,438 2,187
Other 363 97
------ ------
Total deferred tax assets $7,556 $4,694
====== ======
Liabilities:
Plant and equipment, principally due
to differences in depreciation $ 305 $ 109
Other 417 453
------ ------
Total deferred tax liabilities $ 722 $ 562
------ ------
Net deferred tax asset $6,834 $4,132
====== ======
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.
(8) 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 for the years ended December 31, 1996, 1995 and 1994 was
$3,306,000, $1,795,000, and $1,483,000, respectively. The aggregate
minimum rental commitments under non-cancelable leases in effect at
December 31, 1996 are as follows (in thousands):
Year ending
December 31
-----------
1997 $ 2,764
1998 2,103
1999 1,844
2000 1,537
2001 1,266
Thereafter 1,426
-------
$10,940
=======
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, the Company is subject to
various lawsuits, claims and proceedings which arise in the ordinary course
of its business. 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
(continued)
Page 33 of 43
10
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(8) Commitments and Contingencies, continued
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.
(9) Shareholders' Equity
Changes in the components of shareholders' equity were as follows (in
thousands, except share amounts):
Common stock and
additional
paid-in capital
--------------------
Retained
Shares Amount earnings Other
------ ------ -------- -----
Balance at December 31, 1993 1,995,489 $ 4,176 $37,488 $ 1,370
Stock award, net of forfeitures 10,975 361 54 414
Compensation under Restricted Stock Plan -- -- -- (339)
Tax benefit of stock-based compensation items -- 43 -- --
200% stock dividend 4,014,988 745 (745) --
Net change in cumulative translation adjustment -- -- -- (405)
Net earnings -- -- 6,944 --
Dividends declared ($.188 per share) -- (2,269) -- --
---------- ------- ------- -------
Balance at December 31, 1994 6,021,452 $ 5,325 $41,472 $ 1,040
========== ======= ======= =======
Stock issued in connection with the
acquisition of Pulse 1,785,452 29,232 -- --
Stock options assumed -- 3,105 -- --
Stock options exercised 4,420 69 -- --
Stock award, net of forfeitures 24,545 339 35 375
Compensation under Restricted Stock Plan -- -- -- (238)
Tax benefit of stock-based compensation items -- 60 -- --
Net change in cumulative translation adjustment -- -- -- 293
Net earnings -- -- 9,340 --
Dividends declared ($.198 per share) -- -- (2,746) --
---------- ------- ------- -------
Balance at December 31, 1995 7,835,869 $38,130 $48,101 $ 1,470
========== ======= ======= =======
Stock options exercised 174,575 550 -- --
Purchase of common stock (36,600) (5) (1,017) --
Stock award, net of forfeitures 13,615 418 19 437
Compensation under Restricted Stock Plan -- -- -- (347)
Tax benefit of stock-based compensation items -- 1,545 -- --
Net change in cumulative translation adjustment -- -- -- (173)
Net earnings -- -- 20,427 --
Dividends declared ($.20 per share) -- -- (3,191) --
Two-for-one stock split declared in
February 1997 7,987,459 -- -- --
---------- ------- ------- -------
Balance at December 31, 1996 15,974,918 $40,638 $64,339 $ 1,387
========== ======= ======= =======
The cumulative translation adjustment was $600,000 and $773,000 at December
31, 1996 and 1995, respectively.
(continued)
Page 34 of 43
11
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(9) Shareholders' Equity, (continued)
Since the Company decided to formally retire all of the shares of its
own stock purchased in 1996 and in prior years, the cost of such purchases
has been charged against the common stock and retained earnings accounts.
Previously such cost was reflected as an aggregate deduction from
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 include approximately $2,007,000
which has been reserved as an appropriation in accordance with the laws of
the Peoples Republic of China (PRC). This amount, which is based on the
earnings of the Company's subsidiary in the PRC, may not be available for
distribution to the U.S. parent company or its shareholders.
During 1996, the Company adopted 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 $125, 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 are 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.
(10) 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.
continued)
Page 35 of 43
12
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(10) Employee Benefit Plans, continued
Pension expense was as follows (in thousands):
1996 1995 1994
---- ---- ----
Principal defined benefit plans $1,024 $1,449 $1,310
Multi-employer and other non U.S. plans 61 210 361
------ ------ ------
$1,085 $1,659 $1,671
====== ====== ======
The expense for the principal defined benefit pension plans include
the following components (in thousands):
1996 1995 1994
---- ---- ----
Service cost - benefits earned
during the period $1,417 $1,369 $1,286
Interest cost on projected
benefit obligation 1,465 1,319 1,206
Actual return on plan assets (2,714) (3,867) (124)
Net amortization and deferral 856 2,628 (1,058)
------ ------ ------
Net periodic pension cost $1,024 $1,449 $1,310
====== ====== ======
The financial status of the principal defined benefit plans at
December 31, was as follows (in thousands):
1996 1995
Actuarial present value of obligations:
Accumulated benefit obligation (including vested
benefits of $12,805 in 1996 and $11,990 in 1995) $13,477 $13,653
------- -------
Projected benefit obligation for services to date 19,270 20,404
Plan assets at fair value 22,303 20,261
------- -------
Plan assets in excess of (less than) projected
benefit obligation 3,033 (143)
Unrecognized net (gain) from past experience
different from that assumed (5,372) (3,661)
Prior service costs not yet recognized 506 559
Unrecognized net obligation at January 1, 1987
being recognized over 18 years 28 31
------- -------
Accrued pension costs at December 31 $(1,805) $(3,214)
======= =======
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 1996 and 1995 were as
follows:
Discount rates 7.0% to 7.25%
Annual compensation increases 4.75% to 7.0%
Expected long-term rates of return on plan assets 7.0% to 9.0%
(continued)
Page 36 of 43
13
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(10) Employee Benefit Plans, continued
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 $462,000,
$319,000, and $165,000 in 1996, 1995, and 1994, 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 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 (adjusted for the two for one stock split on February 28,
1997):
Available to
be Granted
------------
Shares authorized 1,200,000
Awarded during years prior to 1996, net of cancellations (804,110)
---------
Balance at December 31, 1995 395,890
Awarded during 1996, net of cancellations (27,230)
---------
Balance available at December 31, 1996 368,660
=========
During the years ended December 31, 1996, 1995 and 1994, the Company
issued to employees, net of cancellations, incentive compensation shares
having an approximate fair value at date of issue of $438,000, $375,000 and
$414,000, 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 $976,000 in 1996, $1,517,000 in 1995, and $994,000 in
1994.
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, 1996, 180,844 options remained outstanding. No additional
options are expected to be granted under the assumed plans.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("FAS123"). FAS 123 requires, among other things,
additional disclosures relating to stock options granted on or after
January 1, 1995. 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
FAS 123.
(continued)
Page 37 of 43
14
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(12) Supplementary Information
Charged directly to costs and expenses (in thousands):
1996 1995 1994
---- ---- ----
Depreciation $7,895 $5,828 $5,016
Amortization of intangible assets 1,228 417 255
Advertising 1,573 1,118 1,159
Repairs and maintenance 4,111 2,540 1,936
Bad debt expense 175 109 114
Cash payments made (in thousands):
Income taxes $9,205 $3,559 $3,663
Interest 1,106 1,428 1,058
(13) Segment Information
The "Business 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) Quarterly Financial Data (Unaudited)
Quarterly results of operations (unaudited) for 1996 and 1995 are
summarized as follows (in thousands, except per share data):
Quarter ended
-------------
Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- -------
1996:
Net sales $62,852 $68,028 $59,053 $84,142
Gross profit 21,068 23,867 20,043 26,767
Net earnings 5,466 5,236 4,270 5,455
Net earnings per share .34 .33 .27 .34
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 .14 .17 .14 .25
Earnings per share amounts have been restated to reflect a two-for-one
stock split effective on February 28, 1997.
Page 38 of 43
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, 1996:
Reserve for obsolete and
slow-moving inventory $3,012 $2,534 $(875) $ -- $4,671
====== ====== ===== ====== ======
Year ended
December 31, 1995:
Reserve for obsolete and
slow-moving inventory $ -- $441 $(384) $2,955 (1) $3,012
====== ====== ===== ====== ======
(1) Amount represents the acquired reserve of Pulse. The additions and
deductions to the reserve in 1995 represent Pulse's activity subsequent
to its acquisition by the Company.
Doubtful accounts are written-off as identified.
Page 39 of 43
EXHIBIT INDEX
DOCUMENT
3. (a) Articles of Incorporation Incorporated by reference to
Form 10-K for the year ended
December 31, 1995
(b) By-laws Incorporated by reference to
Form 10-K for the year ended
December 31, 1995
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 41
21. Subsidiaries of Registrant Page 42
23. Consent of Certified Public
Accountants Page 43
27. Financial Data Schedule Electronic Filing Only
Page 40 of 43