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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, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______________ to
_______________
Commission File No. 1-5375
TECHNITROL, INC.
(Exact name of registrant as specified in Charter)
PENNSYLVANIA 23-1292472
(State of Incorporation) (IRS Employer Identification Number)
1210 Northbrook Drive, Suite 385, Trevose, Pennsylvania 19053
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 215-355-2900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each Exchange on which registered
------------------- -----------------------------------------
Common Stock
par value $.125 per share New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days.
YES X NO
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates as of February
26, 1999 is $311,791,000 computed by reference to the closing price on the New
York Stock Exchange on such date.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of February 26, 1999.
Number of shares outstanding
Title of each class February 26, 1999
------------------- -----------------
Common stock 16,170,406
par value $.125 per share
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
DOCUMENT REFERENCE
- -------- ---------
The Registrant's definitive Proxy Statement, Part III
dated March 26, 1999, to be used in connection with Page 30 of 64 pages
Registrant's 1999 Annual Meeting of Shareholders
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Page 1 of 64
Part I
Item 1 Business
General
Technitrol, Inc. is a global manufacturer of electronic and
metallurgical components. We incorporated in Pennsylvania on April 10, 1947.
We operate two business segments: the Electronic Components Segment and
the Metallurgical Components Segment. We refer to these segments as the ECS and
the MCS. Each segment is managed by a President who reports to our Chief
Executive Officer. Prior to June 4, 1997, we operated a third segment, the Test
& Measurement Products Segment. We sold this segment to focus our resources on
designing, manufacturing and marketing electronic and metallurgical components.
Electronic Components Segment
Our Electronic Components Segment provides a variety of magnetics-based
components, miniature chip inductors and modules. These components modify or
filter electrical signals. They are used primarily in local area network,
internet connectivity, telecommunication and power-conversion products. We
manufacture these products in the United States, Ireland, France, Poland,
Malaysia, Thailand, the Philippines and the People's Republic of China. We
sometimes refer to the People's Republic of China as the PRC.
In 1993, we adopted a strategy of expanding our electronic components
business through a combination of internal growth and acquiring companies in the
local area network, telecommunications and power conversion markets, each of
which was identified as growing rapidly. Our acquisitions include:
* The Fil-Mag companies - In 1994, we acquired the Fil-Mag companies
with manufacturing locations in Taiwan and the Philippines.
* Pulse Engineering, Inc. - In 1995, we acquired Pulse Engineering,
Inc., with manufacturing locations in Ireland and China. The
addition of Pulse significantly increased the size of our business.
* The magnetic components business of Northern Telecom, Ltd. - We
completed this acquisition on November 30, 1997. The primary assets
we purchased included manufacturing plants in Malaysia and Thailand
and a design-engineering group in Canada. These assets serve
primarily the telecommunication and power markets.
* FEE Technology, S.A. - We purchased FEE on July 3, 1998. FEE
designed and manufactured magnetic components for telecommunications
and power conversion equipment. With the purchase of FEE, we
acquired manufacturing facilities in France, Thailand and Poland. We
subsequently closed FEE's Thailand facility.
* GTI Corporation - We completed the acquisition of GTI and its
subsidiary, Valor Electronics, on November 16, 1998. Valor designed
and manufactured magnetics-based components for signal processing
Page 2 of 64
and power transfer functions primarily for local area network
products and, to a much lesser extent, telecommunication and
power-conversion products. Their manufacturing facilities were
located in the People's Republic of China and the Philippines. We
closed Valor's Philippine facility and we are in the process of
consolidating Valor's PRC facility into our facilities in the PRC.
After the acquisition of Pulse in 1995, we consolidated our electronic
component businesses to form a unified business throughout the world. This
unified business operates under the Pulse name. As mentioned above, we are in
varying stages of integrating our most recent acquisitions into Pulse.
Metallurgical Components Segment
Our Metallurgical Components Segment manufactures:
* electrical contacts and assemblies;
* contact materials;
* thermostatic bimetals;
* clad metal products; and
* precision contact subassemblies.
We sell these metallurgical components to a wide range of industrial
and consumer product manufacturers. Our products are used in a variety of
applications which affect daily living including:
* residential, commercial and industrial circuit breakers;
* motor controls;
* switches and relays;
* wiring devices;
* temperature controls;
* appliances;
* automobiles;
* telecommunications products; and
* various other electrical products.
We also perform electroplating and metal refining services. Manufacturing occurs
in the United States, Germany, Spain, Puerto Rico and Mexico.
In late 1996, we acquired the assets of Doduco GmbH to support our
strategy of increasing market share and international expansion of our
metallurgical businesses. This business was then combined with our existing
metallurgical component operations in North America and now operate globally
under the name AMI Doduco.
Page 3 of 64
In July of 1998, we acquired certain assets of Metales y Contactos,
S.A. de C.V. Metales designed and manufactured precious and semi-precious metal
contacts used mainly in automobiles and other durable goods. The Metales
facilities are located near Mexico City.
Business Segment Financial Information. Amounts are in thousands:
Net sales from continuing operations 1998 1997 1996
---- ---- ----
Electronic Components $218,876 $179,772 $142,791
Metallurgical Components 229,663 217,295 100,521
-------- -------- --------
Total $448,539 $397,067 $243,312
======== ======== ========
Operating profit before income taxes
Electronic Components $ 37,721 $ 30,865 $ 22,536
Metallurgical Components 15,695 14,888 4,983
-------- -------- --------
Total operating profit $ 53,416 $ 45,753 $ 27,519
Items not included in segment profit (1) (1,073) 1,011 (316)
-------- -------- --------
Earnings from continuing operations
before income taxes $ 52,343 $ 46,764 $ 27,203
======== ======== ========
Assets at end of year
Electronic Components $177,264 $115,467 $ 77,017
Metallurgical Components 101,422 83,023 78,327
-------- -------- --------
Segment assets $278,686 $198,490 $155,344
Assets of discontinued operations -- -- 12,307
Assets not included in segment assets (2) 65,448 56,844 50,696
-------- -------- --------
Total $344,134 $255,334 $218,347
======== ======== ========
Capital expenditures (3)
Electronic Components $ 27,695 $ 11,888 $ 5,568
Metallurgical Components 14,117 5,928 12,664
Discontinued operations -- 322 710
-------- -------- --------
Total $ 41,812 $ 18,138 $ 18,942
======== ======== ========
Depreciation and amortization
Electronic Components $ 9,937 $ 7,195 $ 5,384
Metallurgical Components 6,343 5,668 3,160
Discontinued operations -- 284 579
-------- -------- --------
Total $ 16,280 $ 13,147 $ 9,123
======== ======== ========
(1) Includes interest income, interest expense and other non-operating items
disclosed in our Consolidated Statements of Earnings. We exclude these
items when measuring segment operating profit.
(2) Cash and cash equivalents are the primary corporate assets. We also
exclude net deferred tax assets when measuring segment assets.
(3) During the past three years, our segments have acquired many companies. See
Note 2 of Notes to Consolidated Financial Statements. We have included
property, plant and equipment acquired as part of the acquisitions.
Page 4 of 64
Our segments generally recognize revenue when the products are shipped
to customers. We offer our customers credit terms which we believe are
consistent generally with the terms offered in our businesses. We reserve for or
write off a customer account when we no longer feel the customer can or will pay
us. We believe that the quality of our customers, which are generally large
global companies, and our extensive customer base limits our exposure to
significant concentrations of customer credit risk. For example, no individual
customer accounted for more than 10% of sales in 1998, 1997 or 1996. Sales to
our ten largest customers accounted for 36% of sales in 1998, 24% of sales in
1997, and 41% of sales in 1996. Depending on the amount of cash we have from
time to time, we may maintain significant cash investments at financial
institutions.
We do not use income taxes when measuring the segment results; however,
we do allocate income taxes to the segments to determine certain performance
measures. These performance measures include return on employed capital and
economic value added. The following pro forma disclosure of segment income tax
expense is based on simplified assumptions and includes allocation of corporate
tax items. These allocations are based on the proportionate share of total tax
expense for each segment, obtained by multiplying the respective segment's
operating profit by the estimated effective tax rate for the year. The allocated
tax expense amounts for the ECS were, in thousands, $12,275, 10,022 and 3,419 in
1998, 1997 and 1996, respectively. For the MCS, the were, in thousands, $6,759,
$7,656 and 2,191 in 1998, 1997 and 1996, respectively.
Geographic Information
Our sales are not concentrated in any particular geographic area. We
sell our products to customers in North America and in many other countries
throughout the world. The following table summarizes our sales to customers in
the United States and Germany, where sales are significant. Other countries in
which our sales are not significant are grouped into regions. We attribute
customer sales to the country addressed in the sales invoice. The product is
usually shipped to the same country. Amounts are in thousands.
1998 1997 1996
---- ---- ----
Sales to customers in:
United States $180,541 $177,701 $155,450
Europe, other than Germany 98,892 97,122 39,834
Germany 85,860 76,026 16,897
Asia 55,914 33,375 17,052
North America, other than U.S. 24,972 9,945 11,139
Other 2,360 2,898 2,940
-------- -------- --------
Total $448,539 $397,067 $243,312
======== ======== ========
The following table includes net property, plant and equipment located
in the United States, Germany and China where assets are significant. Where such
assets are not individually significant they are grouped into regions. Property,
plant and equipment represents all of our relevant assets which have long useful
lives. Amounts are in thousands.
Page 5 of 64
1998 1997 1996
---- ---- ----
Net property, plant and equipment
located in:
United States $23,469 $18,476 $18,929
China 19,507 11,320 11,496
Germany 16,466 12,608 9,640
Asia, other than China 15,210 11,818 6,983
Europe, other than Germany 11,156 5,276 4,579
Other 3,260 165 --
Assets of discontinued operations -- -- 2,511
------- ------- --------
Total $89,068 $59,663 $ 54,138
======= ======= ========
International Operations
We have significant operations outside the United States. These
operations, like all international operations, are subject to a number of risks
including:
* currency fluctuations;
* capital and exchange control regulations;
* restrictive government actions; and
* expropriation and nationalization.
We believe that the risks in international operations are greatest in
developing countries. The ECS has significant manufacturing operations in
several developing countries, especially the People's Republic of China.
Although the PRC is one of the world's fastest growing economies, its potential
economic, political and labor developments provide uncertainties and risks.
While the PRC has been receptive to foreign investment, we can't be certain that
the current policies will continue indefinitely into the future. If any country
in which we have significant operations adopts economic, legal, or trading
policies harmful to private industry or foreign investment, such policies could
affect us significantly.
The unpredictability of economic forces and government policies in
foreign countries could cause changes to the favorable operating conditions we
have experienced in recent years. We continually monitor business conditions in
all of the regions where we operate.
Sales and Marketing
Sales managers, district managers, direct salespeople and sales agents
execute our sales and marketing activities.
Competition
We operate in highly competitive industries. The industries are
characterized by numerous firms competing in international markets.
Page 6 of 64
Backlog
Our backlog of orders at December 31, 1998 was $77.3 million compared
to $76.9 million at the end of 1997. The 1998 year end backlog includes orders
for product lines recently acquired from Metales, FEE and GTI/Valor. We expect
to ship the majority of the backlog over the next six months. Our delivery times
vary between segments but are generally less than thirteen weeks. Customers can
cancel orders upon payment of cancellation charges.
We believe that backlog levels are no longer very reliable measures of
near-term business activity. This is particularly true in the electronic
component industry. Customers are adopting inventory management policies that
change ordering patterns and reduce lead times and, consequently, reduce ongoing
backlogs substantially and in some cases, entirely. We expect this trend to
continue and we believe we are prepared to accommodate it.
Raw Materials
We are not dependent on any particular source of supply. However, there
are not a lot of suppliers of certain:
* ferrite materials used in electronic components;
* powder metals used in electrical contacts; and
* specialty steel used in metal laminates.
We have not had any significant difficulties obtaining these raw materials and
do not currently anticipate we will have any significant difficulties.
The MCS uses silver and other precious metals as raw material.
Historically, these precious metals have been readily available. However, early
in 1998, the demand for silver increased significantly and the price of silver
and associated financing costs also increased. This occurred again during the
early part of 1999, although to a lesser extent. The terms of sale within the
MCS allow us to charge customers for the current market value of silver.
However, financing and other costs cannot always be recovered. Thus far we have
been successful in managing the costs associated with our precious metals.
However, if the terms and conditions under which we obtain silver or other
precious metals change significantly in a short period of time, we may
experience a negative impact on our future operating results.
Research and Development
We do not engage in any basic research activities. Our engineers
improve existing products and develop new products related to current or new
product lines. We own numerous patents, trademarks and tradenames, but we do not
consider our earnings to be materially dependent upon any one patent, trademark
or license.
Page 7 of 64
Environment
Federal, state, and local environmental laws affect most of our
manufacturing operations. These laws relate to the discharge of materials and
the protection of the environment. We will continue to make expenditures to meet
or exceed the environmental standards set by these laws. We charge to earnings
or capitalize, as appropriate, the environmental expenditures as they are
incurred.
We are studying and undertaking certain remedial action with respect to
groundwater pollution and soil contamination at a former GTI facility. The
facility is located in Leesburg, Indiana and is closed. We anticipate making
additional environmental expenditures related to this facility in future years.
The expenditures will be for continued environmental studies and analysis and,
upon mutual agreement with appropriate state agencies, implementation of a
remediation plan. Based on our current knowledge of the situation, we do not
anticipate that the future expenses associated with the environmental
remediation will have a material impact on our financial position.
We are also involved in several matters relating to superfund sites,
none of which belong to us. Our involvement has generally arisen from the
alleged disposal at these sites by licensed waste haulers of very small amounts
of waste material many years ago. While we cannot predict the future costs of
cleanup activities, capital expenditures, or operating costs for environmental
compliance at these sites, we do not believe they (alone or together) will have
a material effect on our capital expenditures, earnings or competitive position.
We have reserves which we believe are sufficient to cover the aggregate
amount of the ultimate environmental liability. These reserves are not material
to our current financial position.
Employees
At December 31, 1998, we had approximately 21,400 full time employees
compared with 14,400 at the end of 1997. Some of our ECS operations in Asia are
labor intensive. The total number of employees at the end of 1998 included
employees from our recent acquisitions discussed in the Electronic Components
Segment and Metallurgical Components Segment sections on pages 2 through 5.
Energy
We did not have difficulty obtaining supplies of electricity, gas or
oil in 1998, and we do not expect difficulty in 1999. Hurricane Georges caused
an interruption in power at our MCS plant in Puerto Rico during 1998, but it did
not have a material impact on our annual results of operations.
In developing countries, we may experience short interruptions of
electrical service or other utilities from time to time. Our facilities in those
countries generally maintain independent power supplies through back-up
generators. As a result, power interruptions have not had and are not expected
to have a material effect on our operations.
Page 8 of 64
Products
Within each segment, the primary products sold are similar in design,
material content, production process, application and customer base. We
continually introduce new or improved products in response to customers' needs
and changes within the markets served. For more information on our products, see
pages 2, 3 and 4.
Factors That May Affect Our Future Results (Cautionary Statements for Purposes
of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act
of 1995)
Our disclosures and analysis in this report and in our 1998 annual
report to shareholders contain forward-looking statements. Forward-looking
statements give our current expectations of future events. You can identify
these statements by the fact that they do not relate strictly to historical or
current facts. They often (but not always) use words such as "anticipate",
"estimate", "expect", "project", "intend", "plan", "believe", and similar terms.
From time to time, we also provide oral or written forward-looking statements in
other materials we release to the public.
Any or all of our forward-looking statements in this report, in our
1998 annual report and in any other public statements we make may turn out to be
wrong. They may be affected by inaccurate assumptions we might make or by risks
and uncertainties which are either unknown or not fully known or understood.
Consequentially, no forward-looking statement can be guaranteed. Actual future
results may, and probably will, vary materially.
We do not provide forecasts of future financial performance. We are
optimistic about our long-term prospects; however, the following issues and
uncertainties, among others, should be considered in evaluating our prospects
for the future.
Some of Our Products Are Subject to Rapid Technological Changes.
The ECS operates in an industry known for rapid change, consolidation,
uncertainty and constant new and emerging technologies. Generally, we expect
product life cycles to be very short. Changes in recent years due to the
Internet, on-line services and expansion of networking require the ECS to
maintain a strong engineering and development program. The program is necessary
to avoid product obsolescence and to meet or exceed customer expectations.
Accordingly, we expect to continue to spend money on engineering and development
with no assurances that our efforts in these areas will continue to be
successful.
We Cannot Predict the Market Growth Rate for Our Products.
The ECS sells its products into markets that are characterized by
rapidly changing growth rates. These markets include LAN, telecommunication
devices and power-conversion products. It is often difficult for our customers
or us to assess worldwide demand for upgrades or replacement of networks, or the
pace at which telecommunication infrastructure will progress throughout the
world. The markets may counterbalance one
Page 9 of 64
another in terms of growth or they may move in the same direction. All of this
will impact ECS growth rates.
The growth rates of housing, construction, appliance, telecommunication
systems and auto sales, which are highly cyclical, will impact the revenue
growth of the MCS and the ECS. Recent developments in Europe and Asia typify
these issues.
We May Receive Lower Prices for Our Products.
Both the MCS and the ECS operate in businesses characterized by
continually declining average selling prices on existing products. Future prices
for our products may decrease from historical levels, depending on competition
and other factors, and we may not be able to bring our manufacturing costs down
proportionately or continue to introduce new products, each of which is
necessary to maintain average selling prices and profitability.
We May Not Be Able to Maintain Our Current Gross Margins as a Percentage of
Sales.
Cost of sales as a percentage of sales is different for each segment
and can vary greatly based on sales mix and method of distribution. Mix factors
may increase cost of sales as a percentage of sales in the future. Acquisitions
that we make may also reduce our gross margin percentages, temporarily or
permanently.
We May Not Be Able to Obtain Sufficient Quantities of Raw Materials.
If we cannot obtain sufficient quantities of raw materials, including
precious metals used by the MCS, or if the cost of those materials increases
significantly, and we cannot increase our selling prices, future operating
results could be much different from our expectations. Please refer to the
discussion of raw materials on page 7 of this report.
We May Not Successfully Identify, Integrate, or Manage Acquisitions.
We have completed several acquisitions over the past three years. The
degree of success of these acquisitions depends on our ability to:
* successfully integrate or consolidate acquired operations into our
existing segments;
* identify and take advantage of cost reduction opportunities; and
* further penetrate the market for the products acquired.
Integration of acquisitions may take longer than expected and may never be
achieved to the extent originally anticipated. This could result in business
growth which may be less than anticipated or manufacturing costs which are
higher than anticipated. In addition, acquisitions may cause a disruption in our
ongoing business, distract our managers, unduly tax our other resources and make
it difficult or impossible to maintain our historical standards, procedures and
controls.
Page 10 of 64
The timing, price, structure and success of all acquisitions are
uncertain. In addition, we may not be able to identify suitable acquisition
candidates at reasonable prices, thereby reducing the aggressive acquisition
component of our growth.
We Operate Internationally and in Developing Countries.
We are a global company subject to the risks of doing business outside
of the United States, particularly in developing countries. Please refer to the
discussion of international operations on pages 5 and 6.
The slowing of Asian economies over the last two years has affected
portions of our business as the installation and growth of communications and
electrical infrastructure systems which utilize our components have been
delayed. Our consolidated 1998 sales into Asia were approximately 12% of our net
sales compared to approximately 8% in 1997. We remain optimistic about our
prospects in the Asia Pacific region and we are committed to our presence in
Asia. We believe our widespread manufacturing presence in Asia has been a key
factor in our success. Nevertheless, we are aware of the seriousness and
inherent unpredictability of the current economic situation in Asia. We attempt
to carefully monitor all developments throughout Asia.
Effectively Managing Our Growth May Be Difficult.
We have grown rapidly in the last five years, and we expect to continue
to grow internally and through additional acquisitions. This growth is likely to
place significant strain on our resources and systems. To manage our growth, we
must implement systems, recruit and develop additional human resources and
control our operations by continually training employees at every level.
Other Factors
In addition to the factors discussed above, other factors which could
materially affect actual results include, but are not limited to:
* business conditions and the degree of optimism affecting the
economies throughout the world in general;
* competitive factors such as competitors seeking increased market
share based on price;
* manufacturing efficiencies and capacity;
* legal liability unknown at this time;
* risk of obsolescence due to shifts in market demand;
* Year 2000 issues related to our computer systems or the computer
systems of our suppliers or customers (please see management's
discussion and analysis in Item 7 of Part II of this report); and
* the timing of customer product introductions.
Page 11 of 64
The company believes that it has the market opportunities, product
offerings, facilities, personnel and competitive and financial resources for
continued business success. However, future events, costs, margins, product mix
and profits are all subject to unpredictable factors including those discussed
above.
Item 2 Properties
We produce and market our products all over the world. At December 31,
1998, we operated 20 manufacturing plants in 11 countries. Our corporate offices
are located in Trevose, Pennsylvania where we lease approximately 11,000 square
feet of office space. The lease expires in 2006.
As of December 31, 1998, the ECS produced at 9 manufacturing
facilities, 6 of which are owned. Principal manufacturing facilities are located
in the People's Republic of China, the Philippines, Malaysia, Thailand and
Ireland. The PRC facilities are operated under negotiated contracts with the
provincial government of China. In addition to the manufacturing space, each PRC
facility includes space for staff quarters and dormitories. The ECS also owns
and leases office and warehouse space in San Diego to serve as the segment's
headquarters and North American distribution center. Including office space for
administrative and sales functions, the ECS owns approximately 427,000 square
feet of space and leases approximately 1,692,000 square feet. The lease terms
vary by facility. See Note 8 of the Consolidated Financial Statements for
additional information related to our outstanding leases.
The MCS operates 11 manufacturing plants. The plants are located in the
United States, Europe, Puerto Rico and Mexico. The MCS owns the majority of its
manufacturing facilities. The only major manufacturing plant leased is located
in Export, Pennsylvania. This lease expires in 2001 but it is expected to be
renewed. Total space used by the MCS is 1,342,000 square feet, including office
space for administrative and sales functions.
The productive capacity and extent of utilization of our facilities are
difficult to quantify. In any one facility, maximum capacity and utilization
vary periodically depending on the segment's manufacturing strategies, the
product being manufactured and the current market conditions and demand. We
estimate that our average utilization of overall production capacity in 1998 was
between 70% and 85%.
The ECS is still integrating the operations of FEE Technology and GTI
Corporation into its Pulse operating entities. After completing these
integration efforts in 1999, we believe our facilities will be adequate for our
present needs, although additional manufacturing capacity may be added for
certain products.
Page 12 of 64
Item 3 Legal Proceedings
We have been named in several lawsuits. We consider lawsuits to be part
of our normal business. We do not expect the outcome of any of these lawsuits to
have a material adverse effect on our financial results.
Item 4 Submission of Matters to a Vote of Security Holders - None
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is traded on the New York Stock Exchange. The
following table reflects the highest and lowest sales prices in each quarter of
the last two years. The dividends paid are also shown. We adjusted the amounts
to reflect the two-for-one stock split in February of 1997.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1998 High $39.50 $44.38 $43.38 $32.50
1998 Low $27.38 $37.00 $18.00 $16.88
1998 Dividends Paid $.0525 $.0600 $.0600 $.0600
1997 High $24.94 $28.88 $41.00 $43.13
1997 Low $17.13 $17.88 $27.00 $28.50
1997 Dividends Paid $.0500 $.0525 $.0525 $.0525
On January 8, 1999, there were approximately 1,100 registered holders
of our common stock which has a par value of $.125 per share and is the only
class of stock that we have outstanding.
Page 13 of 64
Item 6 Selected Financial Data (In Thousands, Except Per Share Data)
1998(a) 1997(a) 1996(a) 1995(a) 1994(a)
---- ---- ---- ---- ----
Net sales(b) $448,539 $397,067 $243,312 $143,662 $117,707
Net earnings(b) $ 33,309 $ 29,086 $ 18,138 $ 7,351 $ 5,180
Earnings per share(b):
Basic $ 2.08 $ 1.81 $ 1.14 $ .57 $ .43
Diluted $ 2.06 $ 1.80 $ 1.13 $ .56 $ .43
Total assets $344,134 $255,334 $218,347 $144,940 $ 84,755
Total long-term debt $ 60,898 $ 32,957 $ 41,701 $ 17,125 $ 15,146
Shareholders' equity $174,809 $142,375 $103,590 $ 84,761 $ 45,757
Net worth per share $ 10.81 $ 8.82 $ 6.48 $ 5.41 $ 3.80
Working capital $102,336 $ 87,618 $ 74,787 $ 43,242 $ 32,676
Current ratio 2.0 to 1 2.2 to 1 2.1 to 1 2.1 to 1 2.5 to 1
Number of shares outstanding:
Weighted average,
including common stock
equivalents 16,203 16,137 16,096 13,076 12,030
Year end 16,170 16,135 15,975 15,672 12,042
Dividends declared per share $ .240 $ .210 $ .200 $ .198 $ .188
Price range per share:
High $ 44.38 $ 43.13 $ 21.88 $ 11.88 $ 8.00
Low $ 16.88 $ 17.13 $ 9.56 $ 6.63 $ 4.94
(a) In 1998, we acquired FEE Technology and Metales y Contactos in July, and
GTI Corporation in November. We acquired the magnetic components business
of Nortel in 1997, Doduco GmbH in 1996, Pulse Engineering, Inc. in 1995 and
the Fil-Mag Group in 1994. See Note 2 to Consolidated Financial Statements.
(b) Amounts reflect continuing operations. See Note 2 to Consolidated Financial
Statements.
Information relating to shares outstanding and per share amounts has
been restated to reflect stock splits.
Page 14 of 64
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
This discussion and analysis of our financial condition and results of
operations, as well as other sections of this report, contain certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Please refer to pages 9 through 12 of this report
for a description of "forward-looking statements" and factors that may affect
future results.
We are making the statements below to inform our shareholders of our
general financial condition and our results of operations. We are not trying to
influence investors to buy or sell our securities.
Business Overview
Please refer to Part I, Item I for a description of our continuing
businesses and strategic initiatives.
During the first quarter of 1996, we sold the assets of our Products
Division which produced currency counters and dispensers. In June 1997, we sold
the remainder of our Test & Measurement Products Segment, which manufactured
material testing systems, force measurement products and weighing devices. We
sold these businesses because they did not fit within our core competencies and
did not offer us opportunities to create significant shareholder value. The Test
& Measurement Products Segment is reported as discontinued operations in the
accompanying financial statements.
We believe that the investments, divestiture and strategies described
in Part I, Item I and in the preceding paragraph have positioned us for future
growth and the creation of additional shareholder value.
Liquidity and Capital Resources
Working capital at December 31, 1998 was $102.3 million, an increase of
$14.7 million from the working capital of $87.6 million at December 31, 1997.
Worldwide, cash on hand at December 31, 1998 was $50.6 million.
We believe that the combination of cash on hand, cash generated by
operations and, if necessary, additional borrowings under our credit facilities
will be sufficient to satisfy our operating cash requirements for the
foreseeable future. In addition, we may use internally generated funds and
additional borrowings for acquisitions of suitable businesses or assets.
Cash Flows from Operating Activities
Cash flow from operations was $49.7 million for the year ended December
31, 1998. This represents an increase of approximately $26.0 million from 1997.
Page 15 of 64
Earnings from continuing operations, plus depreciation and amortization and
deferred tax expense, accounted for approximately $11.3 million of the increase.
Also reflected in the year-to-year increase was the fact that 1997 operating
cash flows were negatively affected by an increase in accounts receivable at AMI
Doduco's European operation, since we did not acquire accounts receivable as
part of the Doduco acquisition in late 1996. Our 1998 acquisitions involved
primarily the purchase of stock, under which we assumed operating assets and
current liabilities. Our 1998 changes in assets and liabilities are net of the
effect of our acquisition of Metales, FEE and GTI/Valor.
Cash Flows from Investing Activities
Cash used by investing activities was $62.8 million during 1998. We
used approximately $15.6 million of cash to acquire FEE and certain operating
assets of Metales. We used approximately $34.0 million to acquire all the
outstanding shares of GTI. We also made cash payments of $1.2 million for
previously accrued expenses related to the acquisition of Nortel's magnetic
components business. As part of our 1998 acquisitions, we acquired approximately
$8.0 million of cash.
Cash payments for capital expenditures, excluding acquisitions, totaled
approximately $20.4 million, or about 4.6% of net sales during 1998 and exceeded
overall depreciation by about $7.5 million. We make capital expenditures to
expand production capacity and to improve our operating efficiency. We expect to
continue making such expenditures.
With the exception of approximately $6.2 million of retained earnings
in China which are restricted by PRC regulations, substantially all retained
earnings are free from legal or contractual restrictions. We have not
experienced any significant liquidity restrictions in any country in which we
operate and none are foreseen. However, foreign exchange ceilings imposed by
local governments and the sometimes lengthy approval processes which some
foreign governments require for international cash transfers may delay our
internal cash movements from time to time. The retained earnings in other
countries represent a material portion of our assets. We expect to reinvest
these earnings outside of the United States because we anticipate that a
significant portion of our opportunities for growth in the coming years will be
abroad. If such earnings were brought back to the United States, significant tax
liabilities could be incurred in the United States. This could have a material
unfavorable impact on our net income and cash position.
Cash Flows from Financing Activities
During 1998 we borrowed $44.2 million and repaid approximately $25.5
million of debt. The net incremental borrowings of approximately $18.7 million
were used to acquire all the outstanding shares of GTI.
Page 16 of 64
In November, we entered into an agreement with a syndicate of banks
increasing our line of credit to $125.0 million. The increase in available
credit provides us with additional financial flexibility. The facility is a
multi-currency revolving credit line with a variable interest rate based, at our
option, on either the prime rate or the relevant LIBOR rate. The facility
terminates in June of 2000 and, because of various tax reasons, is secured by a
pledge of the stock of certain of our domestic subsidiaries.
In July, we entered into a DM10.0 million unsecured loan facility with
a German bank in order to convert a portion of our outstanding credit from a
variable-rate revolver to a fixed-rate term debt. This loan is for a term of
five years, bearing interest at a fixed rate of 5.57% and is non-amortizing.
At December 31, 1998, we had approximately $116.4 million of unused
lines of credit from banks.
We have paid dividends for the last 91 consecutive quarters. Our
dividends in 1998 were $3.8 million. We expect to continue making quarterly
dividend payments for the foreseeable future.
Foreign Currency Effects
During 1998, we did not experience any significant foreign currency
gains or losses. We experienced a positive translation adjustment to equity due
to the strengthening of the Deutsche mark and the French franc against the U.S.
dollar in the third and fourth quarters. The currency movements resulted in our
investments in the MCS's European operations and in the acquired FEE operations
being worth more in U.S. dollars than they were prior to the strengthening. This
increase in U.S. dollar value is reflected as an adjustment to equity.
We transact a significant amount of sales in currencies other than the
U.S. dollar. Therefore, changing exchange rates often impact our financial
results. This is particularly true of movements in the exchange rate between the
U.S. dollar and the euro because AMI Doduco's European sales are denominated
primarily in the euro. In the future, it is possible that an increasing
percentage of our sales will be denominated in non-U.S. currencies. This would
increase our exposure to foreign currency fluctuations.
During 1997, currencies in several of the countries where we
manufacture and/or sell products devalued significantly relative to the U.S.
dollar. The majority of our sales originating in those countries, as well as the
majority of raw materials purchased, are denominated in U.S. dollars. Expenses
in those countries, particularly labor and overhead, are denominated and paid in
local currencies which devalued against the U.S. dollar. As a result, the
devaluation of these local currencies favorably affected our profitability by
reducing the manufacturing costs paid in those currencies.
Please see the section titled "Foreign Currency Risk" under Item 7A of
this report for a description of our strategies to manage foreign currency
risks.
Page 17 of 64
New Accounting Pronouncements
In June of 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. This
standard is effective for quarters of fiscal years beginning after June 15,
1999. Adoption of this standard is not expected to have a material effect on our
operating results or liquidity. The impact of this standard on our balance sheet
will depend on the amount of hedging activity outstanding on the date of
adoption.
Results of Operations
Our results from continuing operations for 1998, 1997 and 1996 are as
follows(1). Amounts are in thousands:
Year Ended
December 31,
1998 1997 1996
---- ---- ----
Net sales:
Electronic Components $218,876 $179,772 $142,791
Metallurgical Components 229,663 217,295 100,521
-------- -------- --------
Total $448,539 $397,067 $243,312
======== ======== ========
Earnings before income taxes:
Electronic Components $ 37,721 $ 30,865 $ 22,536
Metallurgical Components 15,695 14,888 4,983
-------- -------- --------
Operating profit 53,416 45,753 27,519
Other income (expense), net (1,073) 1,011 (316)
-------- -------- --------
Earnings from continuing
operations before income taxes $ 52,343 $ 46,764 $ 27,203
======== ======== ========
- -----------------------
(1) The results of the Test & Measurement Products Segment are reported as
discontinued operations in the accompanying financial statements. The Products
Division, which we sold during the first quarter of 1996, was included in the
Test & Measurement Products Segment. The sale of the Products Division occurred
prior to our decision to divest the entire segment, and the financial
information for the division had not been separately reported in the 1996
financial statements. Accordingly, the gain on the sale of that division was
included in income from continuing operations. The 1997 sales of the Test &
Measurement Products Segment were approximately $11.8 million prior to the
divestiture on June 4, 1997.
Page 18 of 64
Revenues
Our sales from continuing operations for 1998 increased by $51.5
million, or 13.0%, from 1997. We attribute the 1998 sales increase to:
* the magnetic components business purchased from Northern Telecom in
late 1997;
* operations of FEE and Metales since July 3, 1998;
* operations of GTI since November 16, 1998; and
* strong sales volume from AMI Doduco's European operations during the
first six months of 1998.
Our 1997 sales increased by $153.8 million, or 63.2%, from 1996 because
the MCS results in 1997 included a full year of operating the European
businesses obtained from Doduco GmbH in November 1996. Also, our electronic
components operations benefited from strong customer demand in the local area
network, telecommunications and computer markets.
Sales in our ECS increased by $39.1 million, or 21.8%, from 1997 to
1998. Recent acquisitions contributed to this increase in sales. These
acquisitions included: the magnetic components business of Northern Telecom in
late 1997, FEE in the third quarter of 1998 and GTI on November 16, 1998. In
addition to the ECS's acquisitions, orders for our power conversion components
were stronger in 1998 than in 1997.
Partially offsetting these positive sales factors was the worldwide
softness in LAN component markets during the majority of 1998, in contrast to
record levels of orders and shipments during the first nine months of 1997. From
September through the end of 1998, the LAN market improved and contributed to
ECS's fourth quarter revenues.
Order entry in the telecommunications markets was somewhat less than we
projected for 1998 as some Asian infrastructure programs, particularly those
undertaken by European equipment suppliers, remained temporarily on hold. Other
telecommunications markets remained strong as the "cellular revolution" and the
construction and upgrading of competing landline networks continued in Europe
and North America.
The ECS's backlog at December 31, 1998 was approximately 2% higher than
at the end of the third quarter and about equal to the end of 1997. Orders for
acquired product lines accounted for the increase in backlog. However, we
believe that backlog levels are much less reliable as a measure of near-term
business activity than they were in previous years. This is particularly true in
the ECS. Customers are adopting inventory management policies that change
ordering patterns and reduce lead times. This trend accelerated in the fourth
quarter of 1998 and we expect it to continue.
Sales in our MCS increased by $12.4 million, or 5.7%, from 1997 to 1998
due to:
* operating certain assets acquired from Metales on July 3, 1998;
Page 19 of 64
* stronger sales volume from the MCS's European operations during the
first six months of 1998; and
* favorable 1998 economic conditions for the construction, automotive
and durable goods industries in North America and most of Western
Europe.
Sales in our MCS increased from 1997 despite various challenges during
the year. Hurricane Georges caused substantial damage to our facilities and to
customer facilities in Puerto Rico, with our plant in Puerto Rico being
effectively shut down for approximately two weeks in late September.
The MCS's fourth-quarter revenues were affected by a decline in demand
for industrial circuit breaker and motor control contacts in North America and
for automotive contacts in Europe. Aside from the slowing in demand for contacts
toward year-end, European automotive markets remained strong in the fourth
quarter.
Cost of Sales
Our gross margin was 31.7% in 1998, a decrease from 32.2% in 1997 and
even with 1996. Our gross margin was slightly lower than in 1997 primarily due
to a slower LAN market and recent ECS acquisitions which were operating at lower
margins than our existing business. Partially offsetting these factors were
favorable exchange rates in the Far East.
In 1998, the ECS operated the former magnetic components business of
Nortel for the full year and the former FEE business for six months. Components
in both of these businesses had lower margins than our previously existing
electronics business. Additionally, we incurred higher than anticipated one time
third quarter costs related to completing the standardization of production
activity reporting and conversion of information systems in the acquired Nortel
businesses. Finally, we operated GTI for seven weeks of 1998. Although a
significant percentage of GTI's business is providing components into the LAN
market, GTI's margins are currently much lower than those realized by the ECS as
a whole. Integration efforts in all of these businesses continue.
We define "production rationalization" as the movement of products to
the optimum manufacturing facility while, at the same time, closing redundant
facilities. The production rationalization phase of the Nortel acquisition is
complete. The production rationalization phase of the FEE acquisition is well
under way and we are in the process of rationalizing the GTI operations. We
expect the production rationalization of GTI to result in GTI's former
operations being consolidated into the ECS's existing facilities.
The MCS's 1998 gross margin was essentially unchanged from 1997. Sales
mix and the continued integration of the various businesses in this segment
positively impacted the 1998 gross margins. These positive factors were offset
by:
* the impact of Hurricane Georges on the Puerto Rico operation;
* unabsorbed overhead during the transfer of production of certain
lines of business from Europe to the United States; and
Page 20 of 64
* costs associated with the integration of operating assets acquired
from Metales in July 1998.
The industries served by both segments remain characterized by aggressive
competition and constant pressure on sales prices resulting from our customers'
ongoing cost reduction activities.
Our gross margin in 1997 increased over 1996 as the ECS's margin
improved due to an increase of sales into the LAN markets. This margin
improvement more than offset the 1997 impact of the acquisition of AMI Doduco's
European operations and the 1997 growth of the MCS, which generally has a lower
gross margin than the ECS.
Operating Expenses
Our total selling, general and administrative expenses for 1998, 1997
and 1996 are as follows. Amounts are in thousands:
Year Ended
December 31,
1998 1997 1996
---- ---- ----
Selling, General & Administrative
Expenses $88,827 $82,264 $49,547
% of Net Sales 19.8% 20.7% 20.4%
Selling, general and administrative spending has increased in dollar
amounts since 1996. The increase reflects the higher spending required to
support higher sales levels and an increasing international presence. This was
especially true in 1997, which included a full year of operating results from
AMI Doduco's European businesses.
As a percentage of net sales, selling, general and administrative
expenses during 1998 were lower due to the absence of Netwave Technologies, Inc.
Netwave was a product line dedicated to wireless LAN access. We sold this
business at the end of 1997. Netwave required a high level of spending in 1997
and 1996 relative to its revenues. On the other hand, 1998 expenses related to
integrating recent acquisitions partially offset the benefit of selling our
interest in Netwave. Additionally, the MCS incurred one time operating expenses
in 1998 for:
* the implementation of its enterprise resource planning tool;
* ongoing personnel recruitment efforts; and
* restructuring our sales efforts in Europe.
We believe that these operating activities will benefit our profitability in the
future.
We include research, development and engineering expenses in selling,
general and administrative expenses. We refer to research, development and
engineering expenses as RD&E. In 1998, RD&E expenses were $11.0 million for the
ECS and $5.8 million for the
Page 21 of 64
MCS. The ECS amount compares to $10.6 in 1997 and $6.6 million in 1996. The
comparable MCS amounts were $5.8 million in 1997 and $2.4 million in 1996.
Although ECS spending on RD&E increased only slightly over 1997, the
1997 amount included RD&E at Netwave. Excluding Netwave's high RD&E expenses in
relation to its sales, the ECS's expenditures on RD&E actually increased
significantly from the prior year. The ECS continues to invest in new
technologies and related improvements to respond to technology changes. Neither
segment anticipates any significant changes to RD&E efforts in 1999.
Interest
Net interest expense was approximately $1.2 million during 1998,
compared with approximately $.1 million of net interest income during 1997. The
1997 interest income amount reflects a higher than customary level of funds
invested in short-term deposit instruments. This high level of funds resulted
from the cash received when we sold the Test & Measurement Products Segment on
June 4, 1997. Also in 1998, we incurred interest expense on a higher level of
debt, particularly following the GTI acquisition late in the year. Finally,
interest incurred in connection with consigned precious metals that we hold for
use in production was higher in 1998 than in 1997 or 1996. These rates were
particularly high during the first part of 1998.
Please see the section titled "Interest Rate Risk" under Item 7A of
this report for additional information regarding interest.
Income Taxes
Our effective income tax rate from continuing operations during 1998
was 36.4%. This compares to 37.8% in 1997 and 33.3% in 1996. Our effective tax
rate has increased since 1996 as a result of additional taxable income from AMI
Doduco's European operations. Countries in Europe, particularly Germany, have
high tax rates compared to other countries in which we operate. The 1998 tax
rate was lower than 1997 due to the availability of tax credits in Germany and
the impact of operating GTI for seven weeks in 1998. These factors offset the
expiration of the income tax holiday in the People's Republic of China at the
beginning of 1998.
We have benefited over recent years from favorable offshore tax
treatments; however, there are no assurances that such treatments will continue
in the future. Developing countries and, in particular, the People's Republic of
China, may change their tax policies at any time. In addition to income tax
policies, we monitor developments relating to other business taxes.
Page 22 of 64
Other Issues
Precious Metal
The MCS uses silver, as well as other precious metals, in the
manufacturing of electrical contacts, rivets and other products. Historically,
we have leased or held these materials through consignment arrangements with our
suppliers. Leasing and consignment costs have been substantially below the costs
to borrow funds to purchase the metals. In addition, the risk of a decrease in
the market price of owned precious metal can be substantial. As is sometimes the
case, during the first quarter of 1998, and to a lesser extent in early 1999,
the price of silver increased significantly. The associated leasing costs have
also increased. The terms of sale within the MCS allow us to charge customers
for the current market value of silver. However, leasing costs cannot always be
recovered. Thus far we have been successful in managing the costs associated
with our precious metals. While limited amounts were purchased during 1998 for
use in production, the vast majority of our precious metal inventory continues
to be leased or held on consignment. If our leasing/consignment fees increase
significantly in a short period of time, and we are unable to recover these
increased costs through higher sale prices, a negative impact on our results of
operations and liquidity may result. We believe this risk is shared by all of
our competitors.
Year 2000 Computer Issues
General
The popularly called "Year 2000" issues associated with the programming
code in existing computer systems revolve around whether computer systems will
properly recognize date-sensitive information when the year changes to 2000.
Information technology ("IT") and non-IT systems that do not properly recognize
such information could generate erroneous data or cause a system to fail. The
Year 2000 problem is pervasive and complex, as virtually every computer
operation will be affected in some way by the rollover of the two digit
value to 00.
Our IT systems include central business computing and ancillary
business computing systems, payroll systems and manufacturing systems. Our
non-IT systems, those with embedded technology such as microcontrollers, include
time reporting systems, alarm and security systems, telecommunication systems,
plant machinery controls and electronic data interfaces. We have analyzed the
impact of the Year 2000 issues on our systems and are in the process of
addressing the issues raised by our analysis.
Our products do not include date-sensitive software or embedded
technology. As a result, we do not expect to experience product warranty or
return issues relating to the Year 2000 problem.
State of Readiness
As a result of our decentralized segment structure and the diversified
systems employed by each segment and the corporate location, the Year 2000 issue
Page 23 of 64
is being managed by each group separately. Oversight and status reviews are
performed by corporate personnel and, ultimately, the audit committee and board
of directors. Corporate, the ECS and the MCS are in varying stages of addressing
Year 2000 issues. We have defined the stages of progress for Year 2000 readiness
as follows: awareness, assessment, renovation, validation and implementation.
Corporate and the ECS are in the implementation stage while the MCS is in the
assessment and renovation stages.
Corporate
The IT systems at our corporate location are primarily purchased
programs. Periodically, these programs are updated with new releases. As a
result of these updates and discussions with vendors, we believe that internal
IT systems used at the corporate location are Year 2000 ready in all material
respects.
We maintain electronic interfaces with external vendors, including
banks, insurance companies, employee benefit providers and many other parties.
In addition, we are dependent on parties such as our transfer agent and the NYSE
to provide for uninterrupted trading of our securities. Based on discussions
with their personnel, we believe these highly regulated institutions are or will
be Year 2000 ready, although we have received no such guarantees. We have
requested Year 2000 readiness statements from these vendors. In the event that
these parties experience Year 2000 problems, the consequences to us are unknown.
We believe that corporate non-IT systems are Year 2000 ready, although
the use of non-IT systems at the corporate level is not critical to our
operations.
ECS
In mid-1997, the ECS formed a working group to address Year 2000 issues
facing this segment. All of the ECS's corporate applications were reviewed to
determine whether to repair, re-engineer, replace, or retire each system. All
recommended reprogramming steps to achieve Year 2000 readiness have been
completed. In addition, the ECS completed compliance implementations and related
testing for infrastructure-related issues with the operating systems, computer
networks, and telecommunications equipment and services, as well as the ECS's
facilities and security systems. To the extent problems develop, the ECS expects
that its IT department, with the assistance of external consultants, will be
able to address those problems on a timely basis.
Regarding the FEE acquisition, the ECS has completed an assessment of
Year 2000 issues related to FEE's IT and non-IT systems. Year 2000 issues were
identified and are currently being addressed by internal resources.
Implementation of necessary changes and testing of those changes are expected to
be completed by the end of the third quarter of 1999 without material
expenditures.
Prior to our acquisition of GTI, GTI completed the installation of an
enterprise resource planning system which addressed GTI's Year 2000 issues
related to their information systems. Any potential Year 2000 issues related to
Page 24 of 64
GTI's facilities or non-IT systems will be addressed by our plans to integrate
GTI's operations into our facilities, which we believe are Year 2000 ready.
The ECS is still in the process of contacting vendors and suppliers,
including hardware, software, telecommunications, networking, security, data and
service providers, regarding the Year 2000 readiness status of their companies
and products. To the extent that a supplier is not able to become Year 2000
ready, alternative supply sources will be identified and contacted, and their
Year 2000 readiness status verified within the next two quarters. The ECS
expects that its major vendors or suppliers will be Year 2000 ready.
Aggregate external costs incurred to address Year 2000 issues within
the ECS have approximated $350,000. About $250,000 of this amount was paid to
consultants and expensed when incurred. The remainder of the costs related to
accelerated purchases of licenses and software, and was capitalized in
accordance with existing company policy. Future costs related to the ECS Year
2000 issues are expected to be immaterial to the ECS.
MCS
Motivated in part by the Year 2000 issue and issues related to the euro
currency conversion, but more so by the need for managers to have access to
real-time business data, the MCS is in the process of installing a worldwide
enterprise resource planning system which is scheduled to be operational in the
second quarter of 1999. We refer to the enterprise resource planning system as
ERP. The MCS is utilizing both internal and external resources to identify,
correct or reprogram and test both IT and non-IT systems for Year 2000
compliance. It is anticipated that all reprogramming efforts will be completed
in a time period sufficient to allow for appropriate testing.
The ERP is expected to be installed and operational in Germany and the
U.S. by the end of April of 1999. The project is on schedule and the vendor has
warranted that the software is Year 2000 ready. This software is not unique to
the MCS and is in use in many Fortune 1000 companies. The MCS is in the process
of assessing the systems in Mexico to determine the extent of any Year 2000
issues, but any compliance issues are expected to be immaterial.
A Year 2000 readiness review of manufacturing systems is also under
way. The MCS's manufacturing systems include furnace controls, computer
integrated manufacturing systems, shop floor data collection and test equipment.
Some of these systems include embedded systems. It is anticipated that any
material Year 2000 problems will be identified and corrected by December of 1999
without material expense.
All remaining IT and non-IT systems are expected to be repaired,
reprogrammed or replaced by the end of the first quarter of 1999. Excluding the
costs of implementing the ERP system, the total costs -- incurred and to be
incurred -- associated with addressing the Year 2000 issues within the MCS are
estimated to be $150,000. Those costs are being expensed as incurred. The cost
of implementing the ERP system is significant to us; however, such costs have
been budgeted and approved in the ordinary course of business and are being
expensed or capitalized in accordance with existing policy. While we expect
Page 25 of 64
that problems will develop from time to time during the course of the ERP change
over, we do not believe that these problems will have a material adverse effect
on our operations or that they necessarily will be Year 2000 related.
The MCS has formalized questionnaires and sent those to vendors
requesting information regarding Year 2000 readiness. The MCS has received
completed surveys from a number of its suppliers. The identification of
alternative supply sources is our intended corrective action with regard to
non-compliant suppliers.
Contingency Plans
As the corporate location and the ECS believe their aggressive action
with respect to Year 2000 problems will mitigate material problems, overall
contingency plans have not been developed.
In the event that there is a failure of the ERP system, MCS's
contingency plans include reverting to existing financial systems that are Year
2000 ready. Other financial and non-financial applications would be run manually
and problems would be addressed as identified.
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. For example, if a utility company were unable to deliver power, or
if a major vendor were unable to deliver product, the operations of the affected
segment could be disrupted or even temporarily shut down. However, in each
segment, our manufacturing facilities and locations are more geographically
diverse than those of most of our competitors. This diversity provides a natural
hedge against those Year 2000 problems which may affect a given supplier or
utility. In the unlikely event that such failures occur, they could materially
and adversely affect our results of operations, liquidity and financial
condition. Due to the general uncertainty of the Year 2000 problem, including
the uncertainty of the Year 2000 readiness of third-party suppliers and
customers, we are unable to determine with complete certainty at this time
whether the consequences of Year 2000 failures will have a material impact on
our results of operations, liquidity or financial condition. Although there can
be no assurance that we have identified and corrected, or will identify and
correct, every Year 2000 problem existing in IT and non-IT systems, we believe
that we have programs in place to identify and correct any such material
problems and that our actions have significantly decreased the risks associated
with the Year 2000 problem.
Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and the euro. We refer to the 11 countries as the participating countries and
the participating countries' sovereign currencies as the legacy currencies. The
euro now trades on currency exchanges and is available for non-cash
transactions.
Page 26 of 64
The legacy currencies are scheduled to remain legal tender in the
participating countries as denominations of the euro between January 1, 1999 and
July 1, 2002. During this transition period, public and private parties may pay
for goods and services using either the euro or a legacy currency. Beginning
January 1, 2002, the participating countries will issue new euro-denominated
bills and coins for use in cash transactions. By July 1, 2002, the participating
countries will withdraw all bills and coins denominated in the legacy
currencies, so that the legacy currencies no longer will be legal tender for any
transactions. The conversion to the euro will then be complete.
We have developed plans to ensure, to the extent possible, our
operations will not be negatively impacted by the euro. On a company-wide basis,
those efforts have been coordinated by the corporate Treasurer and have included
internal personnel as well as external consultants. The ECS is currently
evaluating the impact of the euro on the operations located in Europe. The MCS
is in the renovation and implementation stages of addressing euro conversion
related system issues for its European operations.
The failure to correct a material euro conversion issue could result in
an interruption in, or failure of, certain normal business activities. Such
failures could materially and adversely affect our results of operations,
liquidity and financial condition. Due to the general uncertainty inherent in
the conversion to the euro, we are unable to determine at this time whether the
consequences of euro conversion failures will have a material impact on the
company's results of operations, liquidity or financial condition.
Item 7a Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our financial instruments exposed to changes in interest rates are
primarily cash on hand and long-term debt obligations. We invest our excess cash
with high credit-rated financial institutions. We limit our exposure to any one
financial institution to the extent practical. Our board has adopted policies
relating to these risks and the audit committee of the board continually
monitors compliance with these policies.
The majority of our credit facilities have variable interest rates.
Accordingly, interest expense may increase if the rates associated with, or the
amount of, our borrowings move higher. In addition, we may pursue additional or
alternative financing for growth opportunities in one or both segments. We may
use interest rate swaps or other financial derivatives in order to manage the
risk associated with changes in market interest rates. However, we have not used
any of these instruments to date.
Page 27 of 64
The table below presents principal amounts in equivalent U.S. dollars
and related weighted average interest rates by year of maturity for our cash
investments and debt obligations. The carrying value of cash and cash
equivalents approximates fair value due to its short-term nature. The carrying
value of long-term debt approximates its fair value after taking into
consideration current rates offered to us for similar debt instruments of
comparable maturities. We do not hold or issue financial instruments or
derivative financial instruments for trading purposes. Amounts are in thousands:
Assets
Cash and equivalents Approx.
- -------------------- -------
There- Fair
1999 2000 2001 2002 2003 after Total Value
---- ---- ---- ---- ---- ----- ----- -----
Variable rate:
U.S.$ $41,893 -- -- -- -- -- $41,893 $41,893
Wt. ave. interest rate 4.00%
Renminbi (PRC) $ 2,725 -- -- -- -- -- $ 2,725 $ 2,725
Wt. ave. interest rate 4.00%
Euro $ 2,556 -- -- -- -- -- $ 2,556 $ 2,556
Wt. ave. interest rate 4.00%
Other currencies $ 3,389 -- -- -- -- -- $ 3,389 $ 3,389
Wt. ave. interest rate 4.00%
Liabilities
Long-term debt
- --------------
Fixed rate:
U.S.$ $ 26 $ 27 -- -- -- -- $ 53 $ 53
Wt. ave. interest rate 4.50% 4.50%
Euro $ 167 $ 152 $ 165 $ 183 $ 6,187 $ 423 $ 7,277 $ 7,277
Wt. ave. interest rate 8.40% 8.50% 8.50% 8.50% 5.57% 8.50%
Variable rate:
U.S.$ -- $26,000 -- -- -- -- $26,000 $26,000
Wt. ave. interest rate 5.96%
Euro -- -- $27,568 -- -- -- $27,568 $27,568
Wt. ave. interest rate 3.88%
Foreign Currency Risk
We conduct business in various foreign currencies, including those of
emerging market countries in Asia and well-developed European countries. In
order to reduce our exposure resulting from currency fluctuations, we may
purchase currency exchange forward contracts and/or currency options. These
contracts guarantee a predetermined range of exchange rates at the time the
contract is purchased. This allows us to shift the majority of the risk of
currency fluctuations from the date of the contract to a third party for a fee.
At December 31, 1998, we had two forward exchange contracts and three currency
options outstanding. All were short-term in duration and immaterial to our
financial position. In determining the use of forward exchange contracts and
Page 28 of 64
currency options, we consider the amount of sales and purchases made in local
currencies, the type of currency, and the costs associated with the contracts.
The table below provides information about our non-derivative financial
instruments and presents the information in equivalent U.S. dollars. Amounts
are in thousands:
Assets
Cash and equivalents Approx.
- -------------------- -------
There- Fair
1999 2000 2001 2002 2003 after Total Value
---- ---- ---- ---- ---- ----- ----- -----
Variable rate:
Renminbi (PRC) $2,725 -- -- -- -- -- $ 2,725 $ 2,725
Wt. ave. interest rate 4.00%
Euro $2,556 -- -- -- -- -- $ 2,556 $ 2,556
Wt. ave. interest rate 4.00%
Other currencies $3,389 -- -- -- -- -- $ 3,389 $ 3,389
Wt. ave. interest rate 4.00%
Liabilities
Long-term debt
- --------------
Fixed rate:
Euro $ 167 $ 152 $ 165 $ 183 $ 6,187 $ 423 $ 7,277 $ 7,277
Wt. ave. interest rate 8.40% 8.50% 8.50% 8.50% 5.57% 8.50%
Variable rate:
Euro -- -- $27,568 -- -- -- $27,568 $27,568
Wt. ave. interest rate 3.88%
Item 8 Financial Statements and Supplementary Data
Information required by this item is incorporated by reference from the
Independent Auditor's Report found on page 34 and from the consolidated
financial statements and supplementary schedule on pages 35 through 61.
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Page 29 of 64
Part III
Cross Reference Index
Form 10-K
Item Number and Caption Incorporated Material
----------------------- ---------------------
Item 10 Directors and Executive Officers of the Registrant Registrant's Definitive Proxy Statement
Item 11 Executive Compensation Registrant's Definitive Proxy Statement
Item 12 Security Ownership of Certain Beneficial Owners Registrant's Definitive Proxy Statement
and Management
Item 13 Certain Relationships and Related Transactions Registrant's Definitive Proxy Statement
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report
Financial Statements
--------------------
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Earnings - Years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended December
31, 1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity -
Years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Financial Statement Schedules
-----------------------------
Schedule II, Valuation and Qualifying Accounts
Page 30 of 64
(b) Reports on Form 8-K
We filed a report on Form 8-K on November 30, 1998.
We filed a report on Form 8-K/A on January 28, 1999. Both of
these reports pertain to the acquisition of GTI on November
16, 1998. The report on Form 8-K/A includes pro forma
financial information as well as historical financial
statements of GTI.
We also filed a report on Form 8-K on January 29,
1999. This report pertains to a change in our fiscal year from
December 31 of each year to the last Friday of each December.
(c) Exhibits
(10) Material Contracts (incorporated by reference)
(21) Subsidiaries of the Registrant
(23) Consent of Certified Public Accountants
(27) Financial Data Schedule (electronic filing only)
Page 31 of 64
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TECHNITROL, INC.
By /s/James M. Papada, III
-----------------------------------------------------------
James M. Papada, III
Chairman of the Board of Directors,
Chief Executive Officer and Director
Date March 17, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By By /s/Graham Humes
-------------------------- -----------------------------------
Stanley E. Basara Graham Humes
Director Director
Date March 17, 1999 Date March 17, 1999
By By /s/Edward M. Mazze
-------------------------- -----------------------------------
John E. Burrows, Jr. Edward M. Mazze
Director Director
Date March 17, 1999 Date March 17, 1999
By By /s/Drew A. Moyer
-------------------------- -----------------------------------
Rajiv L. Gupta Drew A. Moyer
Director Corporate Controller and Secretary
(Principal Accounting Officer)
Date March 17, 1999
Date March 17, 1999
By /s/J. Barton Harrison
--------------------------
J. Barton Harrison By /s/Albert Thorp, III
-----------------------------------
Director Albert Thorp, III
Vice President - Finance and Chief
Date March 17, 1999 Financial Officer
(Principal Financial Officer)
By /s/Roy E. Hock
--------------------------
Roy E. Hock Date March 17, 1999
Director
Date March 17, 1999
Page 32 of 64
Index to Financial Statements and Schedules
Financial Statements
--------------------
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Earnings - Years ended December 31, 1998, 1997 and
1996
Consolidated Statements of Cash Flows - Years ended December 31, 1998, 1997 and
1996
Consolidated Statements of Changes in Shareholders' Equity - Years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Financial Statement Schedule
----------------------------
Schedule II - Valuation and Qualifying Accounts
Page 33 of 64
Independent Auditors' Report
The Board of Directors and Shareholders
Technitrol, Inc.:
We have audited the consolidated financial statements of Technitrol,
Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we
also have audited the financial statement schedule as listed in the
accompanying index. These consolidated financial statements and the
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements and the financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Technitrol, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity
with generally accepted accounting principles. Also in our opinion, the
related financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Philadelphia, Pennsylvania
February 26, 1999
Page 34 of 64
Technitrol, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1998 and 1997
In thousands, except for share data
Assets 1998 1997
------ ---- ----
Current assets:
Cash and cash equivalents $ 50,563 $ 48,803
Trade receivables, net 71,482 53,990
Inventories 71,230 50,623
Prepaid expenses and other current assets 10,597 8,834
-------- --------
Total current assets 203,872 162,250
Property, plant and equipment 149,035 106,803
Less accumulated depreciation 59,967 47,140
-------- --------
Net property, plant and equipment 89,068 59,663
Deferred income taxes 9,296 2,743
Excess of cost over net assets acquired, net 39,249 29,571
Other assets 2,649 1,107
-------- --------
$344,134 $255,334
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt $ 193 $ 2,025
Accounts payable 23,270 11,319
Accrued expenses 78,073 61,288
-------- --------
Total current liabilities 101,536 74,632
Long-term liabilities:
Long-term debt, excluding current installments 60,705 30,932
Other long-term liabilities 7,084 7,395
Commitments and contingencies (Note 8)
Shareholders' equity:
Common stock: 75,000,000 shares authorized;
16,170,406 and 16,135,074 outstanding in
1998 and 1997, respectively; $.125 par value
per share and additional paid-in capital 45,109 43,148
Retained earnings 131,227 101,800
Other (1,527) (2,573)
-------- --------
Total shareholders' equity 174,809 142,375
-------- --------
$344,134 $255,334
======== ========
See accompanying Notes to Consolidated Financial Statements.
Page 35 of 64
Technitrol, Inc. and Subsidiaries
Consolidated Statements of Earnings
Years ended December 31, 1998, 1997 and 1996
In thousands, except per share data
1998 1997 1996
---- ---- ----
Net sales $448,539 $397,067 $243,312
Cost of sales 306,296 269,050 166,246
-------- -------- --------
Gross profit 142,243 128,017 77,066
Selling, general and administrative expenses 88,827 82,264 49,547
-------- -------- --------
Operating profit 53,416 45,753 27,519
Other income (expense):
Interest income 2,080 2,469 948
Interest expense (3,264) (2,387) (1,162)
Other, net 111 929 (102)
-------- -------- --------
(1,073) 1,011 (316)
-------- -------- --------
Earnings before income taxes 52,343 46,764 27,203
Income taxes (19,034) (17,678) (9,065)
-------- -------- --------
Net earnings from continuing operations 33,309 29,086 18,138
Discontinued operations, net of income taxes:
Earnings from operations of the Test &
Measurement Products Segment -- 258 2,289
Gain on disposal -- 11,502 --
-------- -------- --------
Net earnings $ 33,309 $ 40,846 $ 20,427
======== ======== ========
Earnings per share from continuing operations:
Basic $ 2.08 $ 1.81 $ 1.14
======== ======== ========
Diluted $ 2.06 $ 1.80 $ 1.13
======== ======== ========
Net earnings per share:
Basic $ 2.08 $ 2.54 $ 1.28
======== ======== ========
Diluted $ 2.06 $ 2.53 $ 1.27
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
Page 36 of 64
Technitrol, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
In thousands
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net earnings $33,309 $40,846 $20,427
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 16,280 13,147 9,123
Deferred taxes 3,415 (748) (2,702)
Gain on sale of Products Division assets -- -- (1,471)
Gain on sale of Test & Measurement
Products Segment -- (11,502) --
Changes in assets and liabilities net of
effect of acquisitions and divestitures:
Accounts receivable (1,705) (15,440) (10,777)
Inventories (4,634) (12,329) 6,991
Accounts payable 5,191 1,633 2,634
Accrued expenses (4,688) 9,406 1,734
Other, net 2,559 (1,279) (332)
------- ------- -------
Net cash provided by operating activities 49,727 23,734 25,627
------- ------- -------
Cash flows from investing activities:
Proceeds from the sale of discontinued
operations, net of cash sold and expenses paid -- 32,362 3,671
Acquisitions, net of cash acquired (42,804) (26,514) (11,677)
Capital expenditures, exclusive of acquisitions (20,398) (13,447) (7,775)
Proceeds from sale of property, plant and equipment 368 668 466
-------- ------- -------
Net cash used in investing activities (62,834) (6,931) (15,315)
------- ------- -------
Cash flows from financing activities:
Principal payments on long-term debt (25,483) (19,093) (9,023)
Net borrowings (repayments) of short-term debt -- (2,911) 520
Proceeds of long-term borrowings 44,218 15,536 30,233
Dividends paid (3,759) (3,336) (3,182)
Proceeds from exercise of stock options 97 317 2,090
Purchase of Technitrol stock (145) -- (1,022)
Contributions from minority interest in subsidiary -- 100 100
------- ------- -------
Net cash provided by (used in) financing activities 14,928 (9,387) 19,716
Net effect of exchange rate changes on cash (61) (2,144) (391)
------- ------- -------
Net increase in cash and cash equivalents 1,760 5,272 29,637
Cash and cash equivalents at beginning of year 48,803 43,531 13,894
------- ------- -------
Cash and cash equivalents at end of year $50,563 $48,803 $43,531
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
Page 37 of 64
Technitrol, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1998, 1997 and 1996
In thousands, except per share data
Other
---------------------------
Accumu-
lated
Common stock and other
paid-in capital Deferred compre- Compre-
--------------------- Retained compen- hensive hensive
Shares Amount earnings sation income income
------ ------ -------- ------ ------ ------
Balance at January 1, 1996 7,836 $38,130 $48,101 $ (710) $ (760)
Purchase of common stock (37) (5) (1,017) -- --
Stock options, awards and related
compensation 189 968 19 (90) --
Tax benefit of stock compensation -- 1,545 -- -- --
Currency translation adjustments -- -- -- -- 173 $ 173
Net earnings -- -- 20,427 -- -- 20,427
--------
Comprehensive income -- -- -- -- -- $ 20,600
========
Dividends declared ($.20 per share) -- -- (3,191) -- --
Two-for-one stock split declared in
February 1997 7,987 -- -- -- --
------ ------- -------- ------- -------
Balance at December 31, 1996 15,975 $40,638 $64,339 $ (800) $ (587)
====== ======= ======== ======= =======
Stock options, awards and related
compensation 160 1,354 -- (378) --
Tax benefit of stock compensation -- 1,156 -- -- --
Currency translation adjustments -- -- -- -- (808) $ (808)
Net earnings -- -- 40,846 -- -- 40,846
--------
Comprehensive income -- -- -- -- -- $ 40,038
========
Dividends declared ($.21 per share) -- -- (3,385) -- --
------ ------- -------- ------- -------
Balance at December 31, 1997 16,135 $43,148 $101,800 $(1,178) $(1,395)
====== ======= ======== ======= =======
Purchase of common stock (8) (145) -- -- --
Stock options, awards and related
compensation 43 1,398 -- (614) --
Tax benefit of stock compensation -- 708 -- -- --
Currency translation adjustments -- -- -- -- 1,660 $ 1,660
Net earnings -- -- 33,309 -- -- 33,309
--------
Comprehensive income -- -- -- -- -- $ 34,969
========
Dividends declared ($.24 per share) -- -- (3,882) -- --
------ ------- -------- ------- -------
Balance at December 31, 1998 16,170 $45,109 $131,227 $(1,792) $ 265
====== ======= ======== ======= =======
See accompanying Notes to Consolidated Financial Statements.
Page 38 of 64
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
------------------------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of
Technitrol, Inc. (the "Company") and all of its subsidiaries. All material
intercompany accounts and transactions are eliminated in consolidation.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include funds invested in a variety of liquid
short-term investments with a maturity of three months or less.
Inventories
- -----------
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method. In addition to the
inventories included in the accompanying balance sheets, the Company has custody
of inventories under consignment-type leases from suppliers ($40,031,000 at
December 31, 1998, and $38,416,000 at December 31, 1997). This inventory
consists primarily of precious metals which are used in the Company's
metallurgical components manufacturing business. Included in interest expense
for the year ended December 31, 1998 are consignment interest fees of
$1,422,000. These interest costs were $394,000 and $232,000 in 1997 and 1996,
respectively.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost. Depreciation is based
upon the estimated useful life of the assets on both the accelerated and the
straight-line methods. The estimated useful lives 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 is primarily related to
acquisitions within the Electronic Components Segment ("ECS") and is amortized
on a straight-line basis over 15 years. When events and circumstances so
indicate, the recoverability of its carrying value is evaluated by determining
whether the amortization of its remaining balance can be recovered through
future operating undiscounted cash flows of the acquired operation.
(continued)
Page 39 of 64
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
------------------------------------------
Foreign Currency Translation
- ----------------------------
Certain foreign subsidiaries of the Company use the U.S. dollar as the
functional currency and others use a local currency. For subsidiaries using the
U.S. dollar as the functional currency, monetary assets and liabilities are
translated at year end exchange rates while non-monetary items are translated at
historical rates. Income and expense accounts are translated at the average
rates in effect during the year, except for depreciation and cost of sales,
which are translated at historical rates. Gains or losses from changes in
exchange rates are recognized in earnings in the year of occurrence. For
entities using a local currency as the functional currency, net assets are
translated at year end rates while income and expense accounts are translated at
average exchange rates. Adjustments resulting from these translations are
reflected directly in shareholders' equity.
Financial Instruments and Derivative Financial Instruments
- ----------------------------------------------------------
The carrying value of cash and cash equivalents, accounts receivable,
short-term borrowings, accounts payable and accrued expenses are a reasonable
estimate of their fair value due to the short-term nature of these instruments.
The carrying value of long-term debt approximates its fair value after taking
into consideration current rates offered to the Company for similar debt
instruments of comparable maturities. The fair values of financial instruments
have been determined through information obtained from quoted market sources and
management estimates. The Company does not hold or issue financial instruments
or derivative financial instruments for trading purposes.
The Company is exposed to market risk from changes in interest rates,
foreign currency exchange rates and precious metal prices. To modify the risk
from these changes, the Company periodically enters into hedging transactions
which have been authorized pursuant to the Company's policies and procedures. To
date, such transactions have been limited to foreign currency forward exchange
contracts and currency options, but in the future these transactions may also be
related to interest rates or precious metal prices. Gains and losses related to
qualified hedges of firm commitments and anticipated transactions are deferred
and are recognized in income or as adjustments of carrying amounts when the
hedged transaction occurs. All other forward exchange and option contracts are
marked to market; and unrealized gains and losses are included in current-period
net income. There were three currency option contracts and two forward contracts
open at December 31, 1998. None were material to the Company's financial
position.
(continued)
Page 40 of 64
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
------------------------------------------
Estimates
- ---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions may affect the reported amounts of
assets and liabilities, 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
GTI Corporation ("GTI"): On November 16, 1998, the Company acquired all
------------------------
of the capital stock of GTI whose principal operating unit was Valor
Electronics, Inc. ("Valor"). Valor designed and manufactured magnetics-based
components for signal processing and power transfer functions used primarily in
local area networking and also in telecommunications and broadband products. At
the time of acquisition, manufacturing operations were located in the People's
Republic of China and the Philippines. GTI's corporate offices were located in
San Diego, California.
The total purchase price included $34.0 million paid to the former
shareholders of GTI. In addition, transaction expenses and related acquisition
costs were incurred. To complete the acquisition, the Company used approximately
$14.0 million of cash on hand, and drew down approximately $20.0 million from
approximately $137.0 million of available and previously unused bank lines of
credit.
The acquisition was accounted for by the purchase method of accounting.
A preliminary allocation of purchase price to the assets acquired and
liabilities assumed has been made using estimated fair values that include
values based on independent appraisals and management estimates. The estimated
fair value of the assets acquired and liabilities assumed approximated $46.2
million and $18.3 million, respectively. The excess of costs over net assets
acquired approximated $5.8 million. These estimates will be adjusted to reflect
actual amounts. Any subsequent adjustments are expected to occur by November 30,
1999 and are not expected to have a material impact on the Company's financial
position.
(continued)
Page 41 of 64
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(2) Acquisitions and Divestitures, continued
-----------------------------
The estimate of liabilities assumed includes an approximate $4.0
million reserve for restructuring the GTI businesses. The reserve was
established in accordance with Emerging Issues Task Force Issue 95-3,
"Recognition of Liabilities in Connection with a Purchase Business Combination",
and is intended to cover the estimated expenses related to integrating GTI's
operations into existing facilities of the Company's Pulse subsidiary. Expenses
are expected to be incurred primarily for terminating employees, leasehold
terminations and other related exit costs. Restructuring plans are expected to
be finalized by November of 1999.
GTI experienced significant financial difficulty prior to its
acquisition by the Company, and the Company plans to make significant changes in
GTI's businesses, as noted above. As a result, the Company does not believe that
the following unaudited pro forma financial information, which reflects
continuing operations only and assumes GTI was acquired on January 1, 1997, is
indicative of the results that actually would have occurred if the acquisition
had been consummated on the date indicated or which may be attained in the
future (in thousands, except for earnings per share).
Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997
------------- -------------
Net sales $489,336 $479,658
Net earnings $17,627 $29,091
Diluted earnings per share $1.09 $1.80
FEE Technology, S.A. ("FEE"): On July 3, 1998, the Company purchased
-----------------------------
all of the capital stock of FEE. FEE designed and manufactured magnetic
components for telecommunications and power conversion equipment. The total
purchase price including assumed debt and transaction costs approximated $20.0
million and was funded by cash on hand. The fair value of the net assets
acquired was approximately $2.7 million resulting in goodwill of approximately
$5.8 million. The total purchase price is subject to adjustment as expenses and
details of the transaction are finalized. Adjustments to the purchase price
allocation are not expected to have a material impact on the Company's
consolidated results of operations for 1999. FEE is now part of the Electronic
Components Segment. The acquisition was accounted for by the purchase method of
accounting and, therefore, the financial results of FEE have been included with
those of the Company beginning on July 3, 1998. Historical pro forma results of
operations would not be materially different from actual results.
(continued)
Page 42 of 64
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(2) Acquisitions and Divestitures, continued
-----------------------------
Certain Assets of Metales y Contactos, S.A. de C.V. ("Metales"): On
----------------------------------------------------------------
July 3, 1998, the Company, through its Metallurgical Components Segment ("MCS"),
acquired certain assets of Metales. The purchase price of Metales' assets was
not material to the Company's consolidated financial position. The results of
the Metallurgical Components Segment include the results of operating the
acquired assets from July 3, 1998.
The Magnetic Components Business of Northern Telecom Ltd. ("Nortel"):
---------------------------------------------------------------------
On November 30, 1997, the Company acquired the magnetic components business of
Nortel (the "Business") by purchasing all of the common stock of two Nortel
subsidiaries (one in Malaysia and one in Thailand) and certain assets in Canada
relating to design engineering support of those subsidiaries. Pursuant to a
separate supply agreement, the Business will continue to provide components such
as inductors and transformers for Nortel's telecommunications and power
conversion equipment.
The acquisition of the Business was accounted for by the purchase
method of accounting. The purchase price was approximately $22.5 million
including transaction expenses. The fair value of the net assets acquired
approximated $8.0 million. The purchase price was funded by cash on hand,
including cash received from the sale of the Test & Measurement Products
Segment, as explained below.
The following unaudited pro forma financial information, which reflects
continuing operations only, assumes that the Business was acquired on January 1,
1996, and is provided for comparative purposes only. It does not purport to be
indicative of the results that actually would have occurred if the acquisition
had been consummated on the date indicated or which may be attained in the
future (in thousands, except for earnings per share).
Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
Net sales $430,242 $281,312
Net earnings $30,275 $20,435
Diluted earnings per share $1.88 $1.27
Doduco GmbH ("Doduco"): 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 produced 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 were complemented by broad capabilities in
electroplating and precious metals refining.
(continued)
Page 43 of 64
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(2) Acquisitions and Divestitures, continued
-----------------------------
The assets purchased consisted of real property in Pforzheim and
Sinsheim, Germany and Madrid, inventories, fixed assets and intangibles. The
liabilities assumed consisted of vacation and bonus payments which were 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 MCS. The fair
value of the net assets acquired approximated $89.0 million. The purchase price
was funded primarily by bank credit.
Divestitures
Test & Measurement Products Segment: On June 4, 1997, the Company
------------------------------------
completed the sale of those entities which formed its Test & Measurement
Products Segment to an affiliate of Ametek, Inc. for approximately $34.0 million
in cash, and a resulting gain of approximately $11.5 million (net of income
taxes of approximately $11.1 million) was realized in the second quarter of
1997. Transaction expenses were paid by the Company from the gross proceeds of
the sale and are reflected in the net gain realized on the sale. As a result of
the foregoing, the Company discontinued its manufacturing and marketing of test
& measurement products and the Test & Measurement Products Segment is reported
as a discontinued operation in the accompanying Consolidated Statements of
Earnings and in these Notes to Consolidated Financial Statements. Where
applicable, prior-year amounts have been restated to exclude the effect of the
discontinued operations. The net assets of the Segment consisted primarily of
accounts receivable, inventories and fixed assets, net of accounts payable and
other accrued operating expenses. The sales of this Segment were approximately
$11.8 million in 1997 prior to the divestiture and were $30.8 million in 1996.
(continued)
Page 44 of 64
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(2) Acquisitions and Divestitures, continued
-----------------------------
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 divestiture of the Products Division, which was included in the Test &
Measurements Products Segment, occurred prior to the Company's decision to
divest the entire Segment, and financial information for the Products Division
had not been separately reported in previous financial statements. Accordingly,
its operating results and the gain on the sale of that Division were previously
included in income from continuing operations. Those items have been
reclassified and are now included as a part of the discontinued operations. The
earnings from operations of the Test & Measurement Products Segment for the year
ended December 31, 1996, include a gain of approximately $699,000 (net of income
taxes of approximately $772,000) realized on the disposal of the Products
Division.
The impact of the divestiture on earnings per share was as follows:
Year Ended December 31,
-----------------------
1997 1996
---- ----
Earnings per share from continuing operations:
Basic $1.81 $1.14
Diluted 1.80 1.13
Discontinued operations, net of tax:
Earnings per share from operations - basic
and diluted .02 .14
Gain per share on disposal - basic and
diluted .71 --
Earnings per share:
Basic 2.54 1.28
Diluted 2.53 1.27
(continued)
Page 45 of 64
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(3) Financial Statement Details
---------------------------
The following provides details for certain financial statement captions
at December 31, 1998 and 1997 (in thousands):
1998 1997
---- ----
Inventories:
Finished goods $ 27,376 $ 18,897
Work in progress 14,926 11,852
Raw materials and supplies 28,928 19,874
-------- --------
$ 71,230 $ 50,623
======== ========
Property, plant and equipment, at cost:
Land $ 4,549 $ 4,036
Buildings and improvements 30,431 25,437
Machinery and equipment 114,055 77,330
-------- --------
$149,035 $106,803
======== ========
Accrued expenses:
Income taxes payable $ 32,301 $ 23,538
Dividends payable 970 847
Accrued compensation 14,977 11,398
Other accrued expenses 29,825 25,505
-------- --------
$ 78,073 $ 61,288
======== ========
(continued)
Page 46 of 64
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(4) Long-term Debt
--------------
At December 31, 1998 and 1997 long-term debt was as follows (in
thousands):
1998 1997
---- ----
Bank Loans
- ----------
Fixed-rate term loan repaid in 1998 $ -- $ 6,000
Variable-rate (U.S. LIBOR plus .40%) multi-currency revolving
credit facility with $125.0 million maximum draw, due June
30, 2000 (5.96% rate at December 31, 1998) 26,000 --
Variable-rate (German LIBOR plus 0.625%) multi-currency bank
loan facility with $40.0 million maximum draw, due
December 31, 2001 (3.875% rate at December 31, 1998) 27,568 26,879
Fixed rate (5.57%), unsecured debt in Germany (denominated in
Deutsche marks) due July 2003 5,993 --
------- -------
Total bank loans 59,561 32,879
Mortgage Notes, secured by mortgages on land, buildings, and certain equipment:
- --------------
4.5% - 10.32% mortgage notes, due in monthly installments until 2007 1,337 78
------- -------
Total long-term debt 60,898 32,957
Less current installments 193 2,025
------- -------
Long-term debt excluding current installments $60,705 $30,932
======= =======
At the Company's option, interest on the revolving credit facilities
may be based on the prime rate or on LIBOR. The facility expiring on June 30,
2000 is secured by a pledge of the stock of certain of the Company's domestic
subsidiaries. All outstanding borrowings on that facility are denominated in
U.S. dollars. The facilities expiring on December 31, 2001, and July 2003 are
unsecured, and all outstanding borrowings under them are in Deutsche marks.
(continued)
Page 47 of 64
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(4) Long-term Debt, continued
--------------
Principal payments due within the next five years are as follows (in
thousands):
1999 $ 193
2000 26,179
2001 27,733
2002 183
2003 6,187
The bank loan facilities contain certain covenants requiring
maintenance of minimum net worth and other customary and normal provisions. The
Company is in compliance with all such covenants.
(5) Research, Development and Engineering Expenses
----------------------------------------------
Research, development and engineering expenses ("RD&E") are included in
selling, general and administrative expenses and were $16.8 million, $16.4
million and $9.0 million in 1998, 1997, and 1996, respectively, for continuing
operations. RD&E includes costs associated with new product development, product
and process improvement, engineering follow-through during early stages of
production, design of tools and dies, and the adaptation of existing technology
to specific situations and customer requirements. The research and development
component of RD&E, which generally includes only those costs associated with new
technology, new products or significant changes to current products or
processes, was $12.5 million, $7.2 million and $5.6 million in 1998, 1997, and
1996, respectively.
(6) Restructuring Charges
---------------------
Restructuring and related costs are 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 ECS. 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 that year. A total of 263 direct and 46 indirect
employees were included in the restructuring plan.
(continued)
Page 48 of 64
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(7) Income Taxes
------------
Earnings before income taxes were as follows (in thousands):
1998 1997 1996
---- ---- ----
Domestic $ 5,984 $23,306 $ 8,350
Non U.S. 46,359 46,537 22,666
------- ------- -------
Total $52,343 $69,843 $31,016
======= ======= =======
Earnings attributable to continuing operations were (in thousands)
$52,343, $46,764 and $27,203 in 1998, 1997 and 1996, respectively.
Income tax expense was as follows (in thousands):
Current: 1998 1997 1996
---- ---- ----
Federal $ 4,420 $14,080 $ 7,310
State and local 688 2,214 1,029
Non-U.S. 10,511 13,451 5,014
------- ------ -------
15,619 29,745 13,353
Deferred expense (benefit) 3,415 (748) (2,702)
------- ------- -------
$19,034 $28,997 $10,651
======= ======= =======
Income tax expense amounts attributable to continuing operations were
(in thousands) $19,034, $17,678 and $9,065 in 1998, 1997 and 1996, respectively.
Income tax expense amounts of (in thousands) $11,319 and $1,586 for 1997 and
1996, respectively, are included in the results of discontinued operations.
Amounts credited to Additional Paid-In Capital include the tax benefit of
certain components of employee compensation related to the Company's common
stock. Such items include dividends paid on restricted stock, the change in
value from the award date to the release date of restricted stock which was
released during the period, and employee compensation related to the exercise
of stock options.
(continued)
Page 49 of 64
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(7) Income Taxes, continued
------------
A reconciliation of the statutory federal income tax rate with the
effective income tax rate follows:
1998 1997 1996
---- ---- ----
Statutory federal income tax rate 35% 35% 35%
Increase (decrease) resulting from:
Tax-exempt earnings of
subsidiaries in Puerto Rico (1) (1) (2)
State and local income taxes, net
of federal tax effect 1 2 2
Non-deductible expenses and
other foreign income subject to
U.S. income tax 10 5 5
Foreign (10) (3) (7)
Other, net 1 4 1
--- --- ---
Effective tax rate 36% 42% 34%
=== === ===
For continuing operations, the Company's effective tax rates were
approximately 36%, 38% and 33% in 1998, 1997 and 1996, respectively. The
effective tax rate of 42% for all operations of the Company in 1997 reflects
significant taxes attributable to the gain on the sale of discontinued
operations.
(continued)
Page 50 of 64
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(7) Income Taxes, continued
------------
Deferred tax assets and liabilities included the following (in
thousands):
Assets: 1998 1997
---- ----
Inventories $ 1,098 $ --
Plant and equipment 126 1,032
Vacation pay and other compensation 892 824
Pension expense 785 1,318
Stock awards 1,247 393
Accrued liabilities 5,186 4,591
Net operating losses 4,774 --
Capital losses carryover 6,582 --
Other 100 660
------- ------
Total deferred tax assets 20,790 8,818
Valuation allowance (6,582) --
------- ------
Net deferred tax assets 14,208 8,818
Liabilities:
Inventories -- 819
Other 23 417
------- ---
Total deferred tax liabilities 23 1,236
------- ------
Net deferred tax asset $14,185 $7,582
======= ======
Based on the Company's history of taxable income and its projection of future
earnings, management believes that it is more likely than not that sufficient
taxable income will be generated in the foreseeable future to realize the net
deferred tax assets.
The Company has not provided for U.S. federal income and foreign
withholding taxes on approximately $170.3 million of non-U.S. subsidiaries'
undistributed earnings (as calculated for income tax purposes) as of December
31, 1998. Such earnings include pre-acquisition earnings of foreign entities
acquired through stock purchases, and are intended to be reinvested outside of
the U.S. indefinitely. It is not practical to estimate the amount of
unrecognized deferred taxes on these undistributed earnings. Where excess cash
has accumulated in the Company's non-U.S. subsidiaries and it is advantageous
for tax or foreign exchange reasons, subsidiary earnings may be remitted.
(continued)
Page 51 of 64
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(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
amounts for the years ended December 31, 1998, 1997 and 1996 were $4.5 million,
$3.6 million and $2.8 million, respectively. The aggregate minimum rental
commitments under non-cancelable leases in effect at December 31, 1998 were as
follows (in thousands):
Year ending
December 31
-----------
1999 $ 6,793
2000 5,055
2001 4,451
2002 3,263
2003 2,677
Thereafter 5,268
-------
$27,507
=======
The Company is involved in several legal actions relating to waste
disposal sites. The Company's involvement in these matters has generally arisen
from the alleged disposal by licensed waste haulers of small amounts of waste
material many years ago. In addition, as a result of the acquisition of GTI, the
Company is involved in studying and undertaking certain remedial actions with
respect to groundwater pollution and soil contamination conditions at a closed
facility in Leesburg, Indiana. The Company anticipates making additional
environmental expenditures in future years to continue its environmental studies
and analysis. Upon mutual agreement with a certain state agency, the Company
will implement a remediation plan. Based on current knowledge, the Company does
not believe that any future expenses associated with environmental remediation
will have a material impact on the financial position of the Company.
The Company is also subject to various lawsuits, claims and proceedings
which arise in the ordinary course of its business. The Company does not believe
that the outcome of any of these lawsuits will have a material adverse effect on
our financial results.
(continued)
Page 52 of 64
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(8) Commitments and Contingencies, continued
-----------------------------
The Company accrues costs associated with environmental and legal
matters when they become probable and reasonably estimable. Accruals are
established based on the estimated undiscounted cash flows to settle the
obligations and are not reduced by any potential recoveries from insurance or
other indemnification claims. Management believes that any ultimate liability
with respect to these actions in excess of amounts provided will not materially
affect the Company's operations or consolidated financial position.
(9) Shareholders' Equity
--------------------
On January 22, 1997, the Company's Board of Directors approved a
two-for-one split of the Company's common stock in the form of a 100% common
stock dividend for shareholders of record as of February 7, 1997. A total of
10,925,774 shares were issued in connection with the split. The stated par value
of each share was not changed from $.125. All relevant share and per share
amounts have been restated to retroactively reflect the stock split.
The retained earnings of the Company at December 31, 1998 include
approximately $6.2 million which has been restricted in accordance with the laws
of the People's Republic of China (PRC). This amount, which is based on the
earnings of the Company's subsidiaries in the PRC, may not be available for
distribution to the U.S. parent company or its shareholders but is not required
to be held in cash.
The Company has a Shareholder Rights Plan. The Rights are currently not
exercisable, and automatically trade with the Company's Common Shares. However,
after a person or group has acquired 15% or more of the Common Shares, the
Rights will become exercisable and separate certificates representing the Rights
(continued)
Page 53 of 64
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(9) Shareholders' Equity, continued
--------------------
will be distributed. In the event that any person or group acquires 15% of the
Common Shares, each holder of two Rights (other than the Rights of the acquiring
person) will have the right to receive, for $135, that number of Common Shares
having a market value equal to two times the exercise price of the Rights.
Alternatively, in the event that, at any time following the date in which a
person or group acquires ownership of 15% or more of the Common Shares, the
Company is acquired in a merger or other business combination transaction, or
50% or more of its consolidated assets or earning power is sold, each holder of
two Rights (other than the Rights of such acquiring person or group) will
thereafter have the right to receive, upon exercise, that number of shares of
common stock of the acquiring entity having a then market value equal to two
times the exercise price of the Rights. The Rights may be redeemed by the
Company at a price of $.005 per Right at any time prior to becoming exercisable.
Rights that are not redeemed or exercised will expire on September 9, 2006.
(10) Earnings Per Share
------------------
Basic earnings per share are calculated by dividing earnings by the
weighted average number of common shares outstanding (excluding restricted
shares) during the year. For calculating diluted earnings per share, common
share equivalents and restricted stock outstanding are added to the weighted
average number of common shares outstanding. Common share equivalents result
from outstanding options to purchase common stock as calculated using the
treasury stock method. Such amounts were 36,000, 44,000 and 139,000 in 1998,
1997 and 1996, respectively. Relevant share amounts and earnings per share have
been restated to reflect a two-for-one stock split effective on February 28,
1997. Earnings per share calculations are as follows (in thousands, except per
share amounts):
1998 1997 1996
---- ---- ----
Net income $33,309 $40,846 $20,427
Basic earnings per share:
Shares 15,981 16,093 15,957
Per share amount $2.08 $2.54 $1.28
Diluted earnings per share:
Shares 16,203 16,137 16,096
Per share amount $2.06 $2.53 $1.27
(continued)
Page 54 of 64
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(11) Employee Benefit Plans
----------------------
The Company and certain of its subsidiaries maintain defined benefit
pension plans and make contributions to multi-employer plans covering certain
union employees. Certain non-U.S. subsidiaries have varying types of retirement
plans providing benefits for substantially all of their employees.
Pension expense was as follows (in thousands):
1998 1997 1996
---- ---- ----
Principal defined benefit plans $(176) $420 $1,024
Multi-employer and other employee benefit plans 206 40 61
--- ---- ------
$ 30 $460 $1,085
===== ==== ======
The expense for the principal defined benefit pension plans include the
following components (in thousands):
1998 1997 1996
---- ---- ----
Service cost - benefits earned during the period $1,093 $1,172 $1,417
Interest cost on projected benefit obligation 1,376 1,332 1,465
Expected actual return on plan assets (2,290) (1,927) (1,778)
Net amortization (355) (157) (80)
------ ------ ------
Net periodic pension cost $ (176) $ 420 $1,024
====== ====== ======
(continued)
Page 55 of 64
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(11) Employee Benefit Plans, continued
----------------------
The financial status of the principal defined benefit plans at December 31, 1998
and 1997, was as follows (in thousands):
1998 1997
---- ----
Change in benefit obligation
Benefit obligation at beginning of year $20,486 $19,270
Service cost 1,093 1,172
Interest cost 1,376 1,332
Actuarial gain (984) (146)
Benefits paid (1,061) (1,142)
------ -------
Benefit obligation at end of year 20,910 20,486
Change in plan assets
Fair value of plan assets at beginning of year 26,379 22,303
Actual return on plan assets 620 5,202
Employer contributions 13 16
Benefits paid (1,061) (1,142)
------- -------
Fair value of plan assets at end of year 25,951 26,379
------- -------
Funded status 5,041 5,893
Unrecognized:
Net gains (8,124) (8,784)
Prior service cost 728 454
Net transition obligation 21 24
------- -------
Accrued pension costs at December 31 $(2,334) $(2,413)
======= =======
(continued)
Page 56 of 64
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(11) Employee Benefit Plans, continued
----------------------
Benefits are based on years of service and average final compensation.
For U.S. plans, the Company funds, annually, at least the minimum amount
required by the Employee Retirement Income Security Act of 1974. Depending on
the investment performance of Plan assets and other factors, the funding amount
may be zero. Plan assets consist principally of short-term investments and
listed bonds and stocks. Assumptions used to develop data for 1998 and 1997 were
as follows:
Discount rates 6.5% to 7.3%
Annual compensation increases 4.8% to 7.0%
Expected long-term rates of return on plan assets 6.5% to 9.0%
The Company maintains defined contribution 401(k) plans covering
substantially all U.S. employees not affected by certain collective bargaining
agreements. Under the primary 401(k) plan, the Company contributes a matching
amount equal to $.50 for each $1.00 of the participant's contribution not in
excess of 3% of the participant's annual wages. The total contribution expense
under the 401(k) plans for employees of continuing operations was $586,000,
$524,000 and $440,000 in 1998, 1997 and 1996, respectively.
The Company does not provide any significant post-retirement benefits
other than the pension plans and 401(k) plans described above.
(12) Stock-Based Compensation
------------------------
The Company has an incentive compensation plan for key employees of the
Company and its subsidiaries. One component of this plan grants the recipient
the right of ownership of Technitrol, Inc. common stock, conditional on
continued employment with the Company. A summary of the shares under the
incentive compensation plan is as follows:
Available to
be Granted
---------------
Shares authorized 1,200,000
Awarded during years prior to 1998, net of cancellations (873,325)
-------
Balance at December 31, 1997 326,675
Awarded during 1998, net of cancellations (28,730)
-------
Balance available at December 31, 1998 297,945
=======
(continued)
Page 57 of 64
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(12) Stock-Based Compensation
------------------------
During the years ended December 31, 1998, 1997 and 1996, the Company
issued to employees, net of cancellations, incentive compensation shares having
an approximate fair value at date of issue of $1,210,000, $1,037,000 and
$438,000, respectively. Shares are held by the Company until the continued
employment requirement has been attained. The market value of the shares at the
date of grant is charged to expense during the vesting period on a straight-line
basis. Amounts charged to expense as a result of the incentive compensation plan
and related expenses were $1,186,000 in 1998, $912,000 in 1997 and $976,000 in
1996. The total grants and expenses noted above include awards made to employees
of the Test & Measurement Products Segment prior to June 4, 1997.
The Company also has a stock award plan for non-employee directors. The
Board of Directors Stock Plan was approved in 1998 to assist the Company in
attracting and retaining highly qualified persons to serve on the Company's
Board of Directors. Under the terms of the plan, 30,000 shares of the Company's
common stock are available for grant. On an annual basis, shares amounting to a
dollar value predetermined by the plan are issued to non-employee directors. In
1998, 2,896 shares (including those deferred at the directors' election) were
issued under the plan.
In connection with the 1995 acquisition of Pulse Engineering, options
which had been granted for the purchase of Pulse common shares were assumed by
the Company and converted into options to purchase Technitrol common stock. At
December 31, 1998, 43,045 options remained outstanding. No additional options
are expected to be granted under the assumed plans.
The Company has not issued any stock options to employees, except for
those options assumed in connection with the acquisition of Pulse. The fair
value of those options was included in the purchase price of the acquisition,
and, accordingly, is amortized as part of the goodwill associated with the
acquisition. The options have no additional impact on the earnings of the
Company under the provisions of Statement of Financial Accounting Standard No.
123, "Accounting for Stock-based Compensation."
(continued)
Page 58 of 64
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(13) Supplementary Information
-------------------------
The following amounts were charged directly to costs and expenses (in
thousands, for continuing operations):
1998 1997 1996
---- ---- ----
Depreciation $13,933 $11,874 $7,317
Amortization of intangible assets 2,347 1,379 1,228
Advertising 799 1,510 777
Repairs and maintenance 6,472 5,868 3,914
Bad debt expense 632 328 135
Cash payments made (in thousands,
for all operations):
Income taxes $11,813 $13,668 $9,205
Interest 3,344 2,353 1,106
Accumulated other comprehensive income as disclosed in the Consolidated
Statements of Changes in Shareholders' Equity consists principally of foreign
currency translation items. In 1997, as a result of the Company's sale of its
Test & Measurement Products Segment (which included Lloyd Instruments, Ltd., a
U.K. Company), a reclassification adjustment was made as follows:
Unrealized currency translation loss arising during period $(1,341)
Less: Reclassification adjustment for losses included
in the gain on the sale of the Test & Measurement
Products Segment 533
-------
Net currency translation adjustment $ (808)
=======
(14) Segment Information
-------------------
The "Business Segment Information" and "Geographic Information"
sections on pages 2 through 6 of this Form 10-K are integral parts of the
Company's financial statements.
(continued)
Page 59 of 64
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(15) Quarterly Financial Data (Unaudited)
------------------------------------
Quarterly results of operations (unaudited) for 1998 and 1997 are
summarized as follows (in thousands, except per share data):
Quarter ended
-------------
Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- -------
1998:
Net sales $110,748 $104,888 $113,349 $119,554
Gross profit 36,142 33,159 34,946 37,996
Net earnings 9,378 8,413 7,442 8,076
Net earnings per share:
Basic .58 .53 .47 .51
Diluted .58 .52 .46 .50
1997:
Net sales $ 92,207 $103,927 $102,127 $ 98,806
Gross profit 28,915 33,646 32,687 32,769
Net earnings from
continuing operations 6,553 7,900 7,138 7,495
Earnings per share from
continuing operations:
Basic .41 .49 .44 .47
Diluted .40 .49 .44 .46
Net earnings per share:
Basic .43 1.20 .44 .47
Diluted .42 1.20 .44 .46
Earnings per share amounts have been restated to reflect a two-for-one stock
split effective on February 28, 1997.
Page 60 of 64
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(1) December 31
- ----------- --------- -------- ---------- ------ -----------
Year ended December 31, 1998:
Reserve for obsolete and slow-
moving inventory $3,720 $3,541 $(4,280) $14,153 $17,134
====== ====== ======= ======= =======
Reserve for doubtful accounts $ 202 $ 632 $ (416) $ 401 $ 819
====== ====== ======= ======= =======
Year ended December 31, 1997:
Reserve for obsolete and slow-
moving inventory $4,671 $6,536 $(7,487) $ -- $ 3,720
====== ====== ======= ======= =======
Reserve for doubtful accounts $ -- $ 328 $ (126) $ -- $ 202
====== ====== ======= ======= =======
- -------------------
(1) Primarily relates to acquisitions
Page 61 of 64
Exhibit Index
DOCUMENT
- --------
3. (a) Articles of Incorporation Incorporated by reference to Form 8-A/A
dated April 10, 1998 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 security holders Incorporated by reference to Form 10-K for
the year ended December 31, 1995, and
to Form 8-A/A dated April 10, 1998
10. Material Contracts The "Agreement and Plan of Merger"
related to the GTI Corporation acquisition
is incorporated by reference to Form 8-K
dated November 16, 1998.
21. Subsidiaries of Registrant Page 63
23. Consent of Certified Public Accountants Page 64
27. Financial Data Schedule Electronic Filing Only
- -------------------------------------------------------------------------------------------------------
Page 62 of 64