Electrical. These increases were partially offset by a decline in demand for certain wireline communications and power products sold by Electronics, a temporary capacity constraint related to employee retention difficulties due to the Chinese new year, the effects of inclement weather at Electronics’ manufacturing operations in China and the temporary operations stoppage in Mianyang, China caused by an earthquake.
The increase in research, development and engineering expenses is primarily due to the inclusion of Sonion expenses. To date, Sonion has required a higher level of RD&E spending as a percentage of revenues than has traditionally been required at Electronics. Excluding Sonion, RD&E expenses as a percentage of Electronics’ sales was 5.7% and was a result of incurring a consistent level of spending as compared to the 2007 period, despite a sales decline. We believe that future sales in the electronic components markets will be driven by next-generation products. As a result, design and development activities with our OEM customers continue at an aggressive pace.
borrowings and uses of cash primarily related to the Sonion acquisition. Silver leasing fees, which are included in net interest expense, increased as compared to the same period in 2007 due to higher average prices of silver.
Other. The increase in other income is primarily attributable to higher net foreign exchange gains during the six months ended June 27, 2008 as compared to the six months ended June 29, 2007. The increase in foreign exchange gains was primarily due to the settlement of two foreign exchange forward contracts related to the acquisition of Sonion, which was primarily offset by the negative effects of the overall strengthening of local functional currencies, primarily the euro and renminbi, relative to the U.S. dollar.
Income Taxes. The effective income tax rate for the six months ended June 27, 2008 was 7.2% compared to 11.6% for the six months ended June 29, 2007. The decrease in the effective tax rate is primarily a result of the usage of tax losses in certain jurisdictions, the release of a tax reserve caused by a statute expiration and the higher proportion of net earnings being recognized in lower tax jurisdictions in 2008 as compared to the same period of 2007.
Minority Interest. The increase in minority interest expense was due to improved net earnings at FRE in 2008.
Liquidity and Capital Resources
Working capital as of June 27, 2008 was $209.0 million, compared to $231.8 million as of December 28, 2007. This $22.8 million decrease was primarily due to a decrease in cash and cash equivalents, which was partially offset by the inclusion of Sonion’s working capital as of February 2008. Cash and cash equivalents, which are included in working capital, decreased from $116.3 million as of December 28, 2007 to $28.7 million as of June 27, 2008, primarily related to cash payments for the Sonion acquisition.
We present our statement of cash flows using the indirect method as permitted under FASB Statement No. 95, Statement of Cash Flows (“SFAS 95”). Our management has found that investors and analysts typically refer to changes in accounts receivable, inventory, and other components of working capital when analyzing operating cash flows. Also, changes in working capital are more directly related to the way we manage our business for cash flow than are items such as cash receipts from the sale of goods, as would appear using the direct method.
Net cash provided by operating activities was $12.6 million for the six months ended June 27, 2008 as compared to $28.1 million in the comparable period of 2007, a decrease of $15.5 million. The decrease is a result of lower net earnings as described above, increased inventory and increased prepaid expenses which were partially offset by the impact of a foreign exchange contract settlement.
Capital expenditures were $16.7 million during the six months ended June 27, 2008 and $8.9 million in the comparable period of 2007. The increase of $7.8 million in the 2008 period compared to 2007 was due primarily to higher expenditures at Electronics, primarily related to the inclusion of Sonion’s capital expenditures for projects in-process as of the acquisition date that we agreed to complete. We make capital expenditures to expand production capacity and to improve our operating efficiency. We plan to continue making such expenditures in the future as and when necessary.
We used $425.8 million, net of cash acquired, for acquisitions during the six months ended June 27, 2008 related to our acquisition of Sonion. We plan on pursuing additional acquisition opportunities in the future.
We used $7.2 million for dividend payments during the six months ended June 27, 2008. On April 25, 2008 we announced a quarterly cash dividend of $0.0875 per common share, payable on July 18, 2008
23
to shareholders of record on July 4, 2008. This quarterly dividend will result in a cash payment to shareholders of approximately $3.6 million in the third quarter of 2008. We expect to continue making quarterly dividend payments for the foreseeable future.
We entered into a credit agreement on February 28, 2008 providing for a $200.0 million senior term loan facility and a $300.0 million senior revolving credit facility.
The senior revolving credit facility consists of an aggregate U.S. dollar-equivalent revolving line of credit in the principal amount of up to $300.0 million, and provides for borrowings in U.S. dollars, euros and yen, including individual sub-limits of:
| | |
| – | a multicurrency facility providing for the issuance of letters of credit in an aggregate amount not to exceed the U.S. dollar equivalent of $25.0 million; and |
| | |
| – | a Singapore sub-facility not to exceed the U.S. dollar equivalent of $50.0 million. |
The credit agreement permits us to request one or more increases in the total commitment not to exceed $100.0 million, provided the minimum increase is $25.0 million, subject to bank approval.
The total amount outstanding under the revolving credit facility may not exceed $300.0 million, provided we do not request an increase in total commitment as noted above.
Outstanding borrowings are subject to two financial covenants, which are both computed on a rolling twelve-month basis as of the most recent quarter-end. The first is maximum debt outstanding amounting to three and one-half times our earnings before interest, taxes, depreciation and amortization (EBITDA), as defined by the credit agreement. In each of the next two proceeding years, our maximum debt outstanding limit will decrease by one quarter percent times EBITDA, with the final covenant being three times EBITDA. The second financial covenant is maximum fixed charges, including principal payments of debt, accrued interest expense and income tax payments, amounting to one and one-half times our EBITDA, as defined by the credit agreement. In 2012, our maximum fixed charges requirement will decrease by one quarter percent amounting to one and one-quarter percent times EBITDA. The credit agreement also contains covenants specifying capital expenditure limitations and other customary and normal provisions. We are in compliance with these covenants as of June 27, 2008.
We pay a commitment fee on the unborrowed portion of the commitment, which ranges from 0.20% to 0.30% of the total commitment, depending on our debt-to-EBITDA ratio. The interest rate for each currency’s borrowing is a combination of the base rate for that currency plus a credit margin spread. The base rate is different for each currency. The credit margin spread is the same for each currency and is 0.875% to 1.50%, depending on our debt-to-EBITDA ratio, as defined in the credit agreement. The weighted-average interest rate, including the credit margin spread, was 3.76% as of June 27, 2008. Multiple subsidiaries, both domestic and international, have guaranteed the obligations incurred under the credit facility.
As of June 27, 2008, we had outstanding borrowings of $200.0 million under the senior term loan facility and $152.0 million under the five-year revolving credit agreement, primarily to fund the Sonion acquisition in February 2008. Our total credit available under the credit agreement, including standby letters of credit, was approximately $146.5 million at June 27, 2008.
We had five standby letters of credit outstanding at June 27, 2008 in the aggregate amount of $1.5 million securing transactions entered into in the ordinary course of business.
We also have an unsecured term loan agreement in Germany for the borrowing of approximately 5.1 million euros, or approximately $8.1 million, outstanding which is due in August 2009.
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We had commercial commitments outstanding at June 27, 2008 of approximately $202.6 million due under precious metal consignment-type leases. This represents an increase of $16.7 million from the $185.9 million outstanding as of December 28, 2007 and is attributable to higher average silver prices during 2008.
The only material change in our contractual obligations from the year ended December 28, 2007 through June 27, 2008 was the addition of the debt and related interest payments in our new credit agreement as described above and the repayment of outstanding debt related to our former credit agreement.
We believe that the combination of cash on hand, cash generated by operations and, if necessary, borrowings under our credit agreement will be sufficient to satisfy our operating cash requirements in the foreseeable future. In addition, we may use internally generated funds or obtain borrowings or additional equity offerings for acquisitions of suitable businesses or assets. 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 foreign governments require for international cash transfers may delay our internal cash movements from time to time. 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. We have not accrued U.S. income and foreign withholding taxes on foreign earnings that have been indefinitely invested abroad. If these earnings were brought back to the United States, significant tax liabilities could be incurred in the United States as several countries in which we operate have tax rates significantly lower than the U.S. statutory rate.
All retained earnings are free from legal or contractual restrictions as of June 27, 2008, with the exception of approximately $25.1 million of retained earnings primarily in the PRC, that are restricted in accordance with Section 58 of the PRC Foreign Investment Enterprises Law. The $25.1 million includes $4.9 million of retained earnings of FRE, a majority owned subsidiary and excludes all retained earnings of Sonion. The amount restricted in accordance with the PRC Foreign Investment Enterprise Law is applicable to all foreign investment enterprises doing business in the PRC. The restriction applies to 10% of our net earnings in the PRC, limited to 50% of the total capital invested in the PRC.
New and Recently Adopted Accounting Pronouncements
Note 1 to the unaudited consolidated financial statements beginning on page 7 describes our new and recently adopted accounting pronouncements.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
There were no material changes in market risk exposures that affect the quantitative and qualitative disclosures presented in our Form 10-K for the year ended December 28, 2007.
Item 4: Controls and Procedures
An evaluation was performed under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act of 1934 as of June 27, 2008. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit is recorded, processed, summarized and reported, as specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
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There were no changes in these controls or procedures that occurred during the six months ended June 27, 2008 that have materially affected, or are reasonably likely to materially affect, these controls or procedures. However, we completed the acquisition of Sonion in February 2008 and we are still in the process of evaluating internal control over financial reporting at Sonion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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PART II. OTHER INFORMATION
| | | |
Item 1 | | Legal Proceedings | None |
| | | |
Item 1a | | Risk Factors | |
| | | |
| | Risk Factors are on page 28. | |
| | | |
Item 2 | | Unregistered Sales of Equity Securities and Use of Proceeds | None |
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Item 3 | | Defaults Upon Senior Securities | None |
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Item 4 | | Submission of Matters to a Vote of Security Holders | |
| | | |
| | The Annual Meeting of Shareholders was held on May 15, 2008 at which the following matters were submitted to a vote of the shareholders. | |
| | | | | | |
| | | (a) | | C. Mark Melliar-Smith was elected to a three-year term as director of the Company. The result of the vote was as follows: | |
| | | | | | |
| | | For | | Withhold Authority | |
| | |
| |
| |
| C. Mark Melliar-Smith | | 34,308,266 | | 3,371,402 | |
| | | | | | |
| | | | | In addition, each of the following directors continued in office after the meeting: John E. Burrows, Jr., David H. Hofmann, Edward M. Mazze and James M. Papada, III. | |
| | | | | | |
| | | (b) | | The shareholders approved the Amended and Restated Technitrol, Inc. Board of Directors Stock Plan. | |
| | | | | | |
| | | | | The result of the vote was as follows: | |
| | | | | | | | |
| For | | Against | | Abstain | | Broker
Non-Vote | |
|
| |
| |
| |
| |
| 31,437,797 | | 2,969,298 | | 273,464 | | 2,999,109 | |
| | | | | | |
| | | (c) | | The shareholders approved the Amended and Restated Restricted Stock Plan II of Technitrol, Inc. | |
| | | | | | |
| | | | | The result of the vote was as follows: | |
| | | | | | | | |
| For | | Against | | Abstain | | Broker
Non-Vote | |
|
| |
| |
| |
| |
| 35,823,417 | | 1,545,972 | | 310,279 | | 0 | |
| | | |
Item 5 | | Other Information | None |
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Item 6 | | Exhibits | |
| | | |
| | (a) Exhibits | |
| | | |
| | The Exhibit Index is on page 36. | |
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Item 1a: Risk Factors
Factors That May Affect Our Future Results (Cautionary Statements for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995)
Our disclosures and analysis in this report contain forward-looking statements. Forward-looking statements reflect our current expectations of future events or future financial performance. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They often use words such as “anticipate”, “estimate”, “expect”, “project”, “intend”, “plan”, “believe” and similar terms. These forward-looking statements are based on our current plans and expectations.
Any or all of our forward-looking statements in this report may prove to be incorrect. They may be affected by inaccurate assumptions we might make or by risks and uncertainties which are either unknown or not fully known or understood. Accordingly, actual outcomes and results may differ materially from what is expressed or forecasted in this report.
We sometimes provide forecasts of future financial performance. The risks and uncertainties described under “Risk Factors” as well as other risks identified from time to time in other Securities and Exchange Commission reports, registration statements and public announcements, among others, should be considered in evaluating our prospects for the future. We undertake no obligation to release updates or revisions to any forward-looking statement, whether as a result of new information, future events or otherwise.
The following factors represent what we believe are the major risks and uncertainties in our business. They are listed in no particular order.
Cyclical changes in the markets we serve could result in a significant decrease in demand for our products and reduce our profitability.
Our components are used in various products for the electronic and electrical markets. These markets are cyclical. Generally, the demand for our components reflects the demand for products in the electronic and electrical equipment markets. A contraction in demand would result in a decrease in sales of our products, as our customers:
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• | may cancel many existing orders; |
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• | may introduce fewer new products; |
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• | may discontinue current products; and |
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• | may decrease their inventory levels. |
A decrease in demand for our products would have a significant adverse effect on our operating results and profitability. Accordingly, we may experience volatility in both our revenues and profits.
Reduced prices for our products may adversely affect our profit margins if we are unable to reduce our costs of production.
The average selling prices for our products tend to decrease over their life cycle. In addition, foreign currency movements and the desire to retain market share increase the pressure on our customers to seek lower prices from their suppliers. As a result, our customers are likely to continue to demand lower prices from us. To maintain our margins and remain profitable, we must continue to meet our customers’ design needs while reducing costs through efficient raw material procurement and process and product improvements. Our profit margins may suffer if we are unable to reduce our costs of production if sales prices decline.
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Rising raw material and production costs may decrease our gross margin.
We use commodities such as copper, brass, aluminum, nickel and plastic resins in manufacturing our products. Volatility in the prices and quantities of such materials could have an impact on the price we pay. Other manufacturing costs, such as direct and indirect labor, energy, freight and packaging costs, also directly impact the costs of our products. If we are unable to pass increased costs through to our customers or recover the increased costs through production efficiencies, our gross margin may suffer.
An inability to adequately respond to changes in technology, applicable standards or customer needs may decrease our sales.
Electronics operates in an industry characterized by rapid change caused by the frequent emergence of new technologies and standards. Generally, we expect life cycles for our products in the electronic components industry to be relatively short. This requires us to anticipate and respond rapidly to changes in industry standards and customer needs and to develop and introduce new and enhanced products on a timely and cost effective basis. Our engineering and development teams place a priority on working closely with our customers to design innovative products and improve our manufacturing processes. Similarly, at Electrical, the performance and cost of electrical contacts are closely linked to alloys used in their production. Improving performance and reducing costs for our customers requires continuing development of new alloys and products. Our inability to react to changes in technology, standards or customer needs quickly and efficiently may decrease our sales or margins.
If our inventories become obsolete, our future performance and operating results will be adversely affected.
The life cycles of our products depend heavily upon the life cycles of the end products into which our products are designed. Many of Electronics’ products have very short life cycles which are measured in quarters. Products with short life cycles require us to closely manage our production and inventory levels. Inventory may become obsolete because of adverse changes in end market demand. During market slowdowns, this may result in significant charges for inventory write-offs. Our future operating results may be adversely affected by material levels of obsolete or excess inventories.
An inability to capitalize on our recent or future acquisitions may adversely affect our business.
We have completed several acquisitions in recent years. We continually seek acquisitions to grow our business. We may fail to derive significant benefits from our acquisitions. In addition, if we fail to achieve sufficient financial performance from an acquisition, long-lived assets, such as property, plant and equipment, goodwill and other intangibles, could become impaired, resulting in our recognition of an impairment loss.
The success of any of our acquisitions depends on our ability to:
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• | successfully execute the integration or consolidation of the acquired operations into our existing businesses; |
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• | develop or modify the financial reporting and information systems of the acquired entity to ensure overall financial integrity and adequacy of internal control procedures; |
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• | identify and take advantage of cost reduction opportunities; and |
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• | further penetrate the markets for the product capabilities acquired. |
Integration of acquisitions may take longer than we expect and may never be achieved to the extent originally anticipated.
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This could result in lower than anticipated business growth or higher than anticipated costs. In addition, acquisitions may:
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• | cause a disruption in our ongoing business; |
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• | distract our managers; |
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• | unduly burden our other resources; and |
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• | result in an inability to maintain our historical standards, procedures and controls, which may result in
non-compliance with external laws and regulations. |
Integration of acquisitions into the acquiring segment may limit the ability of investors to track the performance of individual acquisitions and to analyze trends in our operating results.
Our historical practice has been to rapidly integrate acquisitions into the existing business of the acquiring segment and to report financial performance on the segment level. As a result of this practice, we do not separately track the standalone performance of acquisitions after the date of the transaction. Consequently, investors cannot quantify the financial performance and success of any individual acquisition or the financial performance and success of a particular segment excluding the impact of acquisitions. In addition, our practice of rapidly integrating acquisitions into the financial performance of each segment may limit the ability of investors to analyze any trends in our operating results over time.
An inability to identify, consummate or integrate acquisitions may slow our future growth.
We plan to continue to identify and consummate additional acquisitions to further diversify our business and to penetrate or expand important markets. We may not be able to identify suitable acquisition candidates at reasonable prices. Even if we identify promising acquisition candidates, the timing, price, structure and success of future acquisitions are uncertain. An inability to consummate or integrate attractive acquisitions may reduce our growth rate and our ability to penetrate new markets.
If our customers terminate their existing agreements, or do not enter into new agreements or submit additional purchase orders for our products, our business may suffer.
Most of our sales are made on a purchase order basis, as needed by our customers. In addition, to the extent we have agreements in place with our customers, most of these agreements are either short-term in nature or provide our customers with the ability to terminate the arrangement with little or no prior notice. Such agreements typically do not provide us with any material recourse in the event of non-renewal or early termination. We will lose business and our revenues may decrease if a significant number of customers:
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• | do not submit additional purchase orders; |
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• | do not enter into new agreements with us; or |
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• | elect to terminate their relationship with us. |
If we do not effectively manage our business in the face of fluctuations in the size of our organization, our business may be disrupted.
We have grown both organically and as a result of acquisitions. However, we significantly reduce or expand our workforce and facilities in response to rapid changes in demand for our products due to prevailing global market conditions. These rapid fluctuations place strains on our resources and systems. If we do not effectively manage our resources and systems, our businesses may be adversely affected.
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Uncertainty in demand for our products may result in increased costs of production, an inability to service our customers, or higher inventory levels which may adversely affect our results of operations and financial condition.
We have very little visibility into our customers’ future purchasing patterns and are highly dependent on our customers’ forecasts. These forecasts are non-binding and often highly unreliable. Given the fluctuation in growth rates and cyclical demand for our products, as well as our reliance on often-imprecise customer forecasts, it is difficult to accurately manage our production schedule, equipment and personnel needs and our raw material and working capital requirements.
Our failure to effectively manage these issues may result in:
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• | production delays; |
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• | increased costs of production; |
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• | excessive inventory levels and reduced financial liquidity; |
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• | an inability to make timely deliveries; and |
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• | a decrease in profits. |
A decrease in availability of our key raw materials could adversely affect our profit margins.
We use several types of raw materials in the manufacturing of our products, including:
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• | precious metals such as silver; |
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• | other base metals such as copper and brass; and |
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• | ferrite cores. |
Some of these materials are produced by a limited number of suppliers. We may be unable to obtain these raw materials in sufficient quantities or in a timely manner to meet the demand for our products. The lack of availability or a delay in obtaining any of the raw materials used in our products could adversely affect our manufacturing costs and profit margins. In addition, if the price of our raw materials increases significantly over a short period of time due to increased market demand or shortage of supply, customers may be unwilling to bear the increased price for our products and we may be forced to sell our products containing these materials at lower prices causing a reduction in our profit margins.
Costs associated with precious metals and base metals may not be recoverable.
Some of our raw materials, such as precious metals and certain base metals, are considered commodities and are subject to price volatility. We attempt to limit our exposure to fluctuations in the cost of precious materials, including silver, by holding the majority of our precious metal inventory through leasing or consignment arrangements with our suppliers. We then typically purchase the precious metal from our supplier at the current market price on the day after shipment to our customer and pass this cost on to our customer. We try to limit our exposure to base metal price fluctuations by attempting to pass through the cost of base metals to our customers, typically by indexing the cost of the base metal, so that our cost of the base metal closely relates to the price we charge our customers, but we may not always be successful in indexing these costs or fully passing through costs to our customers.
Leasing/consignment fee increases are primarily caused by increases in interest rates or volatility in the price of the consigned material. Fees charged by the consignor are driven by interest rates and the market price of the consigned material. The market price of the consigned material is determined by its’ supply and demand. Consignment fees may increase if interest rates or the price of the consigned material increase.
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Our results of operations and liquidity may be negatively impacted if:
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• | we are unable to enter into new leasing or consignment arrangements with similarly favorable terms after our existing agreements terminate; |
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• | our leasing or consignment fees increase significantly in a short period of time and we are unable to recover these increased costs through higher sale prices; and |
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• | we are unable to pass through higher base metals’ costs to our customers. |
Competition may result in lower prices for our products and reduced sales.
Both Electronics and Electrical frequently encounter strong competition within individual product lines from various competitors throughout the world. We compete principally on the basis of:
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• | product quality and reliability; |
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• | global design and manufacturing capabilities; |
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• | breadth of product line; |
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• | customer service; |
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• | price; and |
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• | on-time delivery. |
Our inability to successfully compete on any or all of the above factors may result in reduced sales.
Fluctuations in foreign currency exchange rates may adversely affect our operating results.
We manufacture and sell our products in various regions of the world and export and import these products to and from a large number of countries. Fluctuations in exchange rates could negatively impact our cost of production and sales which, in turn, could decrease our operating results and cash flow. In addition, if the functional currency of our manufacturing costs strengthened compared to the functional currency of our competitors’ manufacturing costs, our products may become more costly than our competitors’. Although we engage in limited hedging transactions, including foreign currency contracts to reduce our transaction and economic exposure to foreign currency fluctuations, these measures may not eliminate or substantially reduce our risk in the future.
Our international operations subject us to the risks of unfavorable political, regulatory, labor and tax conditions in other countries.
We manufacture and assemble most of our products in locations outside the United States, including China, Mexico, Tunisia, Poland and Vietnam and a majority of our revenues are derived from sales to customers outside the United States. Our future operations and earnings may be adversely affected by the risks related to, or any other problems arising from, operating in international locations and markets.
Risks inherent in doing business internationally may include:
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• | the inability to repatriate cash on a timely basis; |
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• | economic and political instability; |
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• | expropriation and nationalization; |
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• | trade restrictions; |
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• | capital and exchange control programs; |
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• | transportation delays; |
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• | foreign currency fluctuations; and |
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• | unexpected changes in the laws and policies of the United States or of the countries in which we manufacture and sell our products. |
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Electronics has the majority of its manufacturing operations in the PRC and Vietnam. Our presence in these countries has enabled Electronics to maintain lower manufacturing costs and to adjust our work force to demand levels for our products. Although these countries have a large and growing economy, the potential economic, political, legal and labor developments entail uncertainties and risks. For example, wages have been increasing over the last several years in the southern coastal provinces of the PRC. While the PRC has been receptive to foreign investment, we cannot be certain that its current policies will continue indefinitely into the future. In the event of any changes that adversely affect our ability to conduct our operations within the PRC, our businesses may suffer. We also have manufacturing operations in Tunisia and Mexico, which are subject to unique risks, including earthquakes in Tunisia and the effects of those Middle Eastern and Mexican geo-political events.
We have benefited over recent years from favorable tax incentives and we operate in countries where we realize favorable income tax treatment relative to the U.S. statutory rate. We have been granted special tax incentives, including tax holidays, in jurisdictions such as the PRC, Puerto Rico, Tunisia and Vietnam. This favorable situation could change if these countries were to increase rates or discontinue the special tax incentives, or if we discontinue our manufacturing operations in any of these countries and do not replace the operations with operations in other locations with similar tax incentives. For example, the withholding tax rate on dividend payments from most of our PRC subsidiaries is 5% starting in 2008. In addition, the corporate income tax rate for PRC companies will be 15% or 25% after the applicable holiday and transition period expire, depending on whether the company qualifies as a high-technology company or meets other conditions. Accordingly, in the event of changes in laws and regulations affecting our international operations, we may not be able to continue to take advantage of similar benefits in the future.
Shifting our operations between regions may entail considerable expense and opportunity cost.
In the past, we have shifted our operations from one region to another in order to maximize manufacturing and operational efficiency. We may close one or more additional factories in the future. This could entail significant one-time earnings charges to account for severance, asset impairments, write-offs, write downs and moving expenses, as well as certain adverse tax consequences including the loss of specialized tax incentives or non-deductible expenses. In addition, as we implement transfers of our operations we may experience disruptions, including strikes or other types of labor unrest resulting from layoffs or termination of employees.
Liquidity requirements could necessitate movements of existing cash balances which may be subject to restrictions or cause unfavorable tax and earnings consequences.
A significant portion of our cash is held offshore by our international subsidiaries and is predominantly denominated in currencies other than the U.S. dollar. While we intend to use a significant amount of the cash held overseas to fund our international operations and growth, if we encounter a significant domestic need for liquidity that we cannot fulfill through borrowings, equity offerings, or other internal or external sources, we may experience unfavorable tax and earnings consequences if this cash is transferred to the United States. These adverse consequences would occur if the transfer of cash into the United States is taxed and no offsetting foreign tax credit is available to offset the U.S. tax liability, resulting in lower earnings. In addition, we may be prohibited from transferring cash from the PRC. For example, foreign exchange ceilings imposed by local governments and the sometimes lengthy approval processes which foreign governments require for international cash transfers may delay our internal cash transfers from time to time. We have not experienced any significant liquidity restrictions in any country in which we operate and none are presently foreseen.
With the exception of approximately $25.1 million of retained earnings as of December 28, 2007 primarily in the PRC that are restricted in accordance with the PRC Foreign Investment Enterprises Law, substantially all retained earnings are free from legal or contractual restrictions. This law restricts 10% of our net earnings in the PRC, up to a maximum amount equal to 50% of the total capital we have invested in the PRC.
33
Losing the services of our executive officers or our other highly qualified and experienced employees could adversely affect our businesses.
Our success depends upon the continued contributions of our executive officers and management, many of whom have many years of experience and would be extremely difficult to replace. We must also attract and maintain experienced and highly skilled engineering, sales and marketing and managerial personnel. Competition for qualified personnel is intense in our industries, and we may not be successful in hiring and retaining these people. If we lose the services of our executive officers or cannot attract and retain other qualified personnel, our businesses could be adversely affected.
Public health epidemics (such as flu strains or severe acute respiratory syndrome) or natural disasters (such as earthquakes or fires) may disrupt operations in affected regions and affect operating results.
Electronics and, to a lesser extent, Electrical, maintain extensive manufacturing operations in the PRC and other emerging economies, as do many of our customers and suppliers. A sustained interruption of our manufacturing operations, or those of our customers or suppliers, resulting from complications caused by a public health epidemic or natural disasters could have a material adverse effect on our business and results of operations.
The unavailability of insurance against certain business and product liability risks may adversely affect our future operating results.
As part of our comprehensive risk management program, we purchase insurance coverage against certain business and product liability risks. If any of our insurance carriers discontinues an insurance policy, significantly reduces available coverage or increases our deductibles and we cannot find another insurance carrier to write comparable coverage at similar costs, then we may be subject to increased costs of uninsured losses which may adversely affect our operating results.
Also, our components, modules and other products are used in a broad array of representative end products, including:
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• | handsets and non-cellular wireless systems; |
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• | power supplies; |
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• | laptop computers; |
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• | video game consoles; |
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• | hearing aids and other medical devices; |
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• | electrical circuit breakers; and |
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• | automotive drive trains. |
If our insurance program does not adequately cover liabilities arising from the direct use of our products or claims that we are a party to as a result of our products being used in our customers’ products, we may be subject to increased costs of uninsured losses which may adversely affect our operating results.
Environmental liability and compliance obligations may adversely affect our operations and results.
Our manufacturing operations are subject to a variety of environmental laws and regulations as well as internal programs and policies governing:
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• | air emissions; |
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• | wastewater discharges; |
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• | the storage, use, handling, disposal and remediation of hazardous substances, wastes and chemicals; and |
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• | employee health and safety. |
34
If violations of environmental laws should occur, we could be held liable for damages, penalties, fines and remedial actions for contamination discovered at our present or former facilities. Our operations and results could be adversely affected by any material obligations arising from existing laws or new regulations that may be enacted in the future. We may also be held liable for past disposal of hazardous substances generated by our business or businesses we acquire.
An increase in our debt levels could adversely affect our financial position, liquidity and perception of our financial condition in the financial markets.
We entered into an agreement on February 28, 2008 providing for a $200.0 million senior term loan facility and a $300.0 million senior revolving credit facility. The principal purpose of these new facilities was to fund the acquisition of Sonion. Borrowing against this agreement increased our current outstanding debt by $349.6 million since December 28, 2007. This financing decreased our ratio of earnings to fixed charges and adversely affected other leverage criteria. If the marketplace reacts negatively to our new debt levels, our share price could be affected. Covenants with our lenders under this agreement, that require our compliance with specific financial ratios, may also make it difficult for us to obtain additional financing on acceptable terms for future acquisitions and other corporate needs. Although we anticipate no difficulty in meeting such covenants in the normal course of operations, our ability to remain in compliance with the covenants may be adversely affected by future events beyond our control. Violating any of these covenants could result in being declared in default, which may result in our lenders electing to declare our outstanding borrowings immediately due and payable and terminate all commitments to extend further credit. If the lenders accelerate the repayment of borrowings, we cannot provide assurance that we will have sufficient liquid assets to repay our credit facilities and other indebtedness.
Our results may be negatively affected by changing interest rates.
We are subject to market risk from exposure to changes in interest rates. To mitigate the risk of changing interest rates, we may utilize derivatives or other financial instruments. We do not expect changes in interest rates to have a material effect on income or cash flows in the future, although there can be no assurances that interest rates will not significantly change or that our results would not be negatively affected by such changes.
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Exhibit Index
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2.1 | | Share Purchase Agreement dated January 8, 2008 between Technitrol, Inc., NC III Limited, Nordic Capital III Limited, P-M 2000 A/S, Intermediate Capital Investments Limited and Erhvervsinvest Nord A/S. (incorporated by reference to Exhibit 2.1 to our Form 8-K dated January 8, 2008). |
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3.1 | | Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to our Form 8-K dated December 27, 2007). |
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3.3 | | By-laws (incorporated by reference to Exhibit 3.3 to our Form 8-K dated December 27, 2007). |
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4.1 | | Rights Agreement, dated as of August 30, 1996, between Technitrol, Inc. and Registrar and Transfer Company, as Rights Agent (incorporated by reference to Exhibit 3 to our Registration Statement on Form 8-A dated October 24, 1996). |
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4.2 | | Amendment No. 1 to the Rights Agreement, dated March 25, 1998, between Technitrol, Inc. and Registrar and Transfer Company, as Rights Agent (incorporated by reference to Exhibit 4 to our Registration Statement on Form 8-A/A dated April 10, 1998). |
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4.3 | | Amendment No. 2 to the Rights Agreement, dated June 15, 2000, between Technitrol, Inc. and Registrar and Transfer Company, as Rights Agent (incorporated by reference to Exhibit 5 to our Registration Statement on Form 8-A/A dated July 5, 2000). |
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10.1 | | Technitrol, Inc. 2001 Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-8 dated June 28, 2001, File Number 333-64060). |
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10.1(1) | | Form of Stock Option Agreement (incorporated by reference to Exhibit 10.1(1) to our Form 10-Q for the nine months ended October 1, 2004). |
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10.2 | | Technitrol, Inc. Restricted Stock Plan II, as amended and restated as of February 15, 2008 (incorporated by reference to Exhibit 10.2 to our Form 10-Q for the three months ended March 28, 2008). |
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10.3 | | Technitrol, Inc. 2001 Stock Option Plan (incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-8 dated June 28, 2001, File Number 333-64068). |
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10.4 | | Technitrol, Inc. Board of Directors Stock Plan, as amended (incorporated by reference to Exhibit 10.4 to our Form 8-K dated May 15, 2008). |
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10.5 | | Credit Agreement dated as of February 28, 2008 among Technitrol, Inc. and certain of its subsidiaries, JPMorgan Chase Bank, N.A. as administrative agent and lender, and other lenders partly thereto (incorporated by reference to Exhibit 10.5 to our Form 8-K dated February 28, 2008). |
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10.6 | | Lease Agreement, dated October 15, 1991, between Ridilla-Delmont and AMI Doduco, Inc. (formerly known as Advanced Metallurgy Incorporated), as amended September 21, 2001 (incorporated by reference to Exhibit 10.6 to the Company’s Amendment No. 1 to Registration Statement on Form S-3 dated February 28, 2002, File Number 333-81286). |
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10.7 | | Incentive Compensation Plan of Technitrol, Inc. (incorporated by reference to Exhibit 10.7 to Amendment No. 1 our Registration Statement on Form S-3 filed on February 28, 2002, File Number 333-81286). |
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10.8 | | Technitrol, Inc. Supplemental Retirement Plan, amended and restated January 1, 2002 (incorporated by reference to Exhibit 10.8 to Amendment No. 1 to our Registration Statement on Form S-3 filed on February 28, 2002, File Number 333-81286). |
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10.8(1) | | Technitrol, Inc. Grantor Trust Agreement dated July 5, 2006 between Technitrol, Inc. and Wachovia Bank, National Association (incorporated by reference to Exhibit 10.8(1) to our Form 8-K dated July 11, 2006). |
36
Exhibit Index, continued
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10.9 | | Agreement between Technitrol, Inc. and James M. Papada, III, dated July 1, 1999, as amended April 23, 2001, relating to the Technitrol, Inc. Supplemental Retirement Plan (incorporated by reference to Exhibit 10.9 to Amendment No. 1 to our Registration Statement on Form S-3 filed on February 28, 2002, File Number 333-81286). |
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10.10 | | Letter Agreement between Technitrol, Inc. and James M. Papada, III, dated April 16, 1999, as amended October 18, 2000 (incorporated by reference to Exhibit 10.10 to Amendment No. 1 to our Registration Statement on Form S-3 filed on February 28, 2002, File Number 333-81286). |
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10.10(1) | | Letter Agreement between Technitrol, Inc. and James M. Papada, III dated April 25, 2007 (incorporated by reference to Exhibit 10.10(1) to our Form 8-K dated May 1, 2007). |
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10.10(2) | | Modification to Letter Agreement agreed to on February 15, 2008 (incorporated by reference to Exhibit 10.10(2) to our Form 8-K dated February 22, 2008). |
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10.11 | | Form of Indemnity Agreement (incorporated by reference to Exhibit 10.11 to our Form 10-K for the year ended December 28, 2001). |
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10.12 | | Technitrol Inc. Supplemental Savings Plan (incorporated by reference to Exhibit 10.15 to our Form 10-Q for the nine months ended September 26, 2003). |
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10.13 | | Technitrol, Inc. 401(k) Retirement Savings Plan, as amended (incorporated by reference to post-effective Amendment No. 1, to our Registration Statement on Form S-8 filed on October 31, 2003, File Number 033-35334). |
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10.13(1) | | Amendment No. 1 to Technitrol, Inc. 401(k) Retirement Savings Plan, dated December 31, 2006 (incorporated by reference to Exhibit 10.13(1) to our Form 10-K for the year ended December 29, 2006). |
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10.14 | | Pulse Engineering, Inc. 401(k) Plan as amended (incorporated by reference to post-effective Amendment No. 1, to our Registration Statement on Form S-8 filed on October 31, 2003, File Number 033-94073). |
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10.14(1) | | Amendment No. 1 to Pulse Engineering, Inc. 401(k) Plan, dated December 31, 2006 (incorporated by reference to Exhibit 10.14(1) to our Form 10-K for the year ended December 29, 2006). |
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10.15 | | Amended and Restated Short-Term Incentive Plan (incorporated by reference to Exhibit 10.15 to our Form 10-K for the year ended December 31, 2005). |
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10.17 | | Amended and Restated Consignment Agreement dated November 19, 2007 between Technitrol, Inc. and Sovereign Precious Metals, LLC (incorporated by reference to Exhibit 10.17 to our Form 10-K for the year ended December 28, 2007). |
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10.18(1.0) | | Amended and Restated Fee Consignment and/or Purchase of Silver Agreement dated August 4, 2006 among The Bank of Nova Scotia, AMI Doduco, Inc., AMI Doduco Espana, S.L. and AMI Doduco GmbH (incorporated by reference to Exhibit 10.18 to our Form 10-K for the year ended December 28, 2007). |
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10.18(1.1) | | Letter Amendment dated November 7, 2007 among The Bank of Nova Scotia, AMI Doduco, Inc., AMI Doduco Espana, S.L. and AMI Doduco GmbH (incorporated by reference to Exhibit 10.18(1) to our Form 10-K for the year ended December 28, 2007). |
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10.18(1.2) | | Letter Amendment dated May 8, 2008 among The Bank of Nova Scotia, AMI Doduco, Inc., AMI Doduco Espana, S.L. and AMI Doduco GmbH. |
37
Exhibit Index, continued
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10.18(2.0) | | Consignment and/or Purchase of Silver Agreement dated November 9, 2007 between The Bank of Nova Scotia and AMI Doduco, Inc. (incorporated by reference to Exhibit 10.18(2) to our Form 10-K for the year ended December 28, 2007). |
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10.18(2.1) | | Letter Amendment dated May 8, 2008 between The Bank of Nova Scotia and AMI Doduco, Inc. |
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10.18(3) | | Guarantee dated September 8, 2006 executed by Technitrol, Inc. in favor of the The Bank of Nova Scotia (incorporated by reference to Exhibit 10.18(3) to our Form 10-K for the year ended December 28, 2007). |
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10.19 | | Consignment Agreement dated September 24, 2005 between Mitsui & Co. Precious Metals Inc., and AMI Doduco, Inc. (incorporated by reference to Exhibit 10.19 to our Form 8-K dated March 28, 2006). |
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10.21 | | Corporate Guaranty dated November 1, 2004 by Technitrol, Inc. in favor of Mitsui & Co. Precious Metals, Inc. (incorporated by reference to Exhibit 10.21 to our Form 10-Q for the nine months ended October 1, 2004). |
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10.22 | | Amended and Restated Fee Consignment and/or Purchase of Silver Agreement dated February 12, 2008 among HSBC Bank USA, National Association, AMI Doduco, Inc. and Technitrol, Inc. (incorporated by reference to Exhibit 10.22 to our Form 8-K dated February 22, 2008). |
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10.23 | | Share Purchase Agreement dated August 8, 2005 among Pulse Electronics (Singapore) Pte. Ltd., as Purchaser, and Filtronic Plc and Filtronic Comtek Oy, as Sellers (incorporated by reference to Exhibit 10.1 to our Form 8-K dated August 11, 2005). |
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10.24 | | Sale and Transfer Agreement dated November 28, 2005 among ERA GmbH & Co. KG, Pulse GmbH, CST Electronics Co., Ltd., and certain other parties named therein (incorporated by reference to Exhibit 10.1 to our Form 8-K dated December 2, 2005). |
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10.25 | | CEO Annual and Long-Term Equity Incentive Process (incorporated by reference to Exhibit 10.25 to our Form 10-Q for the three months ended March 28, 2008). |
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10.26 | | Letter Agreement between Technitrol, Inc. and Michael J. McGrath dated March 7, 2007 (incorporated by reference to Exhibit 10.2 to our Form 10-Q for the six months ended June 29, 2007). |
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10.27 | | Letter Agreement between Technitrol, Inc. and Drew A. Moyer dated July 23, 2008 (incorporated by reference to Exhibit 10.27 to our Form 8-K dated July 29, 2008). |
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10.30 | | Schedule of Board of Director and Committee Fees (incorporated by reference to Exhibit 10.30 to our Form 10-Q for the three months ended March 30, 2007). |
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31.1 | | Certification of Principal Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. |
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31.2 | | Certification of Principal Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. |
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32.1 | | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 | | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
38
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | Technitrol, Inc. |
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|
| | (Registrant) |
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August 4, 2008 | | /s/ Edward J. Prajzner |
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|
(Date) | | Edward J. Prajzner |
| | Vice President, Corporate Controller and Chief |
| | Accounting Officer |
| | (duly authorized officer, principal accounting officer) |
39
