Exhibit Index
is on page 24
UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended March 31, 2000, 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 or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
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
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 [ ]
Common Stock - Shares Outstanding as of April 28, 2000: 16,370,430
Page 1 of 25
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Technitrol, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999
In thousands
March 31, Dec. 31,
2000 1999
--------- ---------
Assets (unaudited)
------
Current assets:
Cash and cash equivalents $ 94,186 $ 88,161
Trade receivables 91,764 77,514
Inventories 66,368 65,101
Prepaid expenses and other current assets 10,349 8,512
--------- ---------
Total current assets 262,667 239,288
Property, plant and equipment 155,504 150,926
Less accumulated depreciation 72,753 68,204
--------- ---------
Net property, plant and equipment 82,751 82,722
Deferred income taxes 10,665 8,615
Excess of cost over net assets acquired, net 46,865 48,666
Other assets 1,931 1,948
--------- ---------
$ 404,879 $ 381,239
========= =========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt $ 160 $ 167
Accounts payable 28,532 26,186
Accrued expenses 78,750 71,084
--------- ---------
Total current liabilities 107,442 97,437
Long-term liabilities:
Long-term debt, excluding current installments 52,186 60,329
Other long-term liabilities 11,581 7,838
Shareholders' equity:
Common stock and additional paid-in capital 53,841 48,263
Retained earnings 187,006 171,278
Other (7,177) (3,906)
--------- ---------
Total shareholders' equity 233,670 215,635
--------- ---------
$ 404,879 $ 381,239
========= =========
[FN]
See accompanying Notes to Consolidated Financial Statements.
</FN>
Page 2 of 25
Technitrol, Inc. and Subsidiaries
Consolidated Statements of Earnings
(Unaudited)
In thousands, except per share data
Quarter Ended
March 31, April 2,
2000 1999
---- ----
Net sales $ 152,693 $ 125,230
Costs and expenses applicable to sales
Cost of goods sold 98,552 87,091
Selling, general and administrative expenses 31,018 25,330
Restructuring and other non-recurring items, net 3,305 --
--------- ---------
Total costs and expenses applicable to sales 132,875 112,421
--------- ---------
Operating profit 19,818 12,809
Other income (expense)
Interest, net (25) (699)
Other 37 (342)
--------- ---------
Total other income (expense) 12 (1,041)
--------- ---------
Earnings before taxes 19,830 11,768
Income taxes 2,998 3,032
--------- ---------
Net earnings $ 16,832 $ 8,736
========= =========
Net earnings per share:
Basic $ 1.05 $ .55
Diluted $ 1.03 $ .54
Dividends declared per share $ .0675 $ .06
[FN]
See accompanying Notes to Consolidated Financial Statements.
</FN>
Page 3 of 25
Technitrol, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Quarter Ended March 31, 2000 and April 2, 1999
(Unaudited)
In thousands
March 31, April 2,
2000 1999
-------- --------
Cash flows from operating activities:
Net earnings $ 16,832 $ 8,736
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 5,664 3,943
Changes in assets and liabilities:
Accounts payable and accrued expenses 11,479 (5,919)
Trade receivables (16,102) (2,922)
Inventories (2,188) (1,286)
Other, net 2,529 966
-------- --------
Net cash provided by operating activities 18,214 3,518
-------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired (1,633) (787)
Capital expenditures (5,356) (3,845)
Proceeds from sale of property, plant and equipment 120 --
-------- --------
Net cash used in investing activities (6,869) (4,632)
-------- --------
Cash flows from financing activities:
Dividends paid (1,098) (973)
Proceeds of long-term borrowings 2,386 9,073
Principal payments of long-term debt (8,019) (15,123)
Sale of stock through employee stock purchase plan 1,628 --
Exercise of stock options 7 --
-------- --------
Net cash used in financing activities (5,096) (7,023)
-------- --------
Net effect of exchange rate changes on cash (224) (142)
-------- --------
Net increase (decrease) in cash and cash equivalents 6,025 (8,279)
Cash and cash equivalents at beginning of year 88,161 50,563
-------- --------
Cash and cash equivalents at March 31, 2000 and April 2,
1999 $ 94,186 $ 42,284
======== ========
[FN]
See accompanying Notes to Consolidated Financial Statements.
</FN>
Page 4 of 25
Technitrol, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
March 31, 2000
(Unaudited)
In thousands, except per share data
Other
---------------------
Accumu-
Common stock and lated other
paid-in capital Deferred compre- Compre-
---------------- Retained compen- hensive hensive
Shares Amount earnings sation income income
------ ------ -------- ------ ------ ------
Balance at January 1, 2000 16,266 $ 48,263 $ 171,278 $ (2,401) $ (1,505)
Stock options, awards and related
compensation 51 3,537 (2,829)
Tax benefit of stock compensation 413
Stock issued under employee stock
purchase plan 53 1,628
Currency translation adjustments (442) $ (442)
Net earnings 16,832 16,832
--------
Comprehensive income $ 16,390
========
Dividends declared ($.0675 per share) (1,104)
------- -------- --------- -------- --------
Balance at March 31, 2000 16,370 $ 53,841 $ 187,006 $ (5,230) $ (1,947)
======= ======== ========= ======== ========
[FN]
See accompanying Notes to Consolidated Financial Statements.
</FN>
Page 5 of 25
Technitrol, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(1) Accounting Policies
-------------------
For a complete description of the accounting policies of Technitrol,
Inc. and its consolidated subsidiaries ("the Company"), refer to Note 1 of Notes
to Consolidated Financial Statements included in the Company's Form 10-K filed
for the year ended December 31, 1999.
The results for the quarter ended March 31, 2000 and April 2, 1999,
have been prepared by Technitrol's management without audit by its independent
auditors. In the opinion of management, the financial statements fairly present
in all material respects the results of Technitrol's operations and the
financial position for the periods presented. To the best knowledge and belief
of Technitrol, all adjustments have been made to properly reflect income and
expenses attributable to the periods presented. All such adjustments are of a
normal recurring nature. Operating results for the quarter ended March 31, 2000
are not necessarily indicative of annual results.
(2) Acquisitions
------------
Tool and Die facility in Estonia from AMP: In January of 2000, the
--------------------------------------------
Company completed the acquisition of a tool and die design and manufacturing
operation near Tallinn, Estonia, from AMP, a division of Tyco Electronics
Corporation. The purchase price was not material to the Company's consolidated
financial position. The results of operating these assets in 2000 are included
within the Metallurgical Components Segment ("MCS") results.
MEC Betras Italia S.r.l. ("MEC Betras"): On December 22, 1999, the
------------------------------------------
Company acquired the operating assets of MEC Betras. MEC Betras, located in
Italy, produced electrical contact rivets and stamped electrical contact parts.
The purchase price of MEC Betras' assets was not material to the Company's
consolidated financial position.
Tianjin Electrical Metal Works: In November 1999, the Company acquired
-------------------------------
the assets of an electrical contacts business based in Tianjin, the People's
Republic of China. The purchase price was not material to the Company's
consolidated financial position.
Page 6 of 25
Technitrol, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(3) Restructuring and Other Non-recurring Items
-------------------------------------------
During the first quarter of 2000, the Company initiated a restructuring
plan aimed at reducing the costs of manufacturing in the MCS's European
operations. Employee termination and related costs were recognized in accordance
with Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)" and SEC Staff Accounting
Bulletin No. 100, "Restructuring and Impairment Charges." The Company will
provide severance and related payments to approximately 120 employees.
Accordingly, reserves were established for these costs during the quarter ended
March 31, 2000. The affected employees include both direct and indirect
personnel, and are primarily located at the Company's facility in Pforzheim,
Germany. A charge of $5.5 million is included in the line titled "Restructuring
and other non-recurring items" in the consolidated statements of earnings.
Approximately $4.6 million of this amount relates to employee termination costs
and $.9 million relates to the impairment of certain assets within the MCS.
Partially offsetting these amounts was a gain of approximately $1.4 million
related to the sale of a non-strategic European product line and a $.8 million
gain related to a business interruption insurance settlement. As of March 31,
2000, no employee termination payments have been made under the restructuring
plan. It is anticipated that the majority of the plan will be completed during
2000.
(4) Inventories
-----------
Inventories consisted of the following (in thousands):
March 31, December 31,
2000 1999
---- ----
Finished goods $20,978 $21,916
Work in process 13,880 13,624
Raw materials and supplies 31,510 29,561
------- -------
$66,368 $65,101
======= =======
Page 7 of 25
Technitrol, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(5) Derivatives and Other Financial Instruments
-------------------------------------------
The Company utilizes derivative financial instruments, primarily
forward exchange contracts and currency options, to manage foreign currency
risks. While these hedging instruments are subject to fluctuations in value,
such fluctuations are generally offset by the value of the underlying exposures
being hedged.
At March 31, 2000, the Company had one forward contract outstanding to
purchase 300,000 British pounds sterling. The term of the contract was less than
30 days. The Company had no other financial derivative instruments. In addition,
management believes that there is no material risk of loss from changes in
market rates or prices which are inherent in other financial instruments.
(6) 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 period. 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 common share equivalent amounts were approximately
37,000 and 34,000 for the three months ended March 31, 2000 and April 2, 1999,
respectively. Earnings per share calculations are as follows (in thousands,
except per share amounts):
(continued)
Page 8 of 25
Technitrol, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(6) Earnings Per Share, continued
------------------
Quarter Ended
March 31, April 2,
2000 1999
---- ----
Net earnings $16,832 $ 8,736
Basic earnings per share:
Shares 16,100 16,000
Per share amount $ 1.05 $ .55
Diluted earnings per share:
Shares 16,311 16,210
Per share amount $ 1.03 $ .54
(7) Business Segment Information
----------------------------
For the quarters ended March 31, 2000 and April 2, 1999, there was an
immaterial amount of intersegment revenues eliminated in consolidation. There
has not been a material change in segment assets from December 31, 1999 to March
31, 2000. In addition, the basis for determining segment financial information
has not changed from 1999. Specific segment data are as follows:
Quarter Ended
March 31, April 2,
2000 1999
---- ----
Net sales:
Electronic Components $ 92,529 $ 67,754
Metallurgical Components 60,164 57,476
--------- ---------
Total $ 152,693 $ 125,230
========= =========
Earnings before income taxes:
Electronic Components $ 20,182 $ 8,889
Metallurgical Components 2,941 3,920
Metallurgical Components Segment
restructuring and other non-recurring
items (3,305) --
--------- ---------
Operating profit 19,818 12,809
Other income (expense), net 12 (1,041)
--------- ---------
Earnings before income taxes $ 19,830 $ 11,768
========= =========
Page 9 of 25
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
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. Actual results could differ materially. Please
refer to pages 19 through 22 of this report for a description of
"forward-looking statements" and factors that may affect future results.
Business Overview
Technitrol, Inc. is a global manufacturer of electronic and metallurgical
components. 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.
Electronic Components Segment
Our Electronic Components Segment provides a variety of magnetics-based
components, miniature chip inductors and modules. These components modify or
filter electronic signals. They are used primarily in local area network,
Internet connectivity, telecommunication and power-conversion products. We
manufacture these products in the United States, Ireland, France, Malaysia,
Thailand, the Philippines and the People's Republic of China. We sometimes refer
to the People's Republic of China as the PRC.
Our strategy is to expand our electronic components business through a
combination of internal growth and acquiring companies in the electronic
components business. Acquisitions during the last several years include:
o The magnetic components business of Northern Telecom, Ltd. - We
completed this acquisition on November 30, 1997. The primary assets we
purchased included manufacturing plants in Malaysia and Thailand and a
design engineering group in Canada. These assets primarily serve the
telecommunication and power markets.
o FEE Technology, S.A. - We purchased FEE on July 3, 1998. FEE designed
and manufactured magnetic components for telecommunications and power
conversion equipment. With the purchase of FEE, we acquired
manufacturing facilities in France, Thailand and Poland. We
subsequently closed FEE's Thailand and Poland facilities.
Page 10 of 25
o GTI Corporation - We completed the acquisition of GTI and its
subsidiary, Valor Electronics, on November 16, 1998. Valor
designed and manufactured magnetics-based components for signal
processing and power transfer functions primarily for local area
network products and, to a much lesser extent, telecommunication
and power-conversion products. Their manufacturing facilities
were located in the People's Republic of China and the
Philippines. We closed Valor's Philippine facility and have
completed the consolidation of Valor's PRC facility into our
facilities in the PRC.
Our electronic component businesses operate as a unified business
throughout the world. This unified business operates under the Pulse name.
Metallurgical Components Segment
Our Metallurgical Components Segment manufactures:
o electrical contacts and assemblies;
o contact materials;
o thermostatic bimetals;
o clad metal products; and
o precision contact subassemblies.
We also provide electroplating and refining services.
We sell these metallurgical components to a wide range of industrial and
consumer product manufacturers. Our products are used in a variety of
applications which affect daily living including:
o residential, commercial and industrial circuit breakers;
o motor controls;
o switches and relays;
o wiring devices;
o temperature controls;
o appliances;
o automobiles;
o telecommunications products; and
o various other electrical products.
Page 11 of 25
In late 1996, we acquired the assets of Doduco GmbH in Germany and Spain to
support our strategy of increasing market share and the international presence
of our metallurgical businesses. This business was then combined with our
existing metallurgical component operations in North America. All of our
metallurgical component businesses now operate globally under the name AMI
Doduco.
In July of 1998, we acquired certain assets of Metales y Contactos, S.A. de
C.V. Metales designed and manufactured precious and semi-precious metal contacts
used mainly in automobiles and other durable goods. The Metales facility is
located near Mexico City.
During the fourth quarter of 1999, we made two acquisitions and
substantially completed a third. In November of 1999, we acquired the operating
assets of the Tianjin Electrical Metal Works electrical contacts business based
in Tianjin, PRC. On December 22, 1999, we acquired the operating assets of MEC
Betras Italia S.r.l. MEC Betras, located in Italy, produced electrical contact
rivets and stamped electrical contact parts. In January of 2000, we finalized
our acquisition of a tool and die design and manufacturing operation near
Tallinn, Estonia. These most recent acquisitions provide the MCS with additional
lower-cost operating locations and an enhanced market presence in key areas of
the business.
In 1999, the MCS manufactured in the United States, Germany, Spain, Puerto
Rico and Mexico. We began manufacturing metallurgical products in Italy, the PRC
and Estonia during the first quarter of 2000.
As part of our strategic review of the MCS operations, we recorded employee
termination and related expenses in the first quarter of 2000. For a further
description of these charges, see the "Results of Operations" section of this
report.
Liquidity and Capital Resources
Working capital at March 31, 2000 was $155.2 million compared to $141.9
million at December 31, 1999, an increase of $13.3 million. Cash on hand
increased approximately $6.0 million from December 31, 1999 while debt
outstanding decreased approximately $8.2 million. The operating results
generated by the ECS for the first quarter of 2000 were the primary cause for
these positive changes in our working capital, cash on hand and outstanding debt
since December 31, 1999.
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.
Page 12 of 25
Cash Flows from Operating Activities
Cash provided by operating activities for the quarter ended March 31, 2000
was $18.2 million. Net earnings, adjusted for non-cash depreciation and
amortization charges, and increases in accounts payables and accrued expenses
were only partially offset by increases in current assets. These changes were
the result of our business growth, particularly in the ECS, during the first
quarter of 2000. In addition, accrued expenses increased as a result of employee
termination and related accruals for the MCS. See our discussion of these items
in the "Results from Operations" section of this report.
Cash Flows from Investing Activities
Cash used by investing activities was $6.9 million during the first quarter
of 2000. Approximately $5.4 million of cash was used for capital expenditures.
The remaining balance of approximately $1.5 million represents primarily the
cash used to acquire the MCS tool and die facility in Estonia and transaction
expenses paid in 2000 for 1999 acquisitions.
We make capital expenditures to expand production capacity and to improve
our operating efficiency. We plan to continue making such expenditures.
Additionally, we may acquire other businesses or product lines to expand our
breadth and scope of operations.
With the exception of approximately $7.2 million of retained earnings in
the PRC which are restricted in accordance with 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
We used cash of approximately $5.1 million for financing activities in the
first quarter of 2000. We repaid approximately $5.6 million, net of additional
borrowings, of debt during the quarter ended March 31, 2000. At March 31, 2000,
we had approximately $158.4 million of unused lines of credit from banks.
During the first quarter of 2000, we paid dividends of approximately $1.1
million. We expect to continue paying quarterly dividends for the foreseeable
future. We received proceeds of $1.6 million from the sale of stock through our
employee stock purchase plan.
Page 13 of 25
Foreign Currency Effects
During the first quarter of 2000, the Euro devalued approximately 5%
relative to the U.S. dollar. As a result, we incurred foreign currency losses in
our ECS European operations during the first quarter of 2000, as Euro
denominated assets and liabilities were translated to U.S. dollars for financial
reporting purposes. Foreign currency losses recorded in the first quarter of
2000 were less than those recorded in the first quarter of 1999. As a result of
the downward valuation of the Euro, we also experienced a negative translation
adjustment to equity because our investment in the MCS's European operations is
worth less in U.S. dollars. This decrease in U.S. dollar value is reflected as a
reduction in 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 currency fluctuations. The impact of exchange rate
differences on AMI Doduco's European sales may be offset by the impact on its
expenses, most of which are also denominated in Euros.
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 March 31, 2000, we had one forward exchange contract outstanding. The
contract was short-term in duration and immaterial to our financial position. In
determining the use of forward exchange contracts and currency options, we
consider the amount of sales and purchases made in local currencies, the type of
currency, and the costs associated with the contracts.
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, 2000.
Adoption of this standard is not expected to have a material effect on our
operating results or liquidity. The impact of this standard on our balance sheet
will depend on the amount of hedging activity outstanding on the date of
adoption.
Page 14 of 25
Results of Operations
The results of operations for each of our segments for the quarters ending
March 31, 2000 and April 2, 1999 are as follows. Amounts are in thousands:
Quarter Ended
March 31, April 2,
2000 1999
--------- ---------
Net sales:
Electronic Components $ 92,529 $ 67,754
Metallurgical Components 60,164 57,476
--------- ---------
Total $ 152,693 $ 125,230
========= =========
Earnings before income taxes:
Electronic Components $ 20,182 $ 8,889
Metallurgical Components 2,941 3,920
Metallurgical Components Segment
restructuring and other non-recurring
items (3,305) --
--------- ---------
Operating profit 19,818 12,809
Other income (expense), net 12 (1,041)
--------- ---------
Earnings before income taxes $ 19,830 $ 11,768
========= =========
Revenues
Net sales for the first quarter of 2000 increased approximately $27.5
million, or 21.9%, from the comparable period in 1999. Our sales growth was
attributable primarily to our ECS operations.
ECS revenues increased $24.8 million, or 36.6%, from the first quarter
of 1999. Growth was achieved across all of ECS's primary product categories -
local area/wide area network, Internet connectivity, telecommunications and
power-conversion. As orders exceeded shipments in the first quarter, we expect
the ECS sales growth to continue during the near-term. Our backlog, though a
less-reliable predictor of short-term business volume than it once was,
increased 50% since the beginning of the first quarter.
Sales within the MCS during the quarter ended March 31, 2000 increased
$2.7 million, in spite of a Euro to U.S. dollar exchange rate that was
approximately 12% weaker than in the first quarter of 1999. Excluding the impact
of the Euro to dollar exchange rate differential, sales within the MCS would
have increased approximately $7.7 million. Units shipped increased along most
product lines and geographic areas. The recovery in European markets that began
to appear in the latter part of 1999 continued through the first quarter of
2000, while the North American markets remained strong.
Page 15 of 25
Cost of Sales
Our consolidated gross margin for the quarter ended March 31, 2000 was
35.5% compared to 30.5% for the first quarter of 1999. Although the gross margin
for the MCS increased slightly from the prior year, the consolidated margin
improvement is primarily due to the ECS. The ECS margin benefited from higher
volumes as well as a more favorable sales mix when compared to the first quarter
of 1999. The sales mix in the first quarter of 2000 included new products for a
variety of telecommunications applications such as digital subscriber line
access and for local area network telephony. Local area networking telephony is
also referred to as voice-over-Internet. The increase in the MCS gross margin
is also due to higher volumes as well as contributions from the MEC Betras
acquisition.
Operating Expenses
Excluding restructuring and other non-recurring items, total selling,
general and administrative expenses for the first quarter of 2000 were $31.0
million, or 20.3% of sales, compared to $25.3 million, or 20.2% of sales, in the
comparable 1999 period. The increase in selling, general and administrative
expenses in dollars is due to costs associated with higher sales volume;
incentive awards primarily for strong ECS operating results and a higher common
stock price for expenses related to our restricted stock plan; and enterprise
resource planning optimization related costs within the MCS. We refer to
enterprise resource planning as ERP. These ERP costs include the depreciation
charges associated with operating the system and expenses incurred within the
MCS to optimize the use of the system. Operating margins improved for the ECS
as the segment met record demand while keeping operating costs at or below
budgeted levels. The MCS operating margin on a basis comparable to the first
quarter of 1999 also improved but was negatively affected by the ERP related
costs noted above as well as start-up losses associated with the operations
in the PRC and Estonia.
Research, development and engineering expenses are included in selling,
general and administrative expenses. We refer to research, development and
engineering expenses as RD&E. For the quarter ended March 31, 2000, RD&E
expenses were $3.8 million, or 4.1% of ECS sales, for the ECS and $1.2 million,
or 2.0% of MCS sales, for the MCS. For the comparable period in 1999, the
amounts were $3.5 million, or 5.2% of ECS sales, for the ECS and $1.6 million,
or 2.7% of MCS sales, for the MCS. The decreases in RD&E as a percentage of
sales are primarily attributable to the increase in sales. Neither segment plans
any significant increase or reduction in RD&E efforts in the near term.
Page 16 of 25
Restructuring and other non-recurring items of approximately $3.3 million,
net, relate to the MCS. As a result of a strategic review, our European managers
felt that the operations in Europe needed realignment to maximize market
opportunities and reduce costs. We call this strategic effort "Strategy 2000".
Strategy 2000 will reduce our MCS employment levels by approximately 120 people,
primarily in Germany. This reduction may be partially offset by targeted hiring
of individuals dedicated to certain product lines and initiatives. Strategy 2000
will also facilitate relocation of high-volume, repetitive production to
lower-cost locations, aggressively continue our drive toward continuous process
improvement, and accelerate the expansion of our more profitable and automated
business based in Germany. As a result of the program, we provided approximately
$4.6 million for employee severance and related payments. In addition, we
recorded approximately $.9 million of charges related to the impairment of
certain assets within the MCS. Offsetting these Strategy 2000 costs was a gain
of approximately $1.4 million related to the sale of a non-strategic European
product line and a $.8 million gain related to an insurance settlement. Both of
these items relate to the MCS.
Although we developed the plan for Strategy 2000 during the quarter ended
March 31, 2000 and announced the plan to employees, no employee termination
payments were made under the plan as of that date. It is anticipated that the
majority of the employee related severance matters related to Strategy 2000 will
be completed by September 30, 2000. The ultimate net savings will begin later in
the current year. However, we will not realize the full benefit of the program
until the completion of the early retirement aspect of the program. The 44
people in the early retirement program will retire at varying times, the latest
of which is in 2002. Cost savings from the reduction in employment levels will
affect both cost of goods sold and, to a lesser extent, general and
administrative expenses.
Interest
Interest income and interest expense were essentially equal during the
first quarter of 2000. Net interest expense for the comparable period in 1999
was approximately $.7 million. The decrease in net interest expense is due to
higher cash levels and lower debt levels in the 2000 period.
The majority of our credit facilities have variable interest rates.
Accordingly, interest expense may increase if the rates associated with, or the
amounts borrowed under, our credit facilities move higher during subsequent
quarters. In addition, we may pursue additional or alternative credit to finance
further growth opportunities in one or both of our 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 such
instruments thus far.
Page 17 of 25
Income taxes
Our effective income tax rate during the first quarter of 2000 was 15.1%
compared to 25.8% in the first quarter of 1999. The substantial decrease in our
effective tax rate resulted from the impact of the Strategy 2000 charge against
income in high-tax European jurisdictions and proportionately higher income in
lower-tax jurisdictions. Excluding the impact of the Strategy 2000 charge and
other non-recurring items, our effective tax rate for the first quarter of 2000
would have been approximately 20.1%.
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. 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 are purchased 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.
Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and the Euro. We refer to the 11 countries as the participating countries and
the participating countries' sovereign currencies as the legacy currencies. The
Euro now trades on currency exchanges and is available for non-cash
transactions.
The legacy currencies are scheduled to remain legal tender in the
participating countries as denominations of the Euro between January 1, 1999 and
July 1, 2002. During this transition period, public and private parties may pay
for goods and services using either the Euro or a legacy currency. Beginning
January 1, 2002, the participating countries will issue new Euro-denominated
bills and coins for use in cash transactions. By July 1, 2002, the participating
countries will withdraw all bills and coins denominated in the legacy
currencies, so that the legacy currencies no longer will be legal tender for any
transactions. The conversion to the Euro will then be complete.
Page 18 of 25
We have developed plans to ensure, to the extent possible, the Euro
will not negatively impact our operations. 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 continuously
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. During 1999
and thus far in 2000, we have not encountered any material Euro conversion
problems.
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 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 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.
Page 19 of 25
We Cannot Predict the Market Growth Rate for Our Products.
The ECS sells its products into markets that are characterized by
rapidly changing growth rates. These markets include LAN, telecommunication
devices and power-conversion products. It is often difficult for our customers
or us to assess worldwide demand for upgrades or replacement of networks, or the
pace at which telecommunication infrastructure will be deployed throughout the
world. The markets may counterbalance one another in terms of growth or they may
move in the same direction. All of these variables will impact ECS growth rates.
The growth rates of housing, construction, appliance, telecommunication
systems and auto sales, which are highly cyclical, will impact the revenue
growth of the MCS and the ECS.
We May Receive Lower Prices for Our Products.
Both the MCS and the ECS operate in businesses characterized by
continually declining average selling prices on existing products. Future prices
for our products may decrease from historical levels, depending on competition
and other factors, and we may not be able to bring our manufacturing costs down
proportionately or continue to introduce new products, each of which is
necessary to maintain 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 precious metal on page 18 of this report.
We May Not Successfully Identify, Integrate, or Manage Acquisitions.
We have completed several acquisitions over the past three years. The
degree of success of these acquisitions depends on our ability to:
o successfully integrate or consolidate acquired operations into
our existing segments;
o identify and take advantage of cost reduction opportunities; and
o further penetrate the market for the products acquired.
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Integration of acquisitions may take longer than expected and may never be
achieved to the extent originally anticipated. This could result in business
growth which may be less than anticipated or manufacturing costs which are
higher than anticipated. In addition, acquisitions may cause a disruption in our
ongoing business, distract our managers, unduly tax our other resources and make
it difficult or impossible to maintain our historical standards, procedures and
controls.
The timing, price, structure and success of future acquisitions are
uncertain. In addition, we may not be able to identify suitable acquisition
candidates at reasonable prices, thereby reducing the aggressive acquisition
component of our growth.
We Operate Internationally and in Developing Countries.
We have significant operations outside the United States. These
operations, like all international operations, are subject to a number of risks
including:
o currency fluctuations;
o capital and exchange control regulations;
o restrictive government actions; and
o expropriation and nationalization.
We believe that the risks in international operations are greatest in
developing countries. The ECS has significant manufacturing operations in
several developing countries, especially the People's Republic of China.
Although the PRC 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.
Effectively Managing Our Growth May Be Difficult.
We have grown rapidly in the last five years, and we expect to continue
to grow internally and through additional acquisitions. This growth is likely to
place significant strain on our resources and systems. To manage our growth, we
must implement systems, recruit and develop additional human resources and
control our operations by continually training employees at every level.
Page 21 of 25
Other Factors
In addition to the factors discussed above, other factors which could
materially affect actual results include, but are not limited to:
o business conditions and the degree of optimism affecting the
economies throughout the world in general;
o competitive factors such as competitors seeking increased market
share based on price;
o manufacturing efficiencies and capacity;
o legal liability unknown at this time;
o risk of obsolescence due to shifts in market demand;
o information technology issues related to our computer systems or
the computer systems of our suppliers or customers; and
o the timing of customer product introductions.
We believe that we have the market opportunities, product offerings,
facilities, personnel and competitive and financial resources for continued
business success. However, future events, costs, margins, product mix and
profits are all subject to unpredictable factors including those discussed
above.
Item 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 31, 1999.
Page 22 of 25
PART II. OTHER INFORMATION
Item 1 Legal Proceedings None
Item 2 Changes in Securities and Use of Proceeds None
Item 3 Defaults Upon Senior Securities None
Item 4 Submission of Matters to a Vote of Security Holders None
Item 5 Other Information None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibit Index is on page 24
(b) Reports On Form 8-K None
Page 23 of 25
Exhibit Index
Document
- --------
3.(i) Articles of Incorporation Incorporated by reference to Form
8-A/A dated April 10, 1998
(ii) By-laws Incorporated by reference from Form
10-Q for the quarter ended
July 2, 1999
4. Instruments defining rights Incorporated by reference from Form
of security holders 10-Q for the quarter ended
July 2, 1999, and to 8-A/A dated
April 10, 1998
27. Financial Data Schedule Electronic Filing Only
- -------------------------------------------------------------------------------
Page 24 of 25
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.
Technitrol, Inc.
-----------------------------------------------------
(Registrant)
May 9, 2000 /s/Albert Thorp, III
- --------------------- -----------------------------------------------------
(Date) Albert Thorp, III
Vice President - Finance and
Chief Financial Officer
(Principal Financial Officer)
May 9, 2000 /s/Drew A. Moyer
- --------------------- -----------------------------------------------------
(Date) Drew A. Moyer
Corporate Controller and Secretary
(Principal Accounting Officer)
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