Exhibit Index
is on page 27
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 September 28, 2001, 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 incorporation (IRS Employer Identification
or organization) Number)
1210 Northbrook Drive, Suite 385
Trevose, Pennsylvania 19053
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 215-355-2900
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 October 24, 2001: 33,691,363
Page 1 of 28
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Technitrol, Inc. and Subsidiaries
Consolidated Balance Sheets
September 28, 2001 and December 29, 2000
In thousands
Sept. 28, Dec. 29,
2001 2000
---- ----
Assets
------
(unaudited)
Current assets:
Cash and cash equivalents $171,244 $162,631
Trade receivables 68,828 108,423
Inventories 71,392 86,001
Prepaid expenses and other current assets 23,431 11,679
-------- --------
Total current assets 334,895 368,734
Property, plant and equipment 180,491 173,739
Less accumulated depreciation 90,505 81,341
-------- --------
Net property, plant and equipment 89,986 92,398
Deferred income taxes 10,727 11,235
Goodwill and other intangibles, net 127,765 47,064
Other assets 17,335 1,340
-------- --------
$580,708 $520,771
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt $ 335 $ 151
Accounts payable 23,651 35,046
Accrued expenses 91,224 103,140
-------- --------
Total current liabilities 115,210 138,337
Long-term liabilities:
Long-term debt, excluding current installments 119,835 48,437
Other long-term liabilities 9,560 9,567
Shareholders' equity:
Common stock and additional paid-in capital 70,568 63,909
Retained earnings 269,971 266,132
Other (4,436) (5,611)
-------- --------
Total shareholders' equity 336,103 324,430
-------- --------
$580,708 $520,771
======== ========
See accompanying Notes to Unaudited Consolidated Financial Statements.
Page 2 of 28
Technitrol, Inc. and Subsidiaries
Consolidated Statements of Earnings
(Unaudited)
In thousands, except per share data
Three Months Ended Nine Months Ended
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2001 2000 2001 2000
---- ---- ---- ----
Net sales $100,846 $170,674 $370,925 $486,553
Costs and expenses applicable to sales:
Cost of goods sold 78,693 102,125 273,624 301,321
Selling, general and administrative expenses 23,732 33,863 75,753 97,133
Restructuring and other non-recurring items 8,808 -- 13,014 3,305
-------- -------- -------- --------
Total costs and expenses applicable to
sales 111,233 135,988 362,391 401,759
-------- -------- -------- --------
Operating profit (loss) (10,387) 34,686 8,534 84,794
Other income (expense):
Interest, net (10) 954 1,915 1,475
Other 496 (658) 594 (439)
-------- -------- -------- --------
Total other income (expense) 486 296 2,509 1,036
-------- -------- -------- --------
Earnings (loss) before income taxes (9,901) 34,982 11,043 85,830
Income taxes (benefit) (611) 7,198 3,798 16,330
--------- -------- -------- --------
Net earnings (loss) $ (9,290) $ 27,784 $ 7,245 $ 69,500
======== ======== ======== ========
Net earnings (loss) per share:
Basic $ (.28) $ .85 $ .22 $ 2.14
Diluted $ (.28) $ .84 $ .22 $ 2.12
Dividends declared per share $ .03375 $ .03375 $ .10125 $ .10125
See accompanying Notes to Unaudited Consolidated Financial Statements.
Page 3 of 28
Technitrol, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended September 28, 2001 and September 29, 2000
(Unaudited)
In thousands
Nine Months Ended
Sept. 28, Sept. 29,
2001 2000
---- ----
Cash flows from operating activities:
Net earnings $ 7,245 $69,500
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 18,582 16,197
Tax benefits from employee stock compensation 231 1,629
Amortization of stock incentive plan expense 1,119 6,558
Loss on impairment and sale of property, plant and equipment 4,356 967
Changes in assets and liabilities, net of effect of acquisitions:
Trade receivables 44,532 (30,707)
Inventories 20,453 (13,799)
Prepaid expenses and other current assets (2,176) (3,670)
Accounts payable and accrued expenses (32,717) 27,561
Other, net 606 691
-------- --------
Net cash provided by operating activities 62,231 74,927
-------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired (115,349) (1,711)
Capital expenditures (10,480) (20,595)
Proceeds from sale of property, plant and equipment 1,104 336
-------- --------
Net cash used in investing activities (124,725) (21,970)
-------- --------
Cash flows from financing activities:
Dividends paid (3,391) (3,309)
Proceeds of long-term borrowings 132,865 19,053
Principal payments of long-term debt (60,646) (29,368)
Payoff of debt assumed in acquisition (3,944) --
Sale of stock through employee stock purchase plan 6,548 8,388
Proceeds from exercise of stock options 17 194
-------- --------
Net cash provided by (used in) financing activities 71,449 (5,042)
-------- -------
Net effect of exchange rate changes on cash (342) (114)
-------- --------
Net increase in cash and cash equivalents 8,613 47,801
Cash and cash equivalents at beginning of year 162,631 88,161
-------- --------
Cash and cash equivalents at September 28, 2001 and September 29, 2000 $171,244 $135,962
======== ========
See accompanying Notes to Unaudited Consolidated Financial Statements.
Page 4 of 28
Technitrol, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
September 28, 2001
(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 December 29, 2000 33,237 $63,909 $266,132 $(3,871) $(1,740)
Stock options, awards and related
compensation 56 (120) 909
Tax benefit of stock compensation 231
Stock issued under employee stock
purchase plan 398 6,548
Currency translation adjustments 266 $ 266
Net earnings 7,245 7,245
------
Comprehensive income $7,511
======
Dividends declared ($.10125 per share) (3,406)
------ ------- -------- ------- -------
Balance at September 28, 2001 33,691 $70,568 $269,971 $(2,962) $(1,474)
====== ======= ======== ======= =======
See accompanying Notes to Unaudited Consolidated Financial Statements.
Page 5 of 28
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 29, 2000.
The results for the quarter ended September 28, 2001 and September 29,
2000, 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 September 28,
2001 are not necessarily indicative of annual results.
Certain amounts in the prior year financial statements have been
reclassified to conform with the current year presentation.
(2) Acquisitions
Excelsus Technologies, Inc.: On August 7, 2001, the Company acquired
all of the capital stock of Excelsus Technologies, Inc. ("Excelsus") based in
Carlsbad, California. Excelsus produced customer-premises digital subscriber
line filters and other broadband accessories.
The acquisition was accounted for by the purchase method of accounting.
The purchase price was approximately $89.0 million, net of cash acquired. The
fair value of net assets acquired approximated $17.1 million. Based on
independent appraisals of the assets acquired, the preliminary allocation of the
unadjusted purchase price includes $40.0 million for trade names, $23.9 million
for goodwill and $8.0 million for technology. The only intangible subject to
amortization is the $8.0 million of technology, which is estimated to have a
5-year life. The purchase price is subject to adjustment for the net worth of
Excelsus at the date of closing and the allocation of the purchase price is
subject to adjustment as the details of the transaction are finalized. Included
in the assets acquired is a $6.3 million tax receivable, generated by the
conversion of Excelsus stock options at the time of closing. The Company has
filed income tax returns for the period ending on the closing date, and expects
to receive the full amount of the tax receivable during the fourth quarter of
2001. In order to fund the purchase price, the Company used approximately $19.0
million of cash on-hand and borrowed approximately $74.0 million under its
existing credit facility with a syndicate of commercial banks. Excelsus was
integrated into the Electronic Components Segment ("ECS") as a new division.
Excelsus recorded revenues of approximately $40.0 million in 2000.
Full Rise Electronics Co. Ltd.: In April 2001, the Company made a
minority investment in the common stock of Full Rise Electronics Co. Ltd.
("FRE"). FRE is based in the Republic of China (Taiwan) and manufactures
connector products including single and multiple port jacks. This investment was
made by the ECS and the Company has an option to purchase additional shares of
common stock in FRE in the future.
Page 6 of 28
Technitrol, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(2) Acquisitions, continued
Grupo ECM: In March 2001, the Company acquired Electro Componentes
Mexicana, S.A. de C.V. and affiliates based in Mexico City. These operations are
referred to as Grupo ECM. Grupo ECM manufactured and marketed inductive
components primarily for automotive applications. This business was integrated
into the ECS. The purchase price was not material to the Company's consolidated
financial position.
Engelhard-CLAL: In January 2001, the Company acquired the electrical
contacts business of Engelhard-CLAL. These operations are based in France with
additional operations in Spain and the United Kingdom. Engelhard-CLAL
manufactured electrical contacts, wire and strip contact materials and related
products primarily for the European electrical equipment market. This business
was integrated into the Electrical Contact Products Segment ("ECPS"). The
purchase price was not material to the Company's consolidated financial
position.
EWC, Inc: In October 2000, the Company purchased certain assets of EWC,
Inc. EWC manufactured magnetic components primarily for the defense and
aerospace industries. This business was integrated into the Specialty Components
Division of ECS. The purchase price was not material to the Company's
consolidated financial position.
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. This business was integrated into the ECPS. The purchase price was
not material to the Company's consolidated financial position.
(3) Restructuring
In light of the continued downturn in the markets served by ECS
throughout 2001, the Company continued its restructuring initiatives during the
third quarter of 2001, with the goal of further reducing the ECS's cost
structure. The Company decided to close its production facility in Malaysia in
the third quarter of 2001, and to transfer production to other ECS facilities in
Asia. The Company provided approximately $2.4 million for this action, comprised
of $1.7 million for severance and related payments and $0.7 million for other
exit costs. The majority of this accrual will be utilized by the end of the
first quarter of 2002.
The ECS also adopted other restructuring plans in the third quarter
of 2001. In this regard, a $2.1 million provision was recorded in the third
quarter, primarily for severance of manufacturing personnel. Approximately 930
personnel, primarily involved in Asian manufacturing, were terminated.
Approximately 35 additional support personnel, primarily in North America and
Europe, were also terminated in the third quarter of 2001. Approximately
two-thirds of all of the employee severance and related payments in connection
with these actions have been completed as of September 28, 2001.
Page 7 of 28
Technitrol, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(3) Restructuring, continued
Approximately $0.7 million of the provision remains for severance payments to be
made in the fourth quarter of 2001 primarily for European-based personnel.
The ECPS recorded a restructuring reserve of $0.5 million in the third
quarter of 2001, to provide for the severance of approximately 60 personnel,
primarily involved in North American manufacturing. The majority of the
severance and related payments in connection with these actions have been
completed as of September 28, 2001.
During the second quarter of 2001, the Company recorded a $1.9 million
restructuring provision, primarily for severance payments to manufacturing
personnel. Approximately 830 personnel, primarily involved in Asian
manufacturing, were terminated. Additionally, approximately 60 support personnel
were terminated in North America and Europe. Essentially all of the employee
severance and related payments in connection with these actions were completed
as of June 29, 2001. During the second quarter of 2001, the Company also decided
to close its manufacturing facility in Thailand, and to transfer production to
other ECS facilities in Asia. Approximately $1.0 million was provided for this
action, comprised of $0.8 million for severance and related payments and $0.2
million for other exit costs. Approximately $0.6 million of this accrual was
utilized in the third quarter of 2001 for severance and related payments.
In the first quarter of 2001, approximately $1.3 million of severance
was paid to 1,255 manufacturing personnel primarily in Asia, and 35 support
personnel primarily in North America. These amounts were originally recorded as
cost of goods sold and selling, general and administrative expenses of $1.0
million and $0.3 million, respectively, during the quarter ended March 30, 2001.
These amounts have been reclassified on a year-to-date basis in order to be
consistent with the presentation of the second and third quarter provisions
discussed above.
During the first quarter of 2000, the Company initiated a restructuring
plan aimed at reducing the costs of manufacturing in the ECPS's operations. The
Company provided severance and related benefits to approximately 120 employees.
Accordingly, reserves were established for these costs during the quarter ended
March 31, 2000. The affected employees included both direct and indirect
personnel, and a majority were located at the Company's facility in Pforzheim,
Germany.
A charge of $3.5 million was recorded during the third quarter of 2001
to write down the value of certain ECS assets to their disposal value. The
assets are associated with excess production capacity of the ECS in Asia. Such
assets are in the process of being sold and the remaining cost basis of the
assets has been reclassified from fixed assets to assets held for sale in the
balance sheet at September 28, 2001.
Page 8 of 28
Technitrol, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(3) Restructuring, continued
The Company's restructuring charges are summarized on a year-to-date
basis for 2001 as follows:
Restructuring provision (in millions): ECPS ECS Total
----------------------- --- --- -----
Balance at December 29, 2000 $ 2.5 $ -- $ 2.5
New provisions 0.5 12.5 13.0
Severance and other cash payments (2.0) (4.8) (6.8)
Non-cash asset disposals (0.2) (3.5) (3.7)
----- ----- -----
Balance at September 28, 2001 $ 0.8 $ 4.2 $ 5.0
===== ===== =====
(4) Inventories
Inventories consisted of the following (in thousands):
September 28, December 29,
2001 2000
---- ----
Finished goods $22,649 $28,710
Work in process 13,600 15,907
Raw materials and supplies 35,143 41,384
------- -------
$71,392 $86,001
======= =======
(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 September 28, 2001, the Company had one foreign exchange forward
contract outstanding. 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.
Page 9 of 28
Technitrol, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(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 are calculated using the
treasury stock method. Such common share equivalent amounts were 11,900 and
13,800 for the three months ended September 28, 2001 and September 29, 2000,
respectively and 10,200 and 14,200 for the nine month periods then ended. As the
three month period ended September 28, 2001 resulted in a net loss, common share
equivalents are anti-dilutive, and therefore excluded from the earnings per
share calculation. Earnings per share calculations are as follows (in thousands,
except per share amounts):
Three Months Ended Nine Months Ended
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2001 2000 2001 2000
---- ---- ---- ----
Net earnings (loss) $(9,290) $27,784 $ 7,245 $69,500
Basic earnings (loss) per share:
Shares 33,337 32,610 33,200 32,396
Per share amount $ (.28) $ .85 $ .22 $ 2.14
Diluted earnings (loss) per share:
Shares 33,655 32,970 33,513 32,754
Per share amount $ (.28) $ .84 $ .22 $ 2.12
On October 23, 2000, the Company announced a two-for-one stock split in
the form of a 100% stock dividend payable on November 27, 2000. At that time,
one additional share of stock was issued for each share outstanding to
shareholders of record on November 6, 2000. All per share amounts for periods
before this stock split have been restated to reflect the split.
Page 10 of 28
Technitrol, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(7) Business Segment Information
For the quarters ended September 28, 2001 and September 29, 2000, there
were no material amounts of intersegment revenues eliminated in consolidation.
In addition, the basis for determining segment financial information has not
changed from 2000. Specific segment data are as follows (in thousands):
Three Months Ended Nine Months Ended
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2001 2000 2001 2000
---- ---- ---- ----
Net sales:
Electronic Components $ 50,885 $116,151 $197,870 $313,542
Electrical Contact Products 49,961 54,523 173,055 173,011
-------- -------- -------- --------
Total $100,846 $170,674 $370,925 $486,553
======== ======== ======== ========
Earnings (loss) before income taxes:
Electronic Components $ (1,616) $ 31,556 $ 14,515 $ 78,546
Electronic Components Segment
restructuring and other
non-recurring items (8,267) -- (12,473) --
Electrical Contact Products 37 3,130 7,033 9,553
Electrical Contact Products Segment
restructuring and other
non-recurring items (541) -- (541) (3,305)
-------- -------- -------- --------
Operating profit (10,387) 34,686 8,534 84,794
Other income, net 486 296 2,509 1,036
-------- -------- -------- --------
Earnings (loss) before income taxes $ (9,901) $ 34,982 $ 11,043 $ 85,830
======== ======== ======== ========
Page 11 of 28
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 22 through 25 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 components and
electrical contact products. We operate two business segments: the Electronic
Components Segment and the Electrical Contact Products Segment. We refer to
these segments as the ECS and the ECPS, respectively.
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
("LAN"), Internet connectivity, telecommunication and power-conversion products.
The ECS has manufacturing facilities in the United States, Mexico, France, 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. We have made numerous acquisitions in recent years which
have increased our penetration in our primary markets and expanded our presence
into new markets including automotive and military/aerospace. Our recent
acquisitions include:
o Excelsus: In August 2001, the Company acquired all of the capital
stock of Excelsus Technologies, Inc. ("Excelsus"), a producer of
customer-premises digital subscriber line filters and other
broadband accessories based in Carlsbad, California. This business
was integrated into the ECS as a new division. The purchase price
for Excelsus was $89.0 million, net of cash acquired. Excelsus
recorded revenues of approximately $40.0 million in 2000.
o Grupo ECM: In March 2001, we acquired Electro Componentes Mexicana,
S.A. de C.V. and affiliates. We refer to these operations as Grupo
ECM. Grupo ECM manufactured and marketed inductive components
primarily for automotive applications. It is based in Mexico City
and had revenues in 2000 of approximately $18 million.
Page 12 of 28
o EWC, Inc: We purchased certain assets of EWC, Inc. in October 2000.
EWC manufactured magnetic components primarily for the defense and
aerospace industries. We have integrated this business into the
Specialty Components Division of ECS. The EWC acquisition was not
material to our consolidated financial position or results of
operations.
As part of our restructuring of the ECS operations, we recorded
restructuring provisions in the nine months ended September 28, 2001. For a
further description of these charges, see the "Results of Operations" section of
this report.
Our electronic component businesses operate as a unified business
throughout the world under the name Pulse.
Electrical Contact Products Segment
Our Electrical Contact Products Segment manufactures electrical
contacts and assemblies, contact materials, thermostatic bimetals, clad metal
products and precision contact subassemblies. We also provide selective
electroplating and refining services.
We sell these electrical contact products 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.
The ECPS has manufacturing facilities in the United States, Mexico,
Puerto Rico, Germany, Spain, Italy, France, Estonia, Hungary and the PRC.
ECPS acquisitions in recent years include:
o Engelhard-CLAL - In January 2001, we acquired the electrical
contacts business of Engelhard-CLAL. These operations are based in
France, Spain and the United Kingdom. Engelhard-CLAL manufactured
electrical contacts, wire and strip contact materials and related
products primarily for the European electrical equipment market.
Annualized revenues for these operations are expected to be
approximately $25 million in 2001.
Page 13 of 28
o Tool and Mold Fabrication - In 2000, we finalized our acquisition
of a tool and die design and manufacturing operation near Tallinn,
Estonia. We also began operations in Hungary building molding
tools. Virtually all of these tools and molds are for our own use
and enable us to maintain control over our proprietary tool and
mold designs.
o MEC Betras Italia S.r.l. -In December of 1999, we acquired the
operating assets of MEC Betras, located in Italy. MEC Betras
produced electrical contact rivets and stamped electrical contact
parts.
o Tianjin Electrical Metal Works - In November of 1999, we acquired
the operating assets of this electrical contacts business based in
Tianjin, PRC.
Our recent acquisitions provide the ECPS with additional lower-cost
operating locations and an enhanced market presence in key areas of the
business. All of our electrical contact products businesses now operate globally
under the name AMI Doduco.
As part of our restructuring of the ECPS operations, we recorded
restructuring provisions in the third quarter of 2001 and 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 September 28, 2001 was $219.7 million compared to
$230.4 million at December 29, 2000, a decrease of $10.7 million. Cash on hand
increased approximately $8.6 million from December 29, 2000 while total debt
outstanding increased approximately $72.3 million. Net of the effect of
acquisitions, accounts receivable decreased by $44.5 million and inventories
decreased by $20.5 million, both reflecting the significant downturn in our
electronics markets since the beginning of the year.
All previous credit facilities and lines of credit, excluding fixed
term loans, were replaced as of June 20, 2001 under a new multicurrency
revolving credit agreement providing for $225 million of credit capacity. We pay
a facility fee on the total credit facility size, irrespective of whether there
are outstanding borrowings or not. The facility fee ranges from 0.275% to 0.450%
and is based on our earnings before interest, taxes, depreciation and
amortization ("EBITDA") to debt ratio. Borrowings can be in U.S. dollars, Euros
or British pounds sterling. The interest rate for each currency's borrowing will
be a combination of the base rate for that currency plus a credit margin spread.
The base rate is different for each currency: LIBOR or prime rate for U.S.
dollars, Euro-LIBOR for Euros, and a rate approximating Sterling LIBOR for
British pounds. The credit margin spread is the same for each currency and is
0.85% to 1.425% depending on our EBITDA to debt ratio.
We believe that the combination of cash on hand, cash generated by
operations and, if necessary, additional borrowings under our new credit
agreement will be sufficient to satisfy our operating cash requirements for the
foreseeable future. In addition, we may use internally generated funds or
borrowings for acquisitions of suitable businesses or assets. At September 28,
2001, we had approximately $119.7 million of unused capacity available under the
new credit agreement.
Page 14 of 28
Cash Flows from Operating Activities
Cash provided by operating activities for the nine months ended
September 28, 2001 was $62.2 million, including $20.7 million during the third
quarter. Net earnings, adjusted for non-cash depreciation and amortization
charges, contributed $25.8 million to cash flow during the period. A significant
decrease in ECS revenue from the second quarter to the third quarter of 2001
caused a significant decrease in accounts receivable as outstanding customer
balances were collected and replaced with a much lower level of receivables.
Average weekly revenue declined throughout the quarter. Decreases in accounts
payable and accrued expenses offset the positive cash impact arising from the
decrease in accounts receivable. The decrease in accounts payable and accrued
expenses resulted from payments made for income taxes and compensation related
items, as well as a lower level of trade accounts payable. Net of the effect of
acquisitions, inventory declined by $20.5 million during the nine-month period
ended September 28, 2001 due to the significant reduction in ECS revenue during
the period and corresponding actions to limit purchases and production activity.
The reduction also reflects approximately $6.6 million of write-offs for slow
moving inventory during the period.
Cash Flows from Investing Activities
Cash used by investing activities was $124.7 million during the nine
months ended September 28, 2001. Approximately $115.3 million was used for
acquisitions and purchase of minority-interest investment.
Approximately $10.5 million of cash was used for capital expenditures
during the nine months ended September 28, 2001. The level of capital
expenditures decreased from 2000 due to tight spending controls and lower ECS
capacity needs resulting from lower sales. Capital spending has declined
significantly during 2001 from the $30.0 million expended in 2000. In 2001,
capital spending was $6.0 million in the first quarter, $2.7 million in the
second quarter and $1.8 million in the third quarter, as our efforts to maximize
cashflow during this period of slow market activity were intensified. We make
capital expenditures to expand production capacity and to improve our operating
efficiency. We plan to continue making such expenditures. We may also acquire
other businesses or product lines to expand our breadth and scope of operations.
Other investing activities included approximately $1.1 million of
proceeds from sales of property, plant and equipment.
With the exception of approximately $8.5 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.
Page 15 of 28
Cash Flows from Financing Activities
Approximately $71.5 million of cash was generated from financing
activities in the nine months ended September 28, 2001. We borrowed
approximately $72.3 million of debt during the nine months ended September 28,
2001, net of repayments. These borrowings were used to fund a portion of the
purchase price of Excelsus. In connection with our acquisition of Grupo ECM, we
also immediately repaid approximately $3.9 million of debt acquired with the
operations during the first quarter.
During the first nine months of 2001, we paid dividends of
approximately $3.4 million. During this same period we received proceeds of $6.6
million from the sale of stock through our employee stock purchase plan. We do
not expect to continue receiving significant proceeds through our employee stock
purchase plan in the near-term.
Foreign Currency Effects
Euro currencies were approximately 1.4% weaker, on average, relative to
the U.S. dollar during the third quarter of 2001 than in the third quarter of
2000. Euro currencies were also 3.3% weaker, on average, relative to the U.S.
dollar at September 28, 2001 versus December 29, 2000. As a result, we incurred
foreign currency losses in our ECS European operations, as Euro currency
denominated assets and liabilities were translated to U.S. dollars for financial
reporting purposes during the nine month period ended September 28, 2001. As a
result of the downward valuation of Euro currencies, we also experienced a
negative translation adjustment to equity because our investment in the ECPS's
European operations was worth less in U.S. dollars. This decrease in U.S. dollar
value is reflected as a reduction in equity, although the amount recorded in the
third quarter of 2001 was not material to our consolidated financial position.
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 the ECPS's European sales are denominated
primarily in Euro currencies. 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 ECPS's European sales will be partially offset by the impact on
its expenses and bank borrowings, most of which, regarding ECPS's European
operations, 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 September 28, 2001, we had one foreign currency forward contract outstanding.
The contract was short-term in duration (less then 30 days) and was settled in
October. In determining the use of forward exchange contracts and currency
options, we consider the amount of sales, purchases and net assets or
liabilities denominated in local currencies, the type of currency, and the costs
associated with the contracts.
Page 16 of 28
New Accounting Pronouncements
In October 2001, the Financial Accounting Standards Board ("FASB")
issued Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, ("SFAS 144") which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS 144
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, (`SFAS 121") it retains many
of the fundamental provisions of SFAS 121. SFAS 144 also supersedes the
accounting and reporting provisions of APB Opinion No. 30, Reporting the Results
of Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, (`APB
30"). SFAS 144 does however, retain the requirement in APB 30 to report
separately discontinued operations, and extends this reporting requirement to a
component of an entity that either has been disposed of (by sale, abandonment,
or in a distribution to owners) or is classified as held for sale. Goodwill is
excluded from the scope of SFAS 144. The Company is required to adopt the
provisions of SFAS 144 for the three months ending March 29, 2002. Adoption of
this standard is not expected to have a material effect on our revenue,
operating results or liquidity.
In August 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations ("SFAS 143") which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS143 applies to legal
obligations associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development and (or) normal use of
the assets. SFAS 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the liability
is added to the carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If the
obligation is settled for other than the carrying amount of the liability, the
Company will recognize a gain or loss on settlement. The Company is required to
adopt the provisions of SFAS 143 for the three months ending March 28, 2003.
Adoption of this standard is not expected to have a material effect on our
revenue, operating results or liquidity.
In July 2001, the FASB issued Statement No. 141, Business Combinations,
("SFAS 141") and Statement No. 142, Goodwill and Other Intangible Assets ("SFAS
142"). SFAS 141 requires that the purchase method of accounting be used for all
business combinations completed after June 30, 2001. SFAS 141 also specifies
that intangible assets acquired in a purchase method business combination must
meet certain criteria to be recognized and reported apart from goodwill. SFAS
142 will require that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead they will be tested for impairment at
Page 17 of 28
least annually in accordance with the provisions of SFAS 142. SFAS 142 will also
require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS 144.
The Company is required to adopt the provisions of SFAS 141
immediately, and SFAS 142 effective January 1, 2002. Furthermore, any goodwill
and any intangible asset determined to have an indefinite useful life that are
acquired in a purchase business combination completed after June 30, 2001 will
not be amortized, but will continue to be evaluated for permanent impairment.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized until January 1, 2002. Since
our acquisition of Excelsus was completed on August 7, 2001, the provisions of
SFAS 141 were applied and the goodwill resulting from the Excelsus transaction
has not been subject to amortization.
In connection with the transitional goodwill impairment evaluation,
SFAS 142 will require the Company to perform an assessment of whether there is
an indication that goodwill is impaired as of the date of adoption. To
accomplish this, the Company must determine the carrying value of each reporting
unit by assigning the assets and liabilities, including the existing goodwill
and intangible assets, to those reporting units as of the date of adoption. The
Company will then have up to six months from the date of adoption to determine
the fair value of each reporting unit and compare it to the reporting unit's
carrying amount. To the extent a reporting unit's carrying amount exceeds its
fair value, an indication exists that the reporting unit's goodwill may be
impaired and the Company must perform the second step of the transitional
impairment test. In the second step, the Company must compare the implied fair
value of the reporting unit's goodwill, determined by allocating the reporting
unit's fair value to all of its assets and liabilities in a manner similar to a
purchase price allocation in accordance with SFAS 141, to its carrying amount,
both of which would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in the Company's statement
of earnings.
Based on current goodwill balances, the Company will have approximately
$78.7 million of unamortized goodwill as of January 1, 2002, which will be
subject to the transition provisions of SFAS 141 and SFAS 142. Amortization
expense related to goodwill was approximately $3.8 million and $3.6 million for
the year ended December 29, 2000 and the nine months ended September 28, 2001,
respectively. The Company has not yet determined what the effect of SFAS 142
will be on earnings and financial position.
Page 18 of 28
Results of Operations
Our results of operations for the three and nine months ended September
28, 2001 and September 29, 2000 are as follows. Amounts are in thousands:
Three Months Ende Nine Months Ended
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2001 2000 2001 2000
---- ---- ---- ----
Net sales:
Electronic Components $ 50,885 $116,151 $197,870 $313,542
Electrical Contact Products 49,961 54,523 173,055 173,011
-------- -------- -------- --------
Total $100,846 $170,674 $370,925 $486,553
======== ======== ======== ========
Earnings (loss) before income taxes:
Electronic Components $ (1,616) $ 31,556 $ 14,515 $ 78,546
Electronic Components Segment
restructuring and other
non-recurring items (8,267) -- (12,473) --
Electrical Contact Products 37 3,130 7,033 9,553
Electrical Contact Products Segment
restructuring and other
non-recurring items (541) -- (541) (3,305)
-------- -------- -------- --------
Operating profit (10,387) 34,686 8,534 84,794
Other income, net 486 296 2,509 1,036
-------- -------- -------- --------
Earnings (loss) before income taxes $ (9,901) $ 34,982 $ 11,043 $ 85,830
======== ======== ======== ========
Revenues
Net sales for the third quarter of 2001 decreased approximately $69.8
million, or 40.9%, from the comparable period in 2000. Our sales decline from
the comparable quarter last year was attributable primarily to the precipitous
downturn in markets served by the ECS that began late in 2000.
ECS revenues decreased $65.3 million, or 56.2%, from the third quarter
of 2000. ECS sales were significantly lower in 2001 than in comparable periods
in 2000 as new order rates declined and significant customer order cancellations
occurred. Throughout 2000, record ECS growth was achieved due to demand for
Pulse's customers' broadband access technology, latest generation networking
equipment, and feature-rich wireline and wireless connectivity. This trend
reversed abruptly late in 2000, particularly in North America, and has been
reported by virtually all of ECS's major customers, competitors, suppliers and
peer companies.
Page 19 of 28
Sales within the ECPS during the quarter ended September 28, 2001
decreased $4.6 million, or 8.4%, from the third quarter of 2000. Sales in the
2001 period reflect strong European markets and contributions from the
Engelhard-CLAL operations, acquired in early January 2001. However, these
positive factors were more than offset by a slowdown in North American
manufacturing activity during the third quarter. The lower manufacturing
activity resulted in lower sales primarily from machine tool and other customers
in the commercial and industrial controls sector. In addition, the Euro to U.S.
dollar exchange rate was approximately 1.4% weaker than in the third quarter of
2000. Had the Euro to U.S. dollar exchange rate been the same in the third
quarter of 2001 as it was in the third quarter of 2000, sales within the ECPS
would have been approximately $0.3 million higher than was actually reported for
the quarter ended September 28, 2001.
Cost of Sales
Our consolidated gross margin for the quarter ended September 28, 2001
was 22.0% compared to 40.2% for the third quarter of 2000. Since the ECS gross
profit as a percentage of sales is typically higher than that of the ECPS, our
consolidated gross margin in 2001 was negatively affected by a sales mix
weighted more heavily by the ECPS volume and by the relatively low gross margin
of ECS compared to any time in recent history. The ECS recorded pre-tax
provisions in cost of goods sold for inventory of approximately $1.3 million
during the third quarter of 2001 and $6.6 million on a year-to-date basis. These
resulted from the ECS's actions to reduce production capacity and from the
application of our inventory valuation policies that have been maintained
throughout recent years. The lower revenues for ECPS in North America resulted
in manufacturing inefficiencies and lower gross margins in the third quarter of
2001. These factors more than offset the positive impact of the segment's
Strategy 2000 work force streamlining and process improvement efforts. Strategy
2000 is described in more detail below.
Operating Expenses
Excluding restructuring and other non-recurring items, total selling,
general and administrative expenses for the third quarter of 2001 were $23.7
million, or 23.5% of sales, compared to $33.9 million, or 19.8% of sales in the
comparable 2000 period. The decrease in selling, general and administrative
expenses in 2001 is due to reduced costs associated with tight spending
controls, lower incentive awards and elimination of profit driven expenses
related to our restricted stock plan. There were no incentive awards in the
third quarter of 2001 compared to $2.1 million in the third quarter of 2000. The
underlying expense is primarily variable and dependent upon the Company's
overall financial performance regarding incentive plan targets, primarily the
achievement of economic profit and net operating profit objectives. These
targets, which were set in December of 2000, have not been achieved. Stock-based
compensation plans including the restricted stock plan were $1.4 million lower
in the third quarter of 2001 versus the comparable 2000 period. The underlying
expense is variable and dependent on our common stock price. Operating margins
declined for the ECS due primarily to weak volume, severance and the inventory
provisions recorded in cost of sales. The ECPS operating margin declined due to
soft demand in North America, offset somewhat by improved cost controls and the
segment's Strategy 2000 work force reduction and process improvement
initiatives.
Page 20 of 28
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 three and nine months ended September 28,
2001 and September 30, 2000, RD&E by segment was as follows (in thousands):
Three Months Ended Nine Months Ended
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2001 2000 2001 2000
---- ---- ---- ----
RD&E:
Electronic Components $3,894 $4,100 $11,855 $11,595
% of Segment Sales 7.7% 3.5% 6.0% 3.7%
Electrical Contact Products $1,026 $1,074 $ 3,189 $ 3,401
% of Segment Sales 2.1% 2.0% 1.8% 2.0%
Neither segment plans any significant reduction in RD&E efforts in the near
term.
The Company recorded provisions of $8.8 million and $13.0 million for
restructuring and other non-recurring items, in the quarter and nine months
ended September 28, 2001, respectively. The initiatives included personnel
serverances, facility exit costs and asset impairment provisions, and relate to
both the ECS and ECPS. See note 3 in the Notes to Unaudited Consolidated
Financial Statements for additional discussion on this item.
The Company may also adopt additional restructuring actions during the
remainder of 2001, though it has no current plans to do so. If additional plans
are adopted, the amounts will depend on specific actions taken to reduce
manufacturing capacity and improve efficiency. The actions taken so far (plant
closures and reduction in support personnel worldwide) resulted in the
elimination of approximately $21.7 million of annualized costs, the savings from
which generally will begin in the fourth quarter of 2001. The majority of these
costs represent the annual salaries and benefits of terminated employees. If
incoming orders increase substantially, additional hiring may be necessary to
expand capacity. However, we do not anticipate requiring additional capacity in
the foreseeable future. The eliminated costs also include depreciation savings
from disposed equipment.
Interest
Interest income was substantially offset by interest expense during the
third quarter of 2001. Net interest income was $0.9 million in the comparable
quarter of 2000. This lower net interest income in 2001 resulted from slightly
higher cash levels offset by lower interest income rates, higher debt levels and
higher interest expense rates. The higher debt level resulted from borrowings
used to fund the purchase of Excelsus.
Our new credit facility which was entered into on June 20, 2001 has
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. 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 to date.
Page 21 of 28
Income taxes
The effective income tax rate during the third quarter of 2001 was
recorded as a benefit of 6.2% of the pre-tax loss. The low tax benefit in the
third quarter of 2001 resulted from the non-deductibility of the majority of
restructuring charges incurred in 2001 because plant shut-down costs and
severance expenses were incurred in countries where we have losses in 2001 or
where we will not have operations in the future, so we expect to have no future
income to offset such charges, resulting in little or no income tax benefit. The
effective income tax rate was 20.6% for pre-tax income earned during the third
quarter of 2000.
Other Issues
Precious Metal
The ECPS 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 and leasing and consignment eliminated
the risk of a decrease in the market price of owned precious metal which can be
substantial. The terms of sale within the ECPS allow us to charge customers for
the current market value of silver. 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 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.
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. 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.
Page 22 of 28
We sometimes 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.
We are operating in the midst of the most severe contraction of
technology markets in history, as well as a general slowdown in North American
industry activity.
ECS operates in technology driven markets that, since the end of 2000,
have experienced the most severe contraction in their history. No one can
predict exactly how long this will last or whether we have yet reached the
bottom of this contraction period. In addition, no one can predict what will
happen to average selling prices when markets begin to recover and customers
look for even lower prices from suppliers who have significant unused
capacities. The ECPS's North American industrial markets are in recession and no
one can predict when they will recover.
Some of Our Products Are Subject to Rapid Technological Changes.
The ECS operates in an industry known for rapid change, consolidation,
uncertainty and constant new and emerging technologies. Generally, we expect
product life cycles to be very short. Changes in recent years due to the
Internet, on-line services and expansion of networking require the ECS to
maintain a strong engineering and development program. The program is necessary
to avoid product obsolescence and to meet or exceed customer expectations.
Accordingly, we expect to continue to spend money on engineering and development
with no assurances that our efforts in these areas will continue to be
successful.
We Cannot Predict the Market Growth Rate for Our Products.
The ECS sells its products into markets that are characterized by
rapidly changing growth rates. These markets include LAN, telecommunication
devices and power-conversion products. It is often difficult for our customers
or us to assess worldwide demand for upgrades or replacement of networks, or the
pace at which telecommunication infrastructure will 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 ECPS and the ECS.
We May Receive Lower Prices for Our Products.
Both the ECPS and the ECS operate in businesses characterized by
continually declining average selling prices on existing products. Future prices
for our products may decrease from historical levels, depending on competition
and other factors, and we may not be able to bring our manufacturing costs down
proportionately or continue to introduce new products, each of which is
necessary to maintain average selling prices and profitability.
Page 23 of 28
We May Not Be Able to Maintain Our Current Gross Margins and Operating 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 and operating margin percentages,
temporarily or permanently. We may not be able to reduce selling, general and
administrative expenses at the same rate as a reduction in gross margins.
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 ECPS, 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 22 of this report.
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.
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.
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.
Page 24 of 28
We Operate Internationally and in Developing Countries.
We are a global company subject to the risks of doing business outside
of the United States, particularly in developing countries.
There has been a serious devaluation of the Euro currencies against the
U.S. dollar in the last several years and about 60% of our ECPS revenues are
designed in Euros. The industrial slowdown in North America shows signs of
having an adverse impact in Europe later this year. This would adversely impact
our revenues in these countries.
We Rely on Our Customers' Forecasts
We have very little visibility into our customers' near-term purchasing
patterns and are therefore, highly dependent on our customers' forecasts,
particularly in the ECS. These forecasts might be wrong and we may not be able
to adequately plan our production scheduling, materials management and working
capital requirements to meet our customers' demand.
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 or changes in liabilities 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;
o the timing of customer product introductions;
o precious metals leasing costs, which cannot always be recovered;
o foreign exchange ceilings imposed by foreign governments could
impact our ability to internally transfer cash balances; and
o liquidity requirements could necessitate movements of existing cash
balances, causing unfavorable tax consequences and potentially
unfortunate foreign currency exchanges in the spot markets.
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 29, 2000.
Page 25 of 28
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 27
(b) Reports on Form 8-K
We filed a report on Form 8-K dated August 21,
2001. This report pertains to the acquisition of
Excelsus Technologies, Inc.
Page 26 of 28
Exhibit Index
Document
3.(i) Articles of Incorporation Incorporated by reference to
Exhibit 1 from Form 8-A/A dated
April 10, 1998
3.(i)(a) Articles of Incorporation Incorporated by reference from
(Amendment) Form 10-Q for the quarter ended
July 27, 2001
3.(ii) By-laws Incorporated by reference from
Form 10-Q for the quarter ended
July 2, 1999
4. Instruments defining rights of Incorporated by reference from
security holders Form 8-A/A dated July 5, 2000
-------------------------------------------------------------------------------
Page 27 of 28
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)
November 7, 2001 /s/Albert Thorp, III
--------------------- --------------------------------------------------
(Date) Albert Thorp, III
Vice President - Finance and
Chief Financial Officer
(Principal Financial Officer)
November 7, 2001 /s/Drew A. Moyer
--------------------- --------------------------------------------------
(Date) Drew A. Moyer
Corporate Controller and Secretary
(Principal Accounting Officer)
Page 28 of 28