Exhibit index
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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 30, 1997, 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 October 20, 1997: 16,131,077
Page 1 of 19
TECHNITROL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and December 31, 1996
(Unaudited)
(In thousands of dollars)
Sept. 30, 1997 Dec. 31, 1996
-------------- -------------
Assets
Current Assets:
Cash and cash equivalents $ 67,305 $ 43,531
Trade receivables 52,907 46,537
Inventories 48,809 48,028
Prepaid expenses and other current assets 3,596 4,530
-------- --------
Total current assets 172,617 142,626
Property, plant and equipment 104,476 96,792
Less accumulated depreciation 45,207 42,654
-------- --------
Net property, plant and equipment 59,269 54,138
Deferred income taxes 7,740 6,834
Excess of cost over net assets acquired, net 13,027 13,851
Other assets 787 898
-------- --------
$253,440 $218,347
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt $ 2,022 $ 2,024
Notes payable 4,685 2,911
Accounts payable 12,118 11,694
Accrued expenses 62,208 51,210
-------- --------
Total current liabilities 81,033 67,839
Long-term liabilities:
Long-term debt, excluding current installments 29,050 39,677
Other long-term liabilities 7,555 7,241
Shareholders' equity:
Common stock and additional paid-in capital 43,044 40,638
Retained earnings 95,152 64,339
Other (2,394) (1,387)
-------- --------
Total shareholders' equity 135,802 103,590
-------- --------
$253,440 $218,347
======== ========
See accompanying Notes to Consolidated Financial Statements.
Page 2 of 19
TECHNITROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands of dollars, except share data)
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
-------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
1. Net sales $102,127 $51,277 $298,261 $166,387
2. Costs and expenses applicable to sales
a) Cost of goods sold 69,440 35,067 203,013 112,387
b) Selling, general and
administrative expenses 22,430 10,689 61,865 33,685
-------- ------- -------- --------
Total costs and expenses
applicable to sales 91,870 45,756 264,878 146,072
3. Operating profit 10,257 5,521 33,383 20,315
4. Other income (expense)
Interest, net 324 21 (169) (170)
Other 342 3 314 (5)
-------- ------- -------- --------
Total other income (expense) 666 24 145 (175)
-------- ------- -------- --------
5. Earnings before taxes 10,923 5,545 33,528 20,140
6. Income taxes 3,785 1,946 11,937 7,063
-------- ------- -------- --------
7. Net earnings from continuing operations 7,138 3,599 21,591 13,077
8. Discontinued operations:
Earnings from operations of the Test
& Measurement Products Segment,
net of income taxes -- 671 258 1,895
Gain on disposal of discontinued
business (less income taxes
of $11,064) -- -- 11,502 --
-------- ------- -------- --------
9. Net earnings $ 7,138 $ 4,270 $ 33,351 $ 14,972
======== ======= ======== ========
10. Weighted average common and
equivalent shares outstanding 16,165 16,166 16,127 16,090
11. Earnings per share from continuing
operations $ .44 $ .22 $ 1.34 $ .81
12. Dividends declared per share $ .0525 $ .05 $ .1575 $ .15
Amounts are in thousands except for earnings per share and dividends per share.
See accompanying Notes to Consolidated Financial Statements.
Page 3 of 19
TECHNITROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1997 and 1996
(Unaudited)
(In thousands of dollars)
Sept. 30, Sept. 30,
--------- ---------
1997 1996
---- ----
Cash flows from operating activities:
Net earnings $33,351 $14,972
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 9,940 7,103
Gain on sale of Products Division assets -- (1,471)
Gain on sale of Test & Measurement
Products Segment (11,502) --
Changes in assets and liabilities net of
effect of discontinued operations:
Increase in accounts payable and accrued expenses 13,508 2,590
(Increase) in accounts receivable (13,000) (1,892)
(Increase) decrease in inventories (12,365) 2,860
Other, net (1,119) (123)
------- -------
Net cash provided by operating activities 18,813 24,039
------- -------
Cash flows from investing activities:
Proceeds from the sale of discontinued
operations, net of cash sold and expenses paid 32,393 3,671
Acquisition of Doduco assets and payment
of related expenses (8,100) --
Acquisition of Netwave assets from Xircom -- (1,175)
Capital expenditures, exclusive of acquired business (10,991) (5,420)
Proceeds from sale of property, plant and equipment 332 12
------- -------
Net cash provided by (used in)
investing activities 13,634 (2,912)
------- -------
Cash flows from financing activities:
Dividends paid (2,490) (2,391)
Proceeds of long-term borrowings 12,301 --
Principal payments of long-term debt (18,587) (8,517)
Net borrowings of short-term debt 1,774 --
Proceeds from exercise of stock options 300 499
Purchase of treasury stock -- (344)
Contributions from minority interest in subsidiary 100 100
------- -------
Net cash (used in) financing activities (6,602) (10,653)
------- -------
Net effect of exchange rate changes on cash (2,071) 28
Net increase in cash and cash equivalents 23,774 10,502
Cash and cash equivalents at beginning of year 43,531 13,894
------- -------
Cash and cash equivalents at September 30 $67,305 $24,396
======= =======
See accompanying Notes to Consolidated Financial Statements.
Page 4 of 19
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, 1996.
The results for the nine months ended September 30, 1997 have been
prepared by Technitrol's management without audit or participation by its
independent auditors. In the opinion of management, the financial
statements fairly present in all material respects the results of
Technitrol's operations for the periods presented and the consolidated
balance sheet at September 30, 1997. To the best knowledge and belief of
Technitrol, all adjustments have been made to properly reflect income and
expenses attributable to this period. All such adjustments are of a normal
recurring nature, except for adjustments related to discontinued operations.
Certain amounts in the 1996 financial statements have been reclassified
to conform with the current year's presentation.
(2) Acquisitions and Divestitures
Doduco GmbH: On October 31, 1996, the Company acquired certain
operating assets of the metallurgical business of Doduco GmbH located in
Germany, as well as all of the capital stock of Doduco Espana located in
Madrid, Spain. Doduco produces electrical contacts, contact materials,
thermostatic bimetals, and precision contact sub-assemblies made from
precious and non-precious metals by wrought as well as powdered
metallurgical processes. Its contact-producing operations are complemented
by broad capabilities in electroplating and precious metals refining.
The assets purchased consisted of real property in Pforzheim and
Sinsheim, Germany and Madrid, Spain, inventories, fixed assets and
intangibles. The liabilities assumed consisted of vacation and bonus
payments due to employees. The acquisition of Doduco was accounted for by
the purchase method of accounting. The purchase price for the assets
acquired was approximately $20.5 million, including transaction expenses.
In addition, the Company entered into consignment-type leases with third
party leasing companies for approximately $19.0 million of precious metals
previously owned by Doduco and used in its operations. The conditions of
the leases are essentially the same as those of the leases previously in
effect elsewhere within the Company's Metallurgical Products Segment. The
fair value of the net assets acquired (after giving effect to all purchase
accounting adjustments in 1997) approximated $89.0 million. The purchase
price was funded primarily by bank credit provided under a $30.0 million
multi-currency temporary acquisition facility which was substantially
refinanced with a $40.0 million permanent multi-currency facility.
Page 5 of 19
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(2) Acquisitions and Divestitures, continued
Doduco experienced significant financial difficulty for a number of
years and entered into bankruptcy during June of 1996 and receivership in
August of 1996. The assets of Doduco which were acquired by the Company
were acquired from a receiver and, prior to the Company's purchase of those
assets, other isolated assets and product lines of Doduco were sold or
abandoned by Doduco or the receiver. In addition, significant restructuring
occurred after December 31, 1995 which related to both the product lines
acquired by the Company as well as those otherwise disposed of or abandoned
by the receiver. The net assets acquired by the Company relate to product
lines and operations which were not operated as a separate business entity
but rather were an integral part of Doduco GmbH & Co. and its subsidiary,
Doduco Espana. As a result, management does not believe that the following
unaudited pro forma financial information for the Company (in thousands,
except for earnings per share), which assumes that Doduco was acquired on
January 1, 1996, is indicative of the results that actually would have
occurred if the acquisition had been consummated on the date indicated or
which may be attained in the future.
Nine Months Ended
September 30, 1996
------------------
Sales $280,759
Net earnings from continuing operations $15,217
Earnings per share from continuing operations $0.94
Test & Measurement Products Segment: On June 4, 1997, the Company
completed the sale of the companies that formed its Test & Measurement
Products Segment to an affiliate of AMETEK, Inc. for approximately $34.0
million in cash and a resulting gain of approximately $11.5 million (net of
income taxes of approximately $11.1 million) was realized in the second
quarter of 1997. Transaction expenses were paid by the Company from the
gross proceeds of the sale and are reflected in the net gain realized on the
sale. As a result of the foregoing, the Company discontinued its
manufacturing and marketing of Test & Measurement products (including force-
measurement gauges, rheology test systems and weighing devices) and the Test
& Measurement Products Segment is reported as a discontinued operation in
these financial statements. The net assets of the Segment consisted
primarily of accounts receivable, inventories and fixed assets, net of
accounts payable and other accrued operating expenses. The sales of the
Test & Measurement Products Segment were approximately $11.8 million in 1997
prior to the divestiture.
On February 27, 1996, the Company sold certain assets of its Products
Division to an unrelated party. As a result of the sale, the Company
discontinued its production and marketing of document counters and
dispensers. The divestiture of the Products Division, which was included in
the Test & Measurement Products Segment, occurred prior to the Company's
decision to divest the entire Segment and financial information for the
Products Division had not been separately reported in previous financial
statements. Accordingly, its operating results and the gain on the sale of
that Division were previously included in income from continuing operations.
Those items have been reclassified and are now included as a part of the
discontinued operations. The earnings from operations of the Test &
Measurement Products Segment for the nine months ended September 30, 1996,
includes a gain of approximately $699,000 (net of income taxes of
approximately $772,000) realized on the disposal of the Products Division.
Page 6 of 19
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(2) Acquisitions and Divestitures, continued
The effect of the discontinued operations on earnings per share is as
follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1997 1996 1997 1996
---- ----- ---- ----
Earnings per share from continuing operations $.44 $.22 $1.34 $.81
Discontinued operations:
Earnings per share from Test &
Measurement Products Segment, net of tax -- .04 .02 .12
Gain per share on disposal of Test &
Measurement Products Segment, net of tax -- -- .71 --
---- ---- ----- ----
Earnings per share $.44 $.26 $2.07 $.93
==== ==== ===== ====
(3) Inventories
Inventories consisted of the following (in thousands):
September 30, December 31,
1997 1996
---- ----
Finished goods $17,942 $16,513
Work in process 12,958 14,641
Raw materials and supplies 17,909 16,874
------- -------
$48,809 $48,028
======= =======
Page 7 of 19
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(4) Shareholders' Equity
Changes in the components of shareholders' equity were as follows (in
thousands, except share amounts):
Common stock and
additional paid-in capital
--------------------------
Retained
Shares Amount earnings Other
- ----------------------------------------------------------------------------
Balance at December 31, 1996 15,974,918 $40,638 $64,339 $1,387
Stock issued (primarily
options exercised) 112,374 283 -- --
Stock awards, net of forfeitures 43,785 1,058 -- 1,058
Compensation under Restricted
Stock Plan -- -- -- (534)
Tax benefit of stock-based
compensation items -- 1,065 -- --
Net change in cumulative
translation adjustment -- -- -- 483
Net earnings -- -- 33,351 --
Dividends declared
(.1575 per share) -- -- (2,538) --
---------- ------- ------- ------
Balance at September 30, 1997 16,131,077 $43,044 $95,152 $2,394
========== ======= ======= ======
Other components of shareholders' equity include unearned compensation under
the Company's Restricted Stock Plan and cumulative translation gains and
losses.
(5) Derivatives and Other Financial Instruments
At September 30, 1997, the Company did not have any 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) Subsequent Event
On October 6, 1997, the Company announced that it would acquire the
magnetic components business of Nortel (Northern Telecom) for approximately
$23 million in cash, subject to normal adjustments based on net assets at
closing. The purchase includes manufacturing facilities in Malaysia and
Thailand, and certain design assets in Ontario, Canada. The purchase price
is expected to be paid by using cash on-hand and closing is expected by
December 1997. Estimated 1997 revenues of the acquired companies are $38
million.
Page 8 of 19
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The following Management Discussion and Analysis of Financial Condition
and Results of Operations, as well as other sections of this Report, contain
certain "forward-looking statements" (within the meaning of the Private
Securities Litigation Reform Act of 1995). This report should be read in
conjunction with the factors set forth in Technitrol's report on Form 10-K
for the year ended December 31, 1996, under the caption "Cautionary
Statement for Purposes of the `Safe Harbor' Provisions of the Private
Securities Litigation Reform Act of 1995."
Technitrol, Inc. ("Technitrol" or the "Company") is an international
manufacturer of electronic components and metallurgical products. All of
the Company's businesses are operated within those two business segments.
Electronic Components Segment
The Electronic Components Segment provides a broad array of magnetics-
based components, miniature chip inductors, modules and wireless network
products for use primarily in local area network and telecommunication
products. Manufacturing occurs in the United States, Ireland, Taiwan, the
Philippines and the People's Republic of China.
In 1993, the Company adopted a strategy which focused on expansion of
the Company's electronics business by acquiring companies serving markets
characterized by significant growth opportunities. In 1994, the Company
acquired the Fil-Mag companies with manufacturing capabilities in Taiwan and
the Philippines. In late 1995, the Company acquired Pulse Engineering, Inc.
("Pulse") with manufacturing capabilities in Ireland and China. In 1996,
these businesses, together with the Components Division of the Company, were
combined to form the Electronic Components Segment which provides an array
of products aimed at providing solutions to the problems of customers
engaged in designing and manufacturing local area network and
telecommunications products. The Company believes that the Electronic
Components Segment is a global market leader in the development and sale of
components for local area network products.
In 1996, the Company also acquired a majority equity interest in
Netwave Technologies, Inc. ("NTI"). NTI was organized in 1996 to acquire
the assets of the wireless local area network business formerly conducted by
Xircom, Inc. The Company made a capital contribution to NTI of cash and the
assets which comprised the wireless local area network business formerly
conducted by the Electronic Components Segment. The minority interest in
NTI is owned by a group of employees.
In late 1997, in furtherance of the Company's strategy of expanding its
product offerings in the electronics business so as to be less dependent on
local area network component products, the Company agreed to acquire the
magnetics business of Northern Telecom, Ltd. ("Nortel"). This business,
located in Malaysia and Thailand, manufactures magnetic components used in
telecommunication and power devices. As part of this purchase, the Company
will also acquire certain design assets and capabilities located in Ottawa,
Canada. The Company expects to complete this transaction by December 1997.
Metallurgical Products Segment
The Metallurgical Products Segment is a broad-based manufacturer of
precious metal electrical contacts, bonded or clad metals and contact-
bearing components. These products are used in a variety of applications
which include residential, commercial and industrial circuit breakers, motor
controls, relays, wiring devices, temperature controls, appliances and
various electronic products. This Segment also produces sophisticated
electroplating and metal refining services and produces certain components
for the automotive industry. Manufacturing takes place in the United
States, Puerto Rico, Germany and Spain.
Page 9 of 19
In late 1996, in furtherance of its strategy of creating significant
critical mass in and further geographical penetration of its metallurgical
businesses, the Company acquired the assets of Doduco GmbH ("Doduco") which
is engaged in the manufacture in Germany and Spain of precious metal
contacts, bimetal products and certain contact product modules. These
operations were combined with the Company's Advanced Metallurgy, Inc.
("AMI") companies and Chace Precision Metals, Inc. ("Chace") to form the
Metallurgical Products Segment. The Company believes that the Metallurgical
Products Segment now possesses the critical mass necessary to enable this
Segment to capitalize on advantages in the global markets for metallurgical
contact, bimetal and related products.
Discontinued Operations
During the first quarter of 1996, the Company sold the assets of its
Products Division (part of the Test & Measurement Products Segment) which
manufactured currency counters and dispensers. In June 1997, the Company
completed the sale of the remainder of its Test & Measurement Products
Segment, which previously produced a variety of force measurement products,
complementary measurement equipment and mechanical scales.
In management's opinion, the investments and strategies described above
have positioned the Company for future growth and the creation of additional
shareholder value.
Liquidity and Capital Resources
In June 1997, the Company completed the sale of its Test & Measurement
Products Segment for approximately $34.0 million in cash. The net proceeds
of the sale are presently invested in short-term deposit instruments and are
included in the cash balance at September 30, 1997, which was approximately
$67.3 million. Taxes related to the gain on the sale of the Segment are
primarily U.S. income taxes and the majority of those taxes were paid during
the third quarter of 1997. The Company expects to fund the acquisition of
the magnetic components business of Nortel with cash on hand. The purchase
price for that business (excluding transaction costs) will approximate $23.0
million and will be paid at the closing of the transaction, expected to
occur by December 1997. Total working capital at September 30, 1997 was
$91.6 million.
Cash flow from operations was $18.8 million for the nine months ended
September 30, 1997. The cash flow from operations in 1997 includes the
effect of NTI's operating losses. As noted below in "Results of
Operations," management is considering various options with respect to NTI
and, depending on the option selected, NTI will require additional cash
expenditures in future months. Accounts receivable increased by $13.0
million during the year as a result of the record sales level of the Company
as a whole and increased accounts receivable at Doduco. The Company did not
acquire accounts receivable in Germany as part of the Doduco purchase and
the increase in Doduco's accounts receivable, along with other elements of
Doduco's working capital requirements, occurred after the acquisition date
and into the first part of 1997. (See Note 2 of Notes to Unaudited
Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.)
Inventories increased by $12.4 million during the first nine months of 1997
and reflect the Company's response to strong customer demand during that
period, as well as the customer-driven shortening of lead times. Accounts
payable and accrued expenses increased significantly during the period as a
result of the Company's higher sales and profits, increased inventory level
and increased working capital at Doduco. These changes in assets and
liabilities are net of the effect of discontinued operations.
Cash provided by investing activities was $13.6 million during the
first nine months of 1997. The proceeds of the sale of the Test &
Measurement Products Segment were received in early June and, on a year-to-
date basis, were partially offset by payments related to the Doduco
acquisition and by the Company's investment in capital equipment and
facilities. Approximately $8.1 million was used for the purchase of real
estate in Germany from the Receiver and for the payment of expenses
previously accrued and related to the Doduco acquisition. Although the
acquisition of Doduco was completed on October 31, 1996, a portion of the
real estate acquired was not transferred until early in 1997 as a result of
legal proceedings and documentation that are customary in Germany.
Page 10 of 19
Capital expenditures totaled approximately $11.0 million during the
first nine months of 1997. Further capital expenditures are expected during
1997 for purposes of expanding production capacity and improving the
operating efficiency of the Company's two segments. The pending acquisition
of the magnetic components business of Nortel will include additional
manufacturing and design locations for the Company. Specifically, the
Company will obtain manufacturing locations in Sungai Petani, Malaysia and
Phuket, Thailand. Design assets in Ottawa, Ontario, Canada will also be
purchased. The Company has not experienced any significant liquidity
restrictions in any country in which it operates and none are foreseen
relative to the Nortel operations to be acquired. However, foreign exchange
ceilings imposed by local governments and the lengthy approval process which
certain governments require for international cash transfers can potentially
delay cash remittances from time to time. The expansion of production
capacity and/or the acquisition of other businesses or product lines may
result in the Company conducting business in additional countries where it
does not currently have operating facilities.
A material portion of the Company's liquid assets are offshore and are
unlikely to be repatriated to the U.S. As has been the case in recent
years, management expects that a significant portion of the Company's
opportunities for growth in the coming years will be outside of the U.S.
Accordingly, the Company's policy with regard to foreign earnings is
generally to invest them abroad. If such earnings were repatriated,
significant tax liabilities could be incurred in the U.S. In the event that
foreign earnings were repatriated, the related tax liabilities could have a
material unfavorable impact on the Company's liquidity and cash flow.
The Company believes that cash generated by operations and, if
necessary, additional borrowings under its credit facilities will be
sufficient to satisfy the Company's cash requirements for the foreseeable
future.
Debt repayments in 1997 totaled $18.6 million through September 30,
comprising the majority of the total cash used in financing activities.
Those repayments relate to the Company's domestic term debt, domestic
revolving credit facility, local debt in Spain (assumed in connection with
the acquisition of Doduco) and its multi-currency facility. The borrowings
under that facility at September 30, 1997, were exclusively denominated in
Deutsche marks. The borrowings are expected to continue to be repaid from
the cash flows of Doduco and, since the functional currency of the primary
Doduco operation is Deutsche marks, the Company does not believe that it has
significant foreign currency exposure related to this facility. The Company
borrowed approximately $12.3 million during 1997, primarily under the multi-
currency facility. The net borrowings of short-term debt (as shown on the
Consolidated Statement of Cash Flows at September 30, 1997) include
additional borrowings under the separate line of credit for NTI, as well as
payments made on local debt in Spain. Dividends of $2.5 million were paid
during the first nine months of 1997. Quarterly dividends are expected to
continue to be paid during the foreseeable future.
During the first nine months of 1997, the Company did not experience
any significant foreign currency gains or losses. However, as a result of
denominating a significant amount of sales in currencies other than the U.S.
dollar (and especially the sales of Doduco which are primarily denominated
in Deutsche marks), the reported financial results of the Company are
subject to the effect of changing exchange rates, particularly the exchange
rate between the U.S. dollar and the Deutsche mark. At September 30, 1997,
the Deutsche mark was approximately 11% weaker relative to the dollar than
at December 31, 1996. A weaker Deutsche mark has the effect of lowering the
U.S. dollar - reported amount of sales and profits of Doduco.
During 1997, a number of currencies (in addition to the Deutsche mark)
have depreciated significantly relative to the U.S. dollar. Although the
Company has operations in some countries which have experienced
devaluations, such as Ireland and the Philippines, the depreciation of those
currencies has not had a significant negative impact on the results of
operations of the Company. For the most part, the Company's sales
originating in those countries, as well as the majority of raw material
purchases, are denominated in U.S. dollars while expenses in those
countries, particularly labor and overhead, are denominated and paid in
local currencies.
Page 11 of 19
In order to reduce the Company's exposure resulting from currency
fluctuations, the Company may purchase currency exchange forward contracts.
These contracts guarantee a predetermined exchange rate at the time the
contract is purchased. This allows the Company to shift the risk, whether
positive or negative, of currency fluctuations from the date of the contract
to a third party. When used, the contracts are primarily in European
currencies. The Company will consider increasing the use of currency
exchange forward contracts, depending on the amount of sales and purchases
made in local currencies and the type of currency, and depending on the fees
and other costs associated with such contracts. In addition, the company
evaluates the use of currency options in order to reduce the impact that
exchange rate fluctuations have on the Company's gross margins for sales
made by the Company's foreign operations. The combination of currency
exchange forward contracts and currency options should result in reducing
the Company's risks associated with significant exchange rate fluctuations.
The Company received $.3 million from the exercise of stock options
during the first nine months of 1997. The options exercised were among
those assumed in connection with the acquisition of Pulse and no new options
have been granted by the Company.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 128,
"Earnings Per Share." This statement introduces new methods for calculating
earnings per share. The adoption of this standard will not impact results
from operations, financial condition, or long-term liquidity, but will
require the Company to restate earnings per share reported in prior periods
to conform with this Statement. This Statement is not expected to have a
material effect on the Company's earnings per share amounts. The new
standard is effective for periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The Company expects to implement these new accounting
standards on January 1, 1998, as required. The adoption of these standards
will not impact results of operations, financial condition or long-term
liquidity. SFAS No. 130 requires that all items required to be recognized
as components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements.
Items that are not currently included in the Company's statement of
earnings, but which are defined as components of comprehensive income,
include translation gains or losses and certain other items which have
historically been charged or credited directly to shareholders' equity.
SFAS No. 131 establishes standards for reporting information about operating
segments in annual financial statements and requires selected information
about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers.
Results of Operations
Sale of the Test & Measurement Products Segment
The results of the Test & Measurement Products Segment are reported as
discontinued operations in the accompanying financial statements. The
Products Division, which was sold during the first quarter of 1996, is
included in the Test & Measurement Products Segment. The divestiture of the
Products Division occurred prior to the Company's decision to divest the
entire Segment and financial information for the Division had not been
separately reported in previous financial statements. Accordingly, the
gain on the sale of that Division was included in income from continuing
operations. The 1997 sales of the Test & Measurement Products Segment were
approximately $11.8 million prior to the divestiture on June 4, 1997.
Page 12 of 19
Revenues
(Amounts in millions) Three months ended Nine months ended
9/30/97 9/30/96 9/30/97 9/30/96
------------------ -----------------
Electronic Components $48.5 $32.9 $132.5 $107.6
Metallurgical Products 53.6 18.4 165.8 58.8
------ ----- ------ ------
Sales from continuing operations $102.1 $51.3 $298.3 $166.4
====== ===== ====== ======
Sales attributable to continuing operations in the third quarter and
first nine months of 1997 were $102.1 million and $298.3 million,
respectively, increases of 99.0% and 79.3% over the comparable periods of
1996. The increased sales in 1997 are primarily attributable to Doduco,
which was acquired by the Company in October 1996, and is part of the
Metallurgical Products Segment. In addition to the higher sales of Doduco,
the Electronic Products Segment made a significant contribution to the
record sales in the quarter and first nine months of 1997.
Third quarter sales in the Electronic Components Segment were $48.5
million in 1997 compared to $32.9 million in 1996. Sales of this Segment in
the first nine months of 1997 were $132.5 million compared to $107.6 million
during the first nine months of 1996. These increases of approximately
47.4% and 23.1%, respectively, over the same three- and nine-month periods
in 1996 reflect primarily the higher sales at Pulse as well as the initial
sales of NTI, the Company's wireless network access products business.
During 1997, the sales of Pulse were substantially higher in each
consecutive quarter, relative to the preceding quarter. Shipments in the
third quarter reached a record level reflecting the higher level of incoming
orders during most of the first half of the year. In this Segment, incoming
orders began to decline in the third quarter, particularly in the North
American LAN market. The backlog at September 30, 1997, fell approximately
19% from the level at the end of the second quarter, and management believes
it to be unlikely that the record level of shipments experienced during the
third quarter will continue in the fourth quarter, although the decline is
not expected to be commensurate with the percentage decline in backlog
because of shorter time periods between order entry and delivery.
NTI commenced operations during the third quarter of 1996. The sales
of NTI are not significant in relation to the sales of the Company, and
significant sales are not expected from this operating unit until there is
further development of the market for wireless local area network products.
No one can predict with certainty when this will occur.
Total sales of the Metallurgical Products Segment, which includes
Doduco, were $53.6 million for the third quarter of 1997 compared with $18.4
million for the third quarter of 1996. On a year-to-date basis, sales of
the Segment were $165.8 million through September 30, 1997 and $58.8 million
at September 30, 1996. As noted above, the sales of Doduco (which account
for the large increase in sales of the Segment) are subject to the
fluctuating exchange rate between the U.S. dollar and the Deutsche mark.
Doduco's sales for the three- and nine-month periods ended September 30,
1997, exceeded management's earlier expectations and reflected the positive
impact of efforts to improve customer service with timely deliveries
notwithstanding the significant strengthening of the dollar against the
Deutsche mark since the beginning of 1997. The integration of the Doduco
operations with the previously existing Metallurgical Products Segment of
the Company is continuing. A product rationalization plan has been
completed by the Segment and will result in the sale, discontinuance or
consolidation of certain redundant operations and non-core Doduco product
lines. Over a one- to two-year time frame, the initiative may result in
revenue decreases for the Segment. Management expects that the resulting
revenue decrease (if it occurred all at one time on an immediate basis) will
be $10 million or less (at current currency exchange rates) and may be
largely offset by sales growth of the continuing products of the Segment.
Page 13 of 19
Cost of Sales
During the third quarter of 1997, the Company's gross margin was 32.0%,
a slight increase from 31.6% in 1996. On a year-to-date basis, the gross
margin was down slightly to 31.9% in 1997 from 32.5% in 1996. While the
year-to-date gross margin of the Electronic Components Segment has improved
in 1997 relative to the prior year, the acquisition of Doduco and the growth
of the Metallurgical Products Segment have lowered the combined gross margin
for the Company. The gross margin of the Metallurgical Products Segment is
generally lower than either the Electronic Components Segment or the
(discontinued) Test & Measurement Products Segment. In the third quarter of
1997, the gross margin of the Metallurgical Products Segment was slightly
higher than that experienced in the first quarter, and slightly lower than
that experienced in the second quarter. In general, some long-term margin
improvement is expected in the Metallurgical Products Segment as the Doduco
operations are integrated with the other operations of the Segment and the
product rationalization plan is completed. At the same time, however, the
industries served by the Segment are characterized by aggressive competition
and constant pressure on sales prices resulting from on-going customer cost
reduction activities. During the third quarter, certain manufacturing
facilities experienced vacation and maintenance shutdowns. These shutdowns,
which are routine, nonetheless impact revenue volumes and profit margins
during the summer months.
The favorable cost impact of the relocation of a major portion of the
Electronic Components Segment's manufacturing capacity from Taiwan to the
Philippines also contributed to higher margins in the third quarter and year-
to-date period of 1997. That Segment also benefited from higher volumes and
improved manufacturing efficiencies at its production facilities,
particularly in China. Management expects that a reduction in gross margin
dollars, commensurate with potentially lower sales volume in the Segment,
may occur in the fourth quarter of 1997. If the acquisition of Nortel's
magnetic components business occurs by December as expected, the fourth
quarter will also include some revenue and gross profit contributions from
that business. No attempt has been made to quantify this possible
contribution.
Operating Expenses
Total selling, general and administrative expenses for the quarter
ended September 30, 1997, were $22.4 million compared to $10.7 million for
1996. This represents an increase of 109.3%. As a percentage of sales,
these costs were 22.0% of sales in the quarter ended September 30, 1997 and
20.8% in the prior year comparable quarter. For the nine months ended
September 30, 1997 and 1996, total selling, general and administrative
expenses were $61.9 million and $33.7 million, respectively. The increase
noted when comparing the third quarter of 1997 to the third quarter of 1996
is more significant than the increase of 83.7% on a year-to-date basis.
While the effect of Doduco is primarily responsible for the year-over-year
increase in both periods, the significant costs associated with
restructuring certain Far East operations of the Electronic Components
Segment were included in the 1996 results prior to beginning the third
quarter of that year. That Segment's 1996 operating profits were negatively
impacted by approximately $2.0 million of costs related to the shift of
production capacity from Taiwan to the Philippines. During 1997,
administrative costs also reflect the higher spending required to support
the higher level of sales and increased complexity of the Company. During
the third quarter of 1997, substantial tax and related consulting costs, as
well as significant travel expenses related to business development
opportunities and the investigation of capacity expansion options in various
countries, contributed to higher operating expenses in the Electronic
Components Segment.
Operating expenses attributable to NTI have increased at a rate
substantially higher than revenue growth of that business. Management is
currently focusing significant attention on NTI, and while the market
opportunity continues to appear attractive, the time frame, effort and
investment required to achieve acceptable returns will exceed original
expectations. Several options are being considered, none of which are
expected to materially affect the consolidated results of operations of the
Company when implemented.
Page 14 of 19
For the quarter ended September 30, 1997, research, development &
engineering expenses ("RD&E"), which are included in general and
administrative expenses, were $2.9 million for the Electronic Components
Segment and $1.3 million for the Metallurgical Products Segment. For the
year-to-date period ended September 30, 1997, RD&E expenses were $7.8
million and $4.4 million in the Electronic Components Segment and the
Metallurgical Products Segment, respectively. These amounts include
expenditures for new product development and for product and process
improvement. RD&E expenses have increased in 1997 relative to 1996, and
further increases are likely to occur, particularly in the Electronic
Components Segment, as the importance of new product development is
recognized throughout the Company.
Operating Profit
The operating profit for the Electronic Components Segment and the
Metallurgical Products Segment is shown below. These amounts reflect
certain allocations of corporate expenses and are subject to adjustment in
connection with the preparation of audited annual financial statements for
1997.
(Amounts in millions) Three months ended Nine months ended
9/30/97 9/30/96 9/30/97 9/30/96
------------------ -----------------
Electronic Components $7.2 $4.6 $23.3 $16.7
Metallurgical Products 3.1 .9 10.0 3.6
----- ---- ----- -----
Operating profit from
continuing operations $10.3 $5.5 $33.3 $20.3
===== ==== ===== =====
Interest
Net interest income was approximately $0.3 million during the third
quarter of 1997, compared with an amount less than $.1 million during the
third quarter of 1996. For the nine months ended September 30, 1997, net
interest expense was $0.2 million, approximately the same as during the
first nine months of 1996. Additional borrowings were made late in 1996 in
connection with the acquisition of Doduco. Initially, these additional
borrowings caused the net interest charge to increase for the Company during
1997. However, as a result of the cash received from the sale of the Test &
Measurement Products Segment on June 4, 1997, the Company has a much higher
level of funds invested and the earnings on those short-term deposit
instruments has had the effect of reducing net interest expense. The rate
on the term debt balance of $6.5 million at September 30, 1997, is fixed at
6.65%; however, the majority of the Company's credit facilities have
variable interest rates. Accordingly, interest expense may increase if the
rates associated with the Company's credit facilities move higher during
subsequent quarters. The Company may use interest rate swaps or other
financial derivatives in order to manage the risk associated with changes in
market interest rates; however, the Company has not used any such
instruments thus far. After the completion of the acquisition of Nortel's
magnetic components business and the payment of the purchase price, the
Company's invested cash reserves and related interest earnings will
decrease.
Income Taxes
The effective income tax rate for continuing operations during the
third quarter of 1997 was 34.7%, a slight decrease from the effective rate
of 35.1% during the comparable prior year period. For the nine months ended
September 30, 1997, the Company's effective income tax rate for continuing
operations was 35.6%, compared to 35.1% in the prior year period. The
increase in the Company's effective tax rate for the nine months ended
September 30, 1997 reflects the additional taxable income of Doduco, which
has operations in relatively high-rate jurisdictions, particularly Germany.
The increase during 1997 has been somewhat less pronounced than expected,
however, as a result of higher earnings in various tax-free and low-tax
jurisdictions in which the Electronic Components Segment operates. Earnings
in those locations contributed to the lower effective tax rate for the
Company as a whole during the third quarter of 1997.
Page 15 of 19
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS NONE
ITEM 2 CHANGES IN SECURITIES 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
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibit Index is on page 17
(b) Reports on Form 8-K NONE
Page 16 of 19
EXHIBIT INDEX
DOCUMENT
3. (i) Articles of Incorporation Incorporated by reference to Form 10-Q for
the quarter ended June 30, 1997
(ii) By-laws Incorporated by reference to Form 10-K for
the year ended December 31, 1995
4. Instruments defining rights of Incorporated by reference from Form 10-K
security holders for the year ended December 31, 1995 and
from Exhibit 4 of Form 8-K dated
August 30, 1996
11. Statement re computation of per
share earnings Page 18
27. Financial Data Schedule Electronic Filing Only
Page 17 of 19
EXHIBIT (11) COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
----------------------- ------------------------
Net earnings from continuing operations $ 7,138,000 $3,599,000 $21,591,000 $13,077,000
Primary earnings per share:
Weighted average number of common
shares outstanding 16,115,000 16,024,000 16,079,000 15,950,000
Add: Shares arising from the
assumed exercise of stock
options (as determined under the
Treasury Stock Method) 50,000 142,000 48,000 140,000
Weighted average of common and
equivalent shares 16,165,000 16,166,000 16,127,000 16,090,000
Primary earnings per share from
continuing operations $ .44 $ .22 $ 1.34 $ .81
=========== ========== =========== ===========
Fully diluted earnings per share (1):
Weighted average of common and
equivalent shares outstanding
(as determined for the Primary
earnings per share calculation
above) 16,165,000 16,166,000 16,127,000 16,090,000
Add: Additional shares arising
from the conversion of stock
options or other securities (as
determined for purposes of
calculating full dilution) -- -- -- --
----------- ---------- ----------- -----------
Weighted average of common and
equivalent shares 16,165,000 16,166,000 16,127,000 16,090,000
=========== ========== =========== ===========
Fully diluted earnings per share $ .44 $ .22 $ 1.34 $ .81
=========== ========== =========== ===========
1996 share amounts have been restated to reflect a two-for-one stock
split on February 28, 1997.
(1) This calculation is submitted in accordance with the Securities Act of
1933 Release No. 5,133, although it is not required by footnote 2 to
paragraph 14 of APB Opinion No. 15 because it results in dilution of less
than 3%.
Page 18 of 19
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 5, 1997 /s/Albert Thorp, III
- ---------------------------------- -------------------------------------
(Date) Albert Thorp, III
Vice President - Finance and
Chief Financial Officer
(Principal Financial Officer)
November 5, 1997 /s/Drew A. Moyer
- ---------------------------------- -------------------------------------
(Date) Drew A. Moyer
Corporate Controller and Secretary
(Principal Accounting Officer)
Page 19 of 19