================================================================================
Exhibit index
is on Page 18
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 June 30, 1998, or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ______________ to
______________.
Commission File No. 1-5375
TECHNITROL, INC.
(Exact name of registrant as specified in Charter)
PENNSYLVANIA 23-1292472
(State or other jurisdiction of incorporation or (IRS Employer Identification
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 June 30, 1998: 16,183,486
================================================================================
Page 1 of 19
TECHNITROL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 31, 1997
(In thousands)
June 30, Dec. 31,
1998 1997
------ ------
Assets (unaudited)
------
Current Assets:
Cash and cash equivalents $ 57,533 $ 48,803
Trade receivables 55,033 53,990
Inventories 53,810 50,623
Prepaid expenses and other current assets 7,826 3,995
------- -------
Total current assets 174,202 157,411
Property, plant and equipment 113,317 106,803
Less accumulated depreciation 53,080 47,140
------ ------
Net property, plant and equipment 60,237 59,663
Deferred income taxes 8,587 7,582
Excess of cost over net assets acquired, net 28,493 29,571
Other assets 953 1,107
------- -------
$272,472 $255,334
======= =======
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt $ 2,027 $ 2,025
Accounts payable 11,130 11,319
Accrued expenses 64,675 61,288
------ ------
Total current liabilities 77,832 74,632
Long-term liabilities:
Long-term debt, excluding current installments 28,590 30,932
Other long-term liabilities 6,750 7,395
Shareholders' equity:
Common stock and additional paid-in capital 45,315 43,148
Retained earnings 117,650 101,800
Other (3,665) (2,573)
------- -------
Total shareholders' equity 159,300 142,375
------- -------
$272,472 $255,334
======= =======
See accompanying Notes to Consolidated Financial Statements.
Page 2 of 19
TECHNITROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except share data)
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Net Sales $104,888 $103,927 $215,636 $196,134
Costs and expenses applicable to sales:
Cost of goods sold 71,729 70,281 146,335 133,573
Selling, general and administrative
expenses 19,560 21,087 40,396 39,663
------ ------ ------ ------
Total costs and expenses applicable to
sales 91,289 91,368 186,731 173,236
Operating profit 13,599 12,559 28,905 22,898
Other income (expense):
Interest, net (310) (168) (355) (493)
Other 212 104 216 200
----- ----- ----- -----
Total other income (expense) (98) (64) (139) (293)
----- ----- ---- ----
Earnings before taxes 13,501 12,495 28,766 22,605
Income taxes 5,088 4,595 10,975 8,152
Net earnings from continuing operations 8,413 7,900 17,791 14,453
Discontinued operations:
Earnings (loss) from operations of the Test &
Measurement Products Segment, net of
income taxes -- (23) -- 258
Gain on disposal of discontinued business
(less income taxes of $11,064) -- 11,502 -- 11,502
------- ------ ------ ------
Net earnings $ 8,413 $19,379 $17,791 $26,213
======= ====== ====== ======
Earnings per share from continuing operations:
Basic $ .53 $ .49 $ 1.11 $ .90
Diluted $ .52 $ .49 $ 1.10 $ .90
Net earnings per share:
Basic $ .53 $ 1.20 $ 1.11 $ 1.62
Diluted $ .52 $ 1.20 $ 1.10 $ 1.62
Dividends declared per share $ .06 $ .0525 $ .12 $ .105
See accompanying Notes to Consolidated Financial Statements.
Page 3 of 19
TECHNITROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1998 and 1997
(Unaudited)
(In thousands)
June 30, June 30,
1998 1997
---- ----
Cash flows from operating activities:
Net earnings $17,791 $26,213
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 7,168 5,660
Gain on sale of Test & Measurement Products Segment -- (11,502)
Changes in assets and liabilities, net of effect of
discontinued operations:
Accounts receivable (1,926) (16,783)
Inventories (3,345) (8,670)
Accounts payable and accrued expenses 2,409 13,596
Other, net (1,530) (1,715)
------ ------
Net cash provided by operating activities 20,567 6,799
------ ------
Cash flows from investing activities:
Proceeds from the sale of discontinued operations, net
of cash sold and expenses paid -- 33,179
Acquisitions, net of cash acquired (1,180) (8,084)
Capital expenditures (6,778) (7,019)
Proceeds from sale of property, plant and equipment -- 49
------ -------
Net cash (used in) provided by investing activities (7,958) 18,125
------ ------
Cash flows from financing activities:
Dividends paid (1,817) (1,644)
Proceeds of long-term borrowings -- 10,159
Principal payments of long-term debt (2,119) (11,916)
Repayments of short-term debt, net -- (211)
Proceeds from exercise of stock options 97 269
Contributions from minority interest in subsidiary -- 100
------ ------
Net cash used in financing activities (3,839) (3,243)
------ ------
Net effect of exchange rate changes on cash (40) (1,679)
------ ------
Net increase in cash and cash equivalents 8,730 20,002
Cash and cash equivalents at beginning of year 48,803 43,531
------ ------
Cash and cash equivalents at June 30 $57,533 $63,533
====== ======
See accompanying Notes to Consolidated Financial Statements.
Page 4 of 19
TECHNITROL, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
June 30, 1998
(Unaudited)
(In thousands, except per share data)
Other
-----------------------------
Accumu-
Common stock and lated other
paid-in capital Deferred compre- Compre-
------------------- Retained compen- hensive hensive
Shares Amount earnings sation income income
------ ------ -------- ------ ------ ------
Balance at January 1, 1998 16,135 $43,148 $101,800 $(1,178) $(1,395)
Stock options, awards and related compensation 48 1,467 -- (967) --
Tax benefit of stock compensation -- 700 -- -- --
Currency translation adjustments -- -- -- -- (125) $ (125)
Net earnings -- -- 17,791 -- -- 17,791
------
Comprehensive income -- -- -- -- -- $17,666
======
Dividends declared ($.12 per share) -- -- (1,941) -- --
------ ------ ------- ------ ------
Balance at June 30, 1998 16,183 $45,315 $117,650 (2,145) $(1,520)
====== ====== ======= ====== ======
See accompanying Notes to Consolidated Financial Statements.
Page 5 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, 1997.
The results for the six months ended June 30, 1998, and 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
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.
Certain amounts in the 1997 financial statements have been reclassified
to conform with the current year's presentation.
(2) Acquisitions and Divestitures
The Magnetic Components Business of Northern Telecom Ltd. ("Nortel"):
On November 30, 1997, the Company acquired the magnetic components business of
Nortel (the "Business") by purchasing all of the common stock of two Nortel
subsidiaries (one in Malaysia and one in Thailand) and certain assets in Canada
relating to design engineering support of those subsidiaries. Pursuant to a
separate supply agreement, the Business will continue to provide components such
as inductors and transformers for Nortel's telecommunication and power
conversion equipment.
The acquisition of the Business was accounted for by the purchase
method of accounting. The purchase price was approximately $22.5 million,
including transaction expenses. The fair value of the net assets acquired
approximated $5.6 million. The purchase price was funded by cash on hand,
including cash received from the sale of the Test & Measurement Products
Segment, as explained below. The total purchase price is subject to adjustment
as expenses and details of the transaction are finalized. Adjustments to the
purchase price allocation will be finalized during 1998 and are not expected to
have a material impact on the Company's consolidated results of operations for
1998.
The following unaudited pro forma financial information, which reflects
continuing operations only, assumes that the Business was acquired on January 1,
1997, and is provided for comparative purposes only. It does not purport to be
indicative of the results that actually would have occurred if the acquisition
had been consummated on the date indicated or which may be attained in the
future (in thousands, except for earnings per share).
Six Months Ended
June 30, 1997
-------------
Net sales $214,229
Net earnings $15,102
Diluted earnings per share $.93
Page 6 of 19
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(2) Acquisitions and Divestitures, continued
GTI Corporation ("GTI"): On May 27, 1998, the Company entered into a
definitive agreement to acquire all of the outstanding shares of GTI for
approximately $34 million. Closing is expected during the third quarter of 1998;
however, it is subject to the approval of GTI shareholders and other terms and
conditions normally found in agreements of this type. GTI manufactures
magnetics-based components for signal processing and power transfer functions
primarily in local area networking, but also for telecommunications and
broadband applications. The acquisition will be accounted for by the purchase
method of accounting and results of GTI will be included with those of the
Company beginning as of the closing date.
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. As a
result of the foregoing, the Company discontinued its manufacturing and
marketing of test and 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 1997.
(3) Inventories
Inventories consisted of the following (in thousands):
June 30, December 31,
1998 1997
Finished goods $20,533 $18,897
Work in process 13,763 11,852
Raw materials and supplies 19,514 19,874
------ ------
$53,810 $50,623
====== ======
(4) Derivatives and Other Financial Instruments
At June 30, 1998, the Company had two forward contracts outstanding, one
to purchase 247,000 Irish punt and the other to purchase 152,000 British pounds
sterling. The term of both contracts 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.
(5) Earnings Per Share
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." Prior-year earnings per share amounts
have been restated. Basic earnings per share are calculated by dividing earnings
by the weighted average number of common shares outstanding during the period.
For calculating diluted earnings per share, common share equivalents are added
to the weighted average number of common shares outstanding. Common share
equivalents result from outstanding options to purchase common stock as
calculated using the treasury stock method. Such share amounts were 37,000 and
81,000 for the three months ended June 30, 1998 and 1997, respectively, and
37,000 and 80,000 for the six-month periods then ended. Earnings per share
calculations are as follows (in thousands, except per share amounts):
Page 7 of 19
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(5) Earnings Per Share, continued
Three Months Six Months
Ended June 30 Ended June 30
1998 1997 1998 1997
---- ---- ---- ----
Net earnings $ 8,413 $19,379 $17,791 $26,213
Basic earnings per share:
Shares 15,983 16,101 15,967 16,061
Per share amount $ .53 $ 1.20 $ 1.11 $ 1.62
Diluted earnings per share:
Shares 16,209 16,182 16,193 16,141
Per share amount $ .52 $ 1.20 $ 1.10 $ 1.62
(6) Business Segment Information
At June 30, 1998 and 1997, there were no material intersegment
revenues, and there has not been a material change in Segment assets from
December 31, 1997, to June 30, 1998. In addition, the basis for determining
Segment financial information has not changed from 1997. Specific Segment data
is as follows:
Three Months Six Months
Ended June 30 Ended June 30
1998 1997 1998 1997
---- ---- ---- ----
Net sales:
Electronic Components $ 46,223 $ 46,638 $ 96,293 $ 83,969
Metallurgical Components 58,665 57,289 119,343 112,165
------ ------ ------- -------
Total $104,888 $103,927 $215,636 $196,134
======= ======= ======= =======
Earnings before income taxes:
Electronic Components $ 8,766 $ 8,973 $ 18,956 $ 16,043
Metallurgical Components 4,833 3,586 9,949 6,855
------- ------- ------- -------
Operating profit 13,599 12,559 28,905 22,898
Other income (expense), net (98) (64) (139) (293)
------- ------- ------- -------
Earnings (from continuing
operations) before income taxes $ 13,501 $ 12,495 $ 28,766 $ 22,605
======= ======= ======= =======
(7) Subsequent Events
On July 3, 1998, the Company purchased all of the capital stock of FEE
Technology, S.A. ("FEE"). The total purchase price including assumed debt and
transaction costs approximated $20 million. The estimated annual revenue of FEE
is approximately $36 million. FEE will become part of the Electronic Components
Segment. On the same date, the Metallurgical Components Segment acquired certain
assets of Metales y Contactos, S.A. de C.V. ("Metales"). The purchase price of
Metales' assets was not material to the Company's consolidated financial
position. Both acquisitions were accounted for by the purchase method of
accounting and, as such, the financial results of both FEE and Metales will be
included with those of the Company beginning on July 3, 1998.
Page 8 of 19
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This 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 Annual Report on Form 10-K for the year
ended December 31, 1997, under the caption "Cautionary Statement for Purposes of
the 'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of
1995."
Overview
Technitrol, Inc. ("Technitrol" or the "Company") is a global
manufacturer of electronic and metallurgical components. The Company's
businesses are broadly operated in two business Segments.
Electronic Components Segment ("ECS")
The Electronic Components Segment provides a broad array of
magnetics-based components, miniature chip inductors and modules for use
primarily in local area network, telecommunication and power-conversion
products. As of June 30, 1998, manufacturing facilities were located in the
United States, Ireland, Malaysia, Thailand, the Philippines and the People's
Republic of China. Additional manufacturing facilities were added subsequent to
June 30, 1998 in France, Thailand, and Poland as a result of the acquisition of
FEE Technology, S.A. ("FEE"), as outlined below.
In 1993, the Company adopted a strategy of expanding its electronic
components business by acquiring companies serving markets that the Company
believes offer 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
under the Pulse name within the ECS. In late 1997, the Company acquired the
magnetic components business of Northern Telecom Ltd. ("Nortel"). That business,
which became part of Pulse, includes manufacturing facilities in Malaysia and
Thailand and a design engineering group in Canada. The Company believes that
these acquisitions have positioned the ECS as a global market leader in the
development and sale of components for local area network, telecommunication and
power-conversion products.
The Company completed the acquisition of FEE on July 3, 1998, and
expects to complete the purchase of GTI Corporation ("GTI") in the third quarter
of 1998. FEE designs and manufactures magnetic components for telecommunications
and power conversion equipment. GTI manufactures magnetics-based components for
signal processing and power transfer functions primarily in local area
networking, but also for telecommunications and broadband applications. Both FEE
and GTI will become part of the Pulse organization. The Company intends to
transfer all GTI operations (currently conducted in the Philippines and China)
to the Company's own manufacturing locations in one or both of those countries.
Page 9 of 19
Metallurgical Components Segment ("MCS")
The Metallurgical Components Segment is a broad-based manufacturer of
precious metal electrical contacts, bonded or clad metals and contact
assemblies. These electrical components are used in a variety of applications
which include residential, commercial and industrial circuit breakers, motor
controls, relays, wiring devices, temperature controls, appliances, automotive
and various electrical products. This Segment also engages in sophisticated
electroplating and metal refining services. Manufacturing takes place in the
United States, Puerto Rico, Germany, Spain and, with the acquisition of certain
assets of Metales y Contactos, S.A. de C.V. ("Metales"), Mexico.
In late 1996, in furtherance of its strategy of creating critical mass
in and further effecting geographical penetration of its metallurgical
businesses, the Company acquired the assets of Doduco GmbH ("Doduco"), which was
engaged in the manufacture in Germany and Spain of precious metal contacts,
bimetal products and certain contact assemblies. These operations were combined
with the Company's metallurgical component operations within the MCS and now
operate globally under the name AMI DODUCO. In July of 1998, the Company
acquired certain assets of Metales. With operations located near Mexico City,
Metales designs and manufactures precious and semi-precious metal contacts used
mainly in automobiles and other durable goods. Metales is now part of AMI
DODUCO. The Company believes that the MCS possesses the critical mass necessary
to enable this Segment to capitalize on advantages in the global markets for
metallurgical contacts, bimetals and related products.
In 1997, the MCS began a product rationalization effort by which it
identified products which did not fit into its core businesses. Those product
lines are in the process of being moved, sold or discontinued. In addition, in
1997, the MCS formed global teams to examine and pursue the synergies made
available to the MCS by virtue of its global position (i.e., technology,
information systems, manufacturing, purchasing and selling). These efforts
continue in 1998.
Discontinued Operations
In June 1997, the Company completed the sale of its Test & Measurement
Products Segment, which previously manufactured and sold material testing
systems, force measurement products and weighing devices. The Company concluded
that these businesses did not fit within its core competencies nor did they
offer opportunities to create significant shareholder value. The Test &
Measurement Products Segment is reported as discontinued operations in the
accompanying financial statements.
In management's opinion, the investments, divestiture and strategies
described above have positioned the Company for future growth and the creation
of additional shareholder value.
Liquidity and Capital Resources
Total working capital at June 30, 1998, was $96.4 million, an increase
of $13.6 million from the working capital of $82.8 million at December 31, 1997.
Worldwide, cash on-hand at June 30, 1998, was $57.5 million. Cash on-hand was
used for the purchase of the capital stock of FEE and certain assets of Metales
in early July 1998. The Company anticipates using its available credit to
finance the approximate $34.0 million purchase price for GTI.
Page 10 of 19
Cash Flows from Operating Activities
Cash flow from operations was $20.6 million for the six months ended
June 30, 1998. The accounts receivable increase of $1.9 million during the
period included accounts receivable balances at the newly acquired magnetic
components operations of Nortel and an increase in AMI DODUCO's receivable
balance in Europe, where the market has been strong for AMI DODUCO products.
Partially offsetting these increases is a decrease in Pulse's European accounts
receivable balance. Inventories increased by $3.3 million during the quarter and
continue to reflect the customer-driven reduction in lead times and push to
just-in-time delivery. Accounts payable and accrued expenses increased in 1998
as a result of the Company's growth as evidenced by higher sales and profits and
increased inventory level.
Cash Flows from Investing Activities
Cash used by investing activities was $8.0 million during the first six
months of 1998. Approximately $1.2 million was used for the payment of
previously accrued expenses related to the acquisition of Nortel's magnetic
components business. Cash payments for capital expenditures totaled
approximately $6.8 million during the first half of 1998. Further capital
expenditures are expected during 1998 for purposes of expanding production
capacity, improving the operating efficiency of the Company's businesses and
upgrading information technology systems. The expansion of production capacity
and/or the acquisition of other businesses or product lines may result in the
Company conducting business in countries where it does not currently have
operating facilities. For instance, with the acquisition of FEE and certain
operating assets of Metales, the Company now has operating facilities in France,
Poland and Mexico in addition to the numerous countries where it had existing
operations.
With the exception of approximately $3.2 million of retained earnings
in China which have been appropriated and restricted in accordance with Chinese
regulations, substantially all unremitted earnings held abroad are free from
legal or contractual restrictions in the country where they are held. The
Company has not experienced any significant liquidity restrictions in any
country in which it operates and none are foreseen. However, foreign exchange
ceilings imposed by local governments and the sometimes lengthy approval
processes which certain governments require for international cash transfers may
potentially delay cash remittances from time to time. The earnings of foreign
subsidiaries represent a material portion of the Company's liquid assets and are
likely to be reinvested outside of the United States. As has been the case in
the recent past, management expects that a significant portion of the Company's
opportunities for growth in the coming years will be outside of the United
States. 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 United States. 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 credit facilities will be sufficient to
satisfy the Company's cash requirements for the foreseeable future. The Company
currently has unused lines of credit from banks aggregating approximately $54.0
million. The Company has received a commitment from a consortium of banks to
increase its line of credit to $100 million in order to provide the Company with
additional financial flexibility. Closing on this unsecured line of credit is
expected to occur by the end of August.
Page 11 of 19
Cash Flows from Financing Activities
Long-term debt repayments during the first half of 1998 totaled $2.1
million. Approximately $1.0 million of those repayments relate to the Company's
domestic term debt. The remaining payments relate to borrowings under the
Company's multi-currency facility which, at June 30, 1998, were exclusively
denominated in Deutsche marks. In July 1998, the Company entered into a DM10.0
million unsecured loan facility with a German bank in order to convert a portion
of its outstanding credit from a variable-rate, revolver to fixed-rate, term
debt. This loan is for a term of five years, bears interest at a fixed rate of
5.57% and is non-amortizing. The borrowings for both facilities are expected to
continue to be repaid from the cash flows of AMI DODUCO's German operation and,
since the functional currency of that operation is Deutsche marks, the Company
does not believe that it has significant foreign currency exposure related to
this facility.
Dividends of $1.8 million were paid during the first half of 1998.
Quarterly dividends are expected to continue to be paid during the foreseeable
future.
Foreign Currency Effects
During the first half of 1998, 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 European sales of AMI 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. Although for 1997 as a whole
the Deutsche mark devalued approximately 14% against the U.S. dollar, at June
30, 1998, the exchange rate between the U.S. dollar and the Deutsche mark was
approximately the same as at December 31, 1997.
Over the past year, a number of currencies in the countries where the
Company manufactures and/or sells products (in addition to the Deutsche mark)
depreciated significantly relative to the U.S. dollar. Although the Company has
operations in certain countries which have experienced significant devaluations,
such as Ireland, the Philippines, Malaysia and Thailand, the devaluation 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. As a result,
the devaluation of local currencies favorably affects the Company's
profitability by reducing the equivalent U.S. dollar amount of manufacturing
costs paid in those currencies.
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 to a third party the risk,
whether positive or negative, of currency fluctuations from the date of the
contract. At June 30, 1998, the Company had two forward contracts outstanding,
one to purchase Irish punt and the other for British pounds sterling. Both were
short-term in duration and immaterial to the Company's financial position. 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.
Page 12 of 19
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. This
standard is effective for quarters of fiscal years beginning after June 15,
1999. Adoption of this standard is not expected to have a material effect on the
Company's operating results or liquidity and any effect on the Company's
consolidated balance sheet will be dependent upon the amount, if any, of hedging
activity outstanding on the date of adoption.
Results of Operations
Results of operations for the three month and six month periods ending
June 30, 1998 and 1997 are as follows (in thousands):
Three months Six months
Ended June 30 Ended June 30
1998 1997 1998 1997
------- ------- ------- -------
Net Sales:
Electronic Components $ 46,223 $ 46,638 $ 96,293 $ 83,969
Metallurgical Components 58,665 57,289 119,343 112,165
------- ------- ------- -------
Total $104,888 $103,927 $215,636 $196,134
======= ======= ======= =======
Earnings before income taxes:
Electronic Components $ 8,766 $ 8,973 $ 18,956 $ 16,043
Metallurgical Components 4,833 3,586 9,949 6,855
------- ------- ------- -------
Operating Profit 13,599 12,559 28,905 22,898
Other income (expense), net (98) (64) (139) (293)
------- ------- ------- -------
Earnings (from continuing
operations) before income taxes $ 13,501 $ 12,495 $ 28,766 $ 22,605
======= ======= ======= =======
Revenues*
Sales for the second quarter of 1998 increased by an insignificant
amount when compared to the prior year second quarter. Sales for the first half
of 1998 increased 9.9% from the comparable period of 1997. The increase is
primarily attributable to the sales associated with the magnetic components
business purchased from Nortel in late 1997, and an increase in sales
originating from AMI DODUCO's European operations. Partially offsetting these
increases is lower sales of product into the local area network ("LAN")
component markets, particularly in Europe.
The sales of the ECS during the second quarter and first half of 1997
include the sales of Netwave Technologies, Inc. ("Netwave"), which were
insignificant. During 1998, the consolidated sales of the Company exclude the
sales of Netwave as the Company reduced its equity interest from 80% to 19% as
of December 31, 1997. The remaining 19% interest was subsequently sold in the
second quarter of 1998.
ECS sales, particularly in the second quarter, were affected by
continued softness in the LAN component markets worldwide. This should be
addressed in the context that LAN sales in the second quarter of 1997 were at
the highest levels ever recorded by the ECS. In addition, order entry in the
telecommunication markets was a bit less than projected in the second quarter of
1998 as some Asian infrastructure programs remain on hold. As telecommunications
are an essential element of a modern economy, the Company is confident that
these programs will eventually be completed.
- ----------
* The results of the Test & Measurement Products Segment are reported as
discontinued operations in the accompanying financial statements. That
Segment was sold by the Company on June 4, 1997. The sales of the Test &
Measurement Products Segment in 1997 were approximately $11.8 million prior
to the divestiture.
Page 13 of 19
ECS orders for LAN product lines were soft in the second quarter and
first half of 1998, continuing a trend that began in mid-1997 and is reflective
of published reports from significant customers and other industry participants.
Based on these reports and customer information provided to the Company,
management does not expect a significant upturn in this market until the latter
part of this year nor does management expect to see further softening
in this market. Management believes LAN will continue its significant
growth over the long term and the Company intends to maintain its leadership
position in the market. Orders and sales in the ECS's telecommunication and
power conversion product lines were higher in the first six months of 1998 when
compared to last year, reflecting underlying growth in the power conversion
market as well as the addition of operations in Malaysia and Thailand. While the
ECS backlog was essentially unchanged from that at the end of the first quarter,
LAN backlog increased approximately 3.2% from that at March 31, 1998.
The 6.4% increase in year-to-date MCS sales from the prior year
reflects continued favorable economic conditions for the construction and
durable goods industries offset by softness in demand for powder metal products
which are generally related to housing. The sales for the MCS in the second
quarter and first half of 1998 include the effect on sales of AMI DODUCO's
German operations of a quarterly and year-to-date average Deutsche
mark-to-dollar exchange rate that was 4.4% and 6.9% lower than it was in the
second quarter and first half of 1997, respectively. As noted above, the
European sales reported by AMI DODUCO are subject to the fluctuating exchange
rate between the U.S. dollar and European currencies, particularly the Deutsche
mark. The integration of the worldwide operations of the MCS is continuing as
projected.
Cost of Sales
During the second quarter of 1998, the Company's gross margin was
31.6%, a slight decrease from 32.4% in 1997. On a year-to-date basis, the gross
margin was up slightly to 32.1% in 1998 from 31.9% in 1997. The primary cause
of the fluctuations is the mix of products sold in these periods across both
Segments taken as a whole.
For the second quarter and first half of 1998, the gross margins of the
ECS were slightly lower when compared to the same periods in 1997. As noted
previously, the margins are affected by the addition of operations acquired from
Nortel as telecommunications and power conversion products generally have lower
margins than LAN products. In addition, the softness in the LAN market resulted
in lower volumes of higher margin LAN sales, especially when comparing the
second quarter of 1998 to 1997 as the second quarter 1997 LAN sales were at
record levels. Partially offsetting these factors for the first half results
were favorable exchange rates.
The MCS gross margin for the three month period ended June 30, 1998 was
essentially unchanged compared to the same period ended June 30, 1997. The MCS
margin for the six month period ended June 30, 1998 improved relative to
the comparative 1997 period. Product mix and the continued integration of the
various businesses in this segment positively impacted the year-to-date gross
margins. Further long-term margin improvement is expected in the MCS as
integration and the product rationalization plan is completed. The industries
served by this Segment, however, remain characterized by aggressive competition
and constant pressure on sales prices resulting from on-going customer cost
reduction activites.
Operating Expenses
Total selling, general and administrative expenses for the second
quarter of 1998 were $19.6 million, or 18.6% of sales, compared to $21.1 million
or 20.3% of sales in the comparable 1997 period. For the six months ended June
30, 1998 and 1997, total selling, general and administrative expenses were $40.4
million and $39.7 million, respectively, or 18.7% and 20.2% of sales. As a
percentage of sales, selling, general and administrative expenses during the
second quarter and first half of 1998 were lower due to a variety of factors, a
principal factor being the absence of Netwave which negatively affected selling,
general and administrative expenses during 1997.
For the quarter and six months ended June 30, 1998, research,
development & engineering expenses ("RD&E"), which are included in general and
administrative expenses, were $2.6 million (5.6% of sales) and $5.1 million
(5.3% of sales) for the ECS and $1.3 million (2.3% of sales) and $2.8 million
(2.3% of sales) for the MCS. For the comparative periods in 1997, the amounts
were $2.6 million (5.5% of sales) and $4.9 million (5.8% of sales) for the ECS
and $1.4 million (2.4% of sales) and $3.1 million (2.8% of sales) for the MCS.
While ECS dollar spending in the second quarter and first six months of 1998 was
virtually unchanged, the ECS dollar spending in 1997 reflects RD&E at Netwave,
which had relatively high RD&E expenses in relation to its sales. Accordingly,
ECS spending in the second quarter for RD&E actually increased significantly in
1998 as this Segment continues to invest in new technologies and related
improvements. Neither Segment plans any significant reduction in RD&E efforts.
Page 14 of 19
Interest
Net interest expense was approximately $.3 million during the second
quarter of 1998, compared with approximately $.2 million during the second
quarter of 1997. For the six months ended June 30, 1998, net interest expense
was approximately $.4 compared to $.5 million for the comparable period in 1997.
The majority of the Company's credit facilities have variable interest rates.
Accordingly, interest expense may increase if the rates associated with (or the
amounts drawn down on) the Company's credit facilities move higher during
subsequent quarters. In addition, the Company may pursue additional or
alternative credit to finance further growth opportunities in one or both
Segments. 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.
Income taxes
The effective income tax rate for continuing operations during the
second quarter of 1998 was 37.7%, an increase from the effective rate of 36.8%
during the comparable prior year period. For the six months ended June 30, 1998,
the Company's effective income tax rate for continuing operations was 38.2%,
compared to 36.1% in the prior year period. The increase is due, in part, to the
expiration of the income tax holiday in the People's Republic of China (PRC),
where much of the Company's electronic component manufacturing occurs. Also
contributing to the year-to-year increase were increased earnings in Germany
which has a relatively high corporate income tax rate. In general, Technitrol
continues to benefit from favorable offshore tax treatments.
Other issues
The MCS uses precious metal (primarily silver) in the manufacturing of
electrical contacts, rivets and other products. Historically, the Company has
leased (or taken on consignment) the silver and certain other metals used in its
operations from banks or other financing organizations unrelated to the Company.
The rates paid for leasing or taking precious metals on consignment have
historically been substantially below the alternative financing costs that would
be associated with borrowing the funds necessary to purchase the metals. In
addition, the market risk associated with owning precious metals inventories can
be substantial. As has been the case from time to time in the past, during the
first quarter of 1998, the global demand for silver increased significantly at a
time when the supply of silver decreased significantly and the market price of
silver and the associated leasing costs predictably increased. While the terms
of sale within the MCS provide for sale prices to reflect the current market
value of silver, the degree to which leasing and other associated costs can be
recovered from customers is less certain and is subject to a number of essential
factors including competitive conditions. The Company has thus far been
successful in managing the costs associated with its precious metals and, while
limited amounts have been purchased for use in production during 1998, the vast
majority of its precious metal inventory continues to be leased or held on
consignment. If the terms and conditions of the Company's precious metal leases
change significantly in a short period of time, and the Company is unable to
recover increased costs through higher sale prices for its products, a negative
impact on the Company's results of operations and liquidity may result. The
Company considers this risk to be one shared by all of its competitors.
Page 15 of 19
The Company is aware of the issues associated with the programming code
in existing computer systems as the year 2000 approaches and conversion to the
Euro currency moves closer to a reality. The "year 2000" problem is pervasive
and complex as virtually every computer operation will be affected in some way
by the rollover of the two-digit year value to 00. The issue is whether computer
systems will properly recognize date-sensitive information when the year changes
to 2000. Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail. The Euro conversion issue is equally
complex as systems must convert local currencies to Euros and back using complex
techniques. Motivated in part by the year 2000 issue and issues related to the
Euro currency conversion, but more so by the need for managers to have access to
real-time business data, the MCS has begun installing a worldwide Enterprise
Resource Planning ("ERP") system which is to be operational before the year
2000. Moreover, the Company is utilizing both internal and external resources to
identify, correct or reprogram, and test the systems for year 2000 compliance.
It is anticipated that all reprogramming efforts will be completed in a time
period sufficient to allow adequate time for testing. The total costs associated
with addressing the year 2000 and Euro conversion issues cannot be accurately
estimated at this time, but the Company does not believe that the costs will
have a material negative impact on its results of operations, liquidity or
capital resources during 1998. The Company does not believe that the year 2000
or Euro conversion problems will pose significant operational problems for the
Company's computer systems after modification and conversion. The year 2000
problem creates risks for the Company with respect to third parties with whom
the Company deals with worldwide. Failures of third parties' computer systems
could have a material impact on the Company's ability to conduct its business.
The Company is making inquiries of its major vendors to determine the level of
their year 2000 compliance and related issues.
The Company is involved in various claims, legal actions, customs
issues and other disputes arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters will not have a
material adverse effect on the Company's financial position, results of
operations or liquidity.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Page 16 of 19
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
The regular Annual Meeting of Shareholders was held on May 20,
1998. Messrs. Stanley E. Basara, Roy E. Hock and Edward M.
Mazze were each elected to a three-year term as Directors of
the Company. KPMG Peat Marwick LLP was selected as the
Company's independent public accountants for the year ending
December 31, 1998, and the Board of Directors Stock Plan was
approved. The results of the votes were as follows:
For Withhold Authority
--- ------------------
Stanley E. Basara 13,625,021 88,002
Roy E. Hock 13,624,581 88,442
Edward M. Mazze 13,622,851 90,172
For Against Abstain
--- ------- -------
Board of Directors
Stock Plan 13,185,406 41,853 85,764
For Against Abstain
--- ------- -------
KPMG Peat Marwick 13,587,287 112,948 12,788
ITEM 5 OTHER INFORMATION NONE
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibit Index is on page 18
(b) Reports on Form 8-K NONE
Page 17 of 19
EXHIBIT INDEX
DOCUMENT
3. (i) Articles of Incorporation Incorporated by reference to Form 8-A/A
dated April 10, 1998
(ii) By-laws Incorporated by reference to Form 10-K
for the year ended December 31, 1995
4. Instruments defining rights Incorporated by reference to Form 10-K
of security holders for the year ended December 31, 1995 and
Form 8-A/A dated April 10, 1998
10. Technitrol, Inc. Board of Incorporated by reference to the
Directors Stock Plan Registrant's Definitive Proxy Statement
dated March 27, 1998
27. Financial Data Schedule Electronic Filing Only
- --------------------------------------------------------------------------------
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)
August 12, 1998 /s/Albert Thorp, III
- ---------------------------------------- ----------------------------------
(Date) Albert Thorp, III
Vice President - Finance and
Chief Financial Officer
(Principal Financial Officer)
August 12, 1998 /s/Drew A. Moyer
- ---------------------------------------- ----------------------------------
(Date) Drew A. Moyer
Corporate Controller and Secretary
(Principal Accounting Officer)
Page 19 of 19