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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 July 2, 1999, 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 July 28, 1999: 16,210,761
Page 1 of 25
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Technitrol, Inc. and Subsidiaries
Consolidated Balance Sheets
July 2, 1999 and December 31, 1998
In thousands
July 2, Dec. 31,
1999 1998
----- -----
(unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 49,959 $ 50,563
Trade receivables 80,262 71,482
Inventories 66,073 71,230
Prepaid expenses and other current assets 12,164 10,597
-------- --------
Total current assets 208,458 203,872
Property, plant and equipment 150,236 149,035
Less accumulated depreciation 64,664 59,967
-------- --------
Net property, plant and equipment 85,572 89,068
Deferred income taxes 7,142 9,296
Excess of cost over net assets acquired, net 39,896 39,249
Other assets 2,128 2,649
-------- --------
$343,196 $344,134
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt $ 166 $ 193
Accounts payable 22,717 23,270
Accrued expenses 73,393 78,073
-------- --------
Total current liabilities 96,276 101,536
Long-term liabilities:
Long-term debt, excluding current installments 49,552 60,705
Other long-term liabilities 6,334 7,084
Shareholders' equity:
Common stock and additional paid-in capital 46,380 45,109
Retained earnings 148,171 131,227
Other (3,517) (1,527)
-------- --------
Total shareholders' equity 191,034 174,809
-------- --------
$343,196 $344,134
======== ========
See accompanying Notes to Consolidated Financial Statements.
Page 2 of 25
Technitrol, Inc. and Subsidiaries
Consolidated Statements of Earnings
(Unaudited)
In thousands, except per share data
Three Months Ended Six Months Ended
July 2, June 30, July 2, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Net sales $127,857 $104,888 $253,087 $215,636
Costs and expenses applicable to sales:
Cost of goods sold 87,829 71,729 174,920 146,335
Selling, general and administrative expenses 26,159 19,560 51,489 40,396
-------- -------- -------- --------
Total costs and expenses applicable to sales 113,988 91,289 226,409 186,731
-------- -------- -------- --------
Operating profit 13,869 13,599 26,678 28,905
Other income (expense):
Interest, net (480) (310) (1,179) (355)
Other 92 212 (250) 216
-------- -------- -------- --------
Total other income (expense) (388) (98) (1,429) (139)
-------- -------- -------- --------
Earnings before income taxes 13,481 13,501 25,249 28,766
Income taxes 3,206 5,088 6,238 10,975
-------- -------- -------- --------
Net earnings $ 10,275 $ 8,413 $ 19,011 $ 17,791
======== ======== ======== ========
Net earnings per share:
Basic $ .64 $ .53 $ 1.19 $ 1.11
Diluted $ .63 $ .52 $ 1.17 $ 1.10
Dividends declared per share $ .0675 $ .06 $ .1275 $ .12
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
Page 3 of 25
Technitrol, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended July 2, 1999 and June 30, 1998
(Unaudited)
In thousands
July 2, June 30,
1999 1998
---- ----
Cash flows from operating activities:
Net earnings $19,011 $17,791
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 9,236 7,168
Changes in assets and liabilities:
Trade receivables (12,971) (1,926)
Inventories 2,435 (3,345)
Accounts payable and accrued expenses (3,841) 2,409
Other, net 2,846 (1,530)
------- -------
Net cash provided by operating activities 16,716 20,567
------- -------
Cash flows from investing activities:
Acquisitions, net of cash acquired (863) (1,180)
Capital expenditures (8,555) (6,778)
Proceeds from sale of property, plant and equipment 596 --
------- -------
Net cash used in investing activities (8,822) (7,958)
------- -------
Cash flows from financing activities:
Dividends paid (1,943) (1,817)
Proceeds of long-term borrowings 34,080 --
Principal payments of long-term debt (40,194) (2,119)
Proceeds from exercise of stock options -- 97
------- -------
Net cash used in financing activities (8,057) (3,839)
------- -------
Net effect of exchange rate changes on cash (441) (40)
------- -------
Net increase (decrease) in cash and cash equivalents (604) 8,730
Cash and cash equivalents at beginning of year 50,563 48,803
------- -------
Cash and cash equivalents at July 2, 1999 and June 30, 1998 $49,959 $57,533
======= =======
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
Page 4 of 25
Technitrol, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
July 2, 1999
(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, 1999 16,170 $45,109 $131,227 $(1,792) $ 265
Stock options, awards and related compensation 41 976 (421)
Tax benefit of stock compensation 295
Currency translation adjustments (1,569) $(1,569)
Net earnings 19,011 19,011
-------
Comprehensive income $17,442
=======
Dividends declared ($.1275 per share) (2,067)
------ ------- -------- ------- -------
Balance at July 2, 1999 16,211 $46,380 $148,171 $(2,213) $(1,304)
====== ======= ======== ======= =======
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
Page 5 of 25
Technitrol, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(1) Accounting Policies
-------------------
For a complete description of the accounting policies of Technitrol,
Inc. and its consolidated subsidiaries ("the Company"), refer to Note 1 of Notes
to Consolidated Financial Statements included in the Company's Form 10-K filed
for the year ended December 31, 1998.
The results for the six months ended July 2, 1999 and June 30, 1998,
have been prepared by Technitrol's management without audit by its independent
auditors. In the opinion of management, the financial statements fairly present
in all material respects the results of Technitrol's operations and the
financial position for the periods presented. To the best knowledge and belief
of Technitrol, all adjustments have been made to properly reflect income and
expenses attributable to the periods presented. All such adjustments are of a
normal recurring nature. Operating results for the six months ended July 2, 1999
are not necessarily indicative of annual results.
(2) Acquisitions and Divestitures
-----------------------------
GTI Corporation ("GTI"): On November 16, 1998, the Company acquired all
-----------------------
of the capital stock of GTI whose principal operating unit was Valor
Electronics, Inc. ("Valor"). Valor designed and manufactured magnetics-based
components for signal processing and power transfer functions used primarily in
local area networking and also in telecommunications and broadband products. At
the time of acquisition, manufacturing operations were located in the People's
Republic of China and the Philippines. The majority of these operations have
been integrated into existing facilities of the Company's Electronic Components
Segment. The remaining operations are expected to be transferred by the end of
the third quarter of 1999.
The total purchase price included $34.0 million paid to the former
shareholders of GTI. In addition, transaction expenses and related acquisition
costs were incurred. To complete the acquisition, the Company used approximately
$14.0 million of cash on hand, and drew down approximately $20.0 million from
previously unused bank lines of credit.
(continued)
Page 6 of 25
Technitrol, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(2) Acquisitions and Divestitures, continued
-----------------------------
The acquisition was accounted for by the purchase method of accounting
and, as such, the financial results of Valor have been included with those of
the Company beginning on November 16, 1998. A preliminary allocation of purchase
price to the assets acquired and liabilities assumed has been made using
estimated fair values that include values based on independent appraisals and
management estimates. The estimated fair value of the assets acquired and
liabilities assumed approximated $46.2 million and $18.3 million, respectively.
The excess of costs over net assets acquired approximated $5.8 million. These
estimates will be adjusted to reflect actual amounts. Any subsequent adjustments
are expected to occur during 1999 and are not expected to have a material impact
on the Company's financial position.
The estimate of liabilities assumed included approximately $4.0 million
for restructuring the GTI businesses. The amount was established in accordance
with Emerging Issues Task Force Issue 95-3, "Recognition of Liabilities in
Connection with a Purchase Business Combination", and is intended to cover the
estimated expenses related to integrating GTI's operations into existing
Electronic Components Segment facilities. Expenses have been, and are expected
to be, incurred primarily for terminating employees, leasehold terminations and
other related exit costs. Actual expenses charged to the reserve through July 2,
1999 approximate $1.0 million. The Company is continuing to evaluate the total
cost required to complete the planned restructuring. Restructuring plans are
expected to be finalized during 1999.
GTI experienced significant financial difficulty prior to its
acquisition by the Company, and the Company is making significant changes to
GTI's businesses, as noted above. As a result, the Company does not believe that
the following unaudited pro forma financial information, which reflects
continuing operations only and assumes GTI was acquired on January 1, 1998, 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 (in thousands, except for earnings per share).
Six Months Ended
June 30, 1998
-------------
Net sales $239,867
Net earnings $6,437
Diluted earnings per share $.40
(continued)
Page 7 of 25
Technitrol, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(2) Acquisitions and Divestitures, continued
-----------------------------
FEE Technology, S.A. ("FEE"): On July 3, 1998, the Company purchased
----------------------------
all of the capital stock of FEE. FEE designed and manufactured magnetic
components for telecommunications and power conversion equipment. FEE is now
part of the Electronic Components Segment.
The total purchase price including assumed debt was approximately $17.0
million and was funded by cash on hand. In addition, transaction expenses and
related acquisition costs were incurred. The approximate fair value of the net
assets acquired was $8.3 million resulting in goodwill of approximately $8.7
million. The fair value of liabilities assumed included approximately $1.7
million for restructuring the FEE businesses, of which approximately $.9 million
remains as of July 2, 1999. The remaining amounts are primarily for severance
payments and other related exit costs resulting from closing factories. The
amounts disclosed above include adjustments made during 1999 to reflect the
final allocation of the purchase price to the fair market value of assets
acquired and liabilities assumed.
The acquisition was accounted for by the purchase method of accounting
and, therefore, the financial results of FEE have been included with those of
the Company beginning on July 3, 1998. Historical pro forma results of
operations would not be materially different from actual results.
Certain Assets of Metales y Contactos, S.A. de C.V. ("Metales"): On
---------------------------------------------------------------
July 3, 1998, the Company, through its Metallurgical Components Segment ("MCS"),
acquired certain assets of Metales. The purchase price of Metales' assets was
not material to the Company's consolidated financial position. The results of
the Metallurgical Components Segment include the results of operating the
acquired assets from July 3, 1998.
(3) Inventories
-----------
Inventories consisted of the following (in thousands):
July 2, December 31,
1999 1998
---- ----
Finished goods $25,658 $27,376
Work in process 14,034 14,926
Raw materials and supplies 26,381 28,928
------- -------
$66,073 $71,230
======= =======
Page 8 of 25
Technitrol, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(4) Derivatives and Other Financial Instruments
-------------------------------------------
At July 2, 1999, the Company had two forward contracts outstanding, one
to purchase 200,000 Irish punt and the other to purchase 150,000 British pound
sterling. The terms of both contracts were 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
------------------
Basic earnings per share are calculated by dividing earnings by the
weighted average number of common shares outstanding (excluding restricted
shares) during the period. For calculating diluted earnings per share, common
share equivalents and restricted stock outstanding are added to the weighted
average number of common shares outstanding. Common share equivalents result
from outstanding options to purchase common stock as calculated using the
treasury stock method. Such common share equivalent amounts were 35,000 and
37,000 for the three months ended July 2, 1999 and June 30, 1998, respectively,
and 34,000 and 37,000 for the six-month periods then ended. Earnings per share
calculations are as follows (in thousands, except per share amounts):
Three Months Ended Six Months Ended
July 2, June 30, July 2, June 30
1999 1998 1999 1998
---- ---- ---- ----
Net earnings $10,275 $ 8,413 $19,011 $17,791
Basic earnings per share:
Shares 16,051 15,983 16,035 15,967
Per share amount $ .64 $ .53 $ 1.19 $ 1.11
Diluted earnings per share:
Shares 16,244 16,209 16,227 16,193
Per share amount $ .63 $ .52 $ 1.17 $ 1.10
Page 9 of 25
Technitrol, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(6) Business Segment Information
----------------------------
For the six months ended July 2, 1999, there was an immaterial amount
of intersegment revenues eliminated in consolidation. There were no intersegment
revenues in the six months ended June 30, 1998. There has not been a material
change in segment assets from December 31, 1998 to July 2, 1999. In addition,
the basis for determining segment financial information has not changed from
1998. Specific segment data are as follows:
Three Months Ended Six Months Ended
July 2, June 30, July 2, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Net sales:
Electronic Components $ 72,711 $ 46,223 $140,465 $ 96,293
Metallurgical Components 55,146 58,665 112,622 119,343
-------- -------- -------- --------
Total $127,857 $104,888 $253,087 $215,636
======== ======== ======== ========
Earnings before income taxes:
Electronic Components $ 11,573 $ 8,766 $ 20,462 $ 18,956
Metallurgical Components 2,296 4,833 6,216 9,949
-------- -------- -------- --------
Operating profit 13,869 13,599 26,678 28,905
Other income (expense), net (388) (98) (1,429) (139)
-------- -------- -------- --------
Earnings before income taxes $ 13,481 $ 13,501 $ 25,249 $ 28,766
======== ======== ======== ========
Page 10 of 25
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
This discussion and analysis of our financial condition and results of
operations, as well as other sections of this report, contain certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Actual results could differ materially. This
report should be read in conjunction with the factors set forth in our Annual
Report on Form 10-K for the year ended December 31, 1998 in Item 1 under the
caption "Factors That May Affect Our Future Results (Cautionary Statements for
Purposes of the 'Safe Harbor' Provisions of the Private Securities Litigation
Reform Act of 1995)."
Business Overview
Technitrol, Inc. is a global manufacturer of electronic and
metallurgical components. We operate two business segments: the Electronic
Components Segment and the Metallurgical Components Segment. We refer to these
segments as the ECS and the MCS.
Electronic Components Segment
The ECS provides a variety of magnetics-based components, miniature
chip inductors and modules. These components modify or filter electrical
signals. They are used primarily in local area network, Internet connectivity,
telecommunications and power-conversion products. We manufacture these products
in the United States, Ireland, France, Malaysia, Thailand, the Philippines and
the People's Republic of China. We sometimes refer to the People's Republic of
China as the PRC.
Our strategy is to expand our electronic components business through a
combination of internal growth and the acquisition of companies in the
electronic components business. Acquisitions during the last several years
include:
o Pulse Engineering, Inc. - In 1995, we acquired Pulse Engineering,
Inc., with manufacturing locations in Ireland and China. The
addition of Pulse significantly increased the size of our ECS
business.
o The magnetic components business of Northern Telecom, Ltd. - We
completed this acquisition on November 30, 1997. The primary
assets we purchased included manufacturing plants in Malaysia and
Thailand and a design-engineering group in Canada. These assets
primarily serve the telecommunications and power markets.
o FEE Technology, S.A. - We purchased FEE on July 3, 1998. FEE
designed and manufactured magnetic components for
telecommunications and power conversion equipment. With the
purchase of FEE, we acquired manufacturing facilities in France,
Thailand and Poland. We subsequently closed FEE's Thailand
facility and are in the process of closing the facility in Poland.
o GTI Corporation - We completed the acquisition of GTI and its
subsidiary, Valor Electronics, in November 1998. Valor designed
and manufactured magnetics-based components for signal processing
and power transfer functions primarily for local area network
products and, to a much lesser extent, telecommunication
Page 11 of 25
and power-conversion products. Their manufacturing facilities were
located in the PRC and the Philippines. We closed Valor's
Philippine facility and we are in the process of consolidating
Valor's PRC facility into our facilities in the PRC.
Our electronic component businesses are consolidated to form a unified
business throughout the world. This unified business operates under the Pulse
name. As mentioned above, we are in varying stages of integrating our 1998
acquisitions into Pulse. We expect these integration efforts to be substantially
completed by the end of 1999.
Metallurgical Components Segment
The MCS manufactures:
o electrical contacts and assemblies;
o contact materials;
o thermostatic bimetals;
o clad metal products; and
o precision contact subassemblies often using our plastic molding
capabilities.
We sell these components to a wide range of industrial and consumer
product manufacturers. Our products are used in a variety of applications which
affect daily living including:
o residential, commercial and industrial circuit breakers;
o motor controls;
o switches and relays;
o wiring devices;
o temperature controls;
o appliances;
o automobiles;
o telecommunications products; and
o various other electrical products.
We also perform electroplating and metal refining services. Manufacturing occurs
in the United States, Germany, Spain, Puerto Rico and Mexico.
Page 12 of 25
In late 1996, we acquired the assets of Doduco GmbH to support our
strategy of increasing market share and international expansion of our
metallurgical businesses. This business, located in Germany and Spain, was then
combined with our existing metallurgical component operations in North America
and now operates globally under the name AMI Doduco.
In July 1998, we acquired certain assets of Metales y Contactos, S.A.
de C.V. Metales designed and manufactured precious and semi-precious metal
contacts used mainly in automobiles and other durable goods. The Metales
facilities are located near Mexico City.
Liquidity and Capital Resources
Working capital at July 2, 1999 was $112.2 million, approximately $9.8
million greater than working capital at December 31, 1998. Worldwide cash on
hand at July 2, 1999 was $50.0 million, consistent with the December 31, 1998
amount. Cash in the amount of approximately $6.1 million was used in the first
half of 1999 to repay debt which was outstanding as of December 31, 1998. We
currently have approximately $132 million of unused lines of credit available
to us.
We believe that the combination of cash on hand, cash generated by
operations and, if necessary, additional borrowings under our credit facilities
will be sufficient to satisfy our operating cash requirements for the
foreseeable future. In addition, we may use internally generated funds and
additional borrowings for acquisitions of suitable businesses or assets.
Cash Flows from Operating Activities
Cash provided by operating activities for the six months ended July 2,
1999 was $16.7 million. Accounts receivable increased by $13.0 million during
the year as a result of the record level sales for the second quarter of 1999,
particularly in the Electronic Components Segment. Inventory levels have
decreased $2.4 million as a result of the higher sales level, including
shipments made from inventory, and a concerted effort to reduce inventory levels
while maintaining or improving customer service. Accounts payable and accrued
expenses decreased due to payments for income taxes, incentives and
restructuring efforts on recently acquired businesses.
Cash Flows from Investing Activities
Cash used by investing activities was $8.8 million during the first
half of 1999, substantially all of which was used for capital expenditures.
We make capital expenditures to expand production capacity and to
improve our operating efficiency. We plan to continue making such expenditures.
Additionally, we may acquire other businesses or product lines to expand our
breadth and scope of operations.
With the exception of approximately $6.2 million of retained earnings
in the PRC which are restricted in accordance with PRC regulations,
substantially all retained earnings are free from legal or contractual
Page 13 of 25
restrictions. We have not experienced any significant liquidity restrictions in
any country in which we operate and none are foreseen. However, foreign exchange
ceilings imposed by local governments and the sometimes lengthy approval
processes which some foreign governments require for international cash
transfers may delay our internal cash movements from time to time. The retained
earnings in other countries represent a material portion of our assets. We
expect to reinvest these earnings outside of the United States because we
anticipate that a significant portion of our opportunities for growth in the
coming years will be abroad. If such earnings were brought back to the United
States, significant tax liabilities could be incurred in the United States. This
could have a material unfavorable impact on our net income and cash position.
Cash Flows from Financing Activities
We repaid, net of additional borrowings, $6.1 million of debt during
the first six months of 1999. At July 2, 1999, we had approximately $131.8
million of unused lines of credit from banks.
We paid dividends of approximately $1.9 million during the first half
of 1999. Our quarterly dividend was increased from $.06 to $.0675 per share
during the second quarter, and was paid in July. We expect to continue paying
quarterly dividends for the foreseeable future.
Foreign Currency Effects
During the first six months of 1999, the Euro devalued approximately
12% relative to the U.S. dollar. As a result, we incurred foreign currency
losses at our ECS European operations during the first half of 1999, as Euro
denominated assets and liabilities were translated to U.S. dollars for financial
reporting purposes. In addition, we experienced a negative translation
adjustment to equity as our investment in the MCS's European operations is worth
less in U.S. dollars than it was prior to the downward valuation of the Euro.
This decrease in U.S. dollar value results in a reduction to equity.
We transact a significant amount of sales in currencies other than the
U.S. dollar. Therefore, changing exchange rates often impact our financial
results. This is particularly true of movements in the exchange rate between the
U.S. dollar and the Euro currencies, in which AMI Doduco's European sales are
primarily denominated. During the first half of 1999, the devaluation of the
Euro relative to the dollar negatively impacted the sales and profits of AMI
Doduco. In the future, it is possible that an increasing percentage of our sales
will be denominated in non-U.S. currencies. This would increase our exposure to
currency fluctuations.
In order to reduce our exposure resulting from currency fluctuations,
we may purchase currency exchange forward contracts and/or currency options.
These contracts guarantee a predetermined range of exchange rates at the time
the contract is purchased. This allows us to shift the majority of the risk of
currency fluctuations from the date of the contract to a third party for a fee.
At July 2, 1999, we had two forward exchange contracts outstanding, one to
purchase 200,000 Irish punt and the other to purchase 150,000 British pound
sterling. The terms of both contracts were less than 30 days. In
Page 14 of 25
determining the use of forward exchange contracts and currency options, we
consider the amount of sales and purchases made in local currencies, the type
of currency, and the costs associated with the contracts.
New Accounting Pronouncements
In June of 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities.
Statement 133 is effective for all fiscal quarters for fiscal years beginning
after June 15, 2000. Adoption of this standard is not expected to have a
material effect on our operating results or liquidity. The impact of this
standard on our balance sheet will depend on the amount of hedging activity
outstanding on the date of adoption.
Results of Operations
Our results of operations for the three and six month periods ending
July 2, 1999 and June 30, 1998 are as follows. Amounts are in thousands:
Three Months Ended Six Months Ended
July 2, June 30, July 2, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Net sales:
Electronic Components $ 72,711 $ 46,223 $ 140,465 $ 96,293
Metallurgical Components 55,146 58,665 112,622 119,343
-------- -------- --------- --------
Total $127,857 $104,888 $ 253,087 $215,636
======== ======== ========= ========
Earnings before income taxes:
Electronic Components $ 11,573 $ 8,766 $ 20,462 $ 18,956
Metallurgical Components 2,296 4,833 6,216 9,949
-------- -------- --------- --------
Operating profit 13,869 13,599 26,678 28,905
Other income (expense), net (388) (98) ( 1,429) (139)
-------- --- ---- --------- --------
Earnings before income taxes $ 13,481 $ 13,501 $ 25,249 $ 28,766
======== ======== ========= ========
Revenues
Net sales for the second quarter of 1999 increased by $23.0 million, or
21.9%, when compared to the prior year second quarter. Net sales for the first
half of 1999 increased by $37.5 million, or 17.4%, from the comparable period in
1998. The increase was due to record level ECS sales partially offset by lower
MCS sales.
The ECS sales in the second quarter of 1999 increased by $26.5 million,
or 57.3%, from the second quarter of 1998 due to strengthening markets served by
the ECS and contributions from the 1998 acquisitions of FEE Technology, S.A. and
Valor Electronics. These same factors positively impacted the ECS's year-to-date
1999 sales, which increased $44.2 million, or 45.9%, from the sales recorded
through the first six months of 1998.
Page 15 of 25
Sales for the MCS in the second quarter of 1999 decreased $3.5 million,
or 6.0%, from the second quarter of 1998. MCS 1999 year-to-date sales decreased
by $6.7 million, or 5.6%, from the first half of 1998. MCS second quarter sales
continue to be adversely affected by weakness in the European economies in
general, particularly Germany and France. Our sales were lower across all
markets we serve in Europe, except for sales into the automotive industry.
Second quarter sales were also negatively impacted by a weakening Euro relative
to the U.S. dollar when compared to the second quarter of 1998. Partially
offsetting the decrease in sales due to the conditions in Europe was strength in
North America and the sales contributed by the operations of Metales, acquired
on July 3, 1998. Construction and durable goods markets were relatively strong
in North America and partially offset the negative impact of a weaker industrial
sector. Indications are that the Euro is stabilizing against the U.S. dollar and
the German economy appears to be strengthening. It is too early to predict
trends in these areas with any degree of certainty.
Cost of Sales
During the second quarter of 1999, our gross margin was 31.3%,
consistent with the margin for the same period of 1998. The gross margin for the
first six months of 1999 was 30.9% compared with 32.1% for the six month period
ended June 30, 1998. While consolidated margins for both the ECS and the MCS
decreased from the prior year period, second quarter margins were consistent as
we realized proportionately more higher-margin ECS sales than MCS sales in 1999.
There were a variety of factors contributing to the decline in margin both for
the quarter and six months ended July 2, 1999. For the ECS, the primary factors
continued to be:
o the addition of the FEE and Valor businesses which historically
have operated at somewhat lower margins than the traditional Pulse
businesses;
o expenses related to the continuing integration efforts of FEE and
Valor, including the relocation and consolidation of certain
production operations, severances and related expenses; and
o continuing pricing pressures from the ECS customers.
The MCS margins during 1999 have been negatively affected by weakness
in the European markets as our fixed costs were allocated over less volume.
Margins have been further affected by unfavorable product mix in Europe. We
intend to continue our cost reduction efforts in the MCS in both the
manufacturing and administrative efforts while we also try to increase our
revenues through new product introduction and better customer service.
Operating Expenses
Total selling, general and administrative expenses for the second
quarter of 1999 were $26.2 million, or 20.5% of sales, compared to $19.6
million, or 18.7% of sales, in the comparable 1998 period. For the first six
months of 1999 and 1998, total selling, general and administrative expenses were
$51.5 million and $40.4 million, respectively, or 20.3% and 18.7% of sales. The
increase in selling, general and administrative expenses, both in dollars and as
a percentage of sales for both the second quarter and first half of
Page 16 of 25
1999 includes expenses related to integrating FEE and Valor into existing ECS
facilities. In addition, the MCS continued to incur expenses relating to the
implementation of an enterprise resource planning system. These expenses were
especially high in the second quarter of 1999 as the MCS went "live" on the new
system in April. Offsetting these factors was the positive impact of an expense
control program implemented in both the ECS and MCS during the first quarter.
Research, development and engineering expenses are included in selling,
general and administrative expenses. We refer to research, development and
engineering expenses as RD&E. For the three and six months ended July 2, 1999
and June 30, 1998, RD&E by segment was as follows:
Three Months Ended Six Months Ended
July 2, June 30, July 2, June 30,
1999 1998 1999 1998
---- ---- ---- ----
RD&E:
Electronic Components $ 3,545 $ 2,591 $ 7,074 $ 5,102
% of Segment Sales 4.9% 5.6% 5.0% 5.3%
Metallurgical Components $ 1,434 $ 1,370 $ 2,984 $ 2,769
% of Segment Sales 2.6% 2.3% 2.7% 2.3%
Neither segment plans any significant reduction in RD&E efforts in the
near-term.
Interest
Net interest expense was approximately $.5 million during the second
quarter of 1999, compared with $.3 million of net interest expense during the
second quarter of 1998. For the first six months of 1999, net interest expense
was approximately $1.2 million compared with $.4 million in the comparable
period of 1998. The increase in net interest expense resulted from higher levels
of debt outstanding during 1999 when compared to 1998, particularly in early
1999 as we used approximately $20.0 million of debt to finance our acquisition
of GTI/Valor on November 16, 1998.
The majority of our credit facilities have variable interest rates.
Accordingly, interest expense may increase if the rates associated with, or the
amounts borrowed under, our credit facilities move higher during subsequent
quarters. In addition, we may pursue additional or alternative credit to finance
further growth opportunities in one or both of our segments. We may use interest
rate swaps or other financial derivatives in order to manage the risk associated
with changes in market interest rates; however, we have not used any such
instruments thus far.
Income taxes
Our effective income tax rate in the second quarter of 1999 was 23.8%.
The rate for the first six months of 1999 was 24.7%. The rates for the
Page 17 of 25
comparable periods of the prior year were 37.7% for the second quarter of 1998
and 38.2% for the first six months of 1998. The substantial decrease in our
effective tax rate resulted from actions initiated in the first quarter of 1999
related to a comprehensive global review of our business operations. This
comprehensive review was aimed at ensuring that our overall tax rates are
optimal and appropriate. Also contributing to the lower overall tax rate was a
decline in the proportion of taxable income attributable to high-tax
jurisdictions such as Germany.
Other Issues
Precious Metal
The MCS uses silver, as well as other precious metals, in the
manufacturing of electrical contacts, rivets and other products. Historically,
we have leased or held these materials through consignment arrangements with our
suppliers. Leasing and consignment costs have been substantially below the costs
to borrow funds to purchase the metals. In addition, the risk of a decrease in
the market price of owned precious metal can be substantial. As is sometimes the
case, during the first quarter of 1998, and to a lesser extent in early 1999,
the price of silver increased significantly. The associated leasing costs also
increased. The terms of sale within the MCS allow us to charge customers for the
current market value of silver. However, leasing costs cannot always be
recovered. Thus far we have been successful in managing the costs associated
with our precious metals. While limited amounts are purchased for use in
production, the vast majority of our precious metal inventory continues to be
leased or held on consignment. If our leasing/consignment fees increase
significantly in a short period of time, and we are unable to recover these
increased costs through higher sale prices, a negative impact on our results of
operations and liquidity may result. We believe this risk is shared by all of
our competitors.
Year 2000 Computer Issues
General
The popularly called "Year 2000" issues associated with the programming
code in existing computer systems revolve around whether computer systems will
properly recognize date-sensitive information when the year changes to 2000.
Information technology ("IT") and non-IT systems that do not properly recognize
such information could generate erroneous data or cause a system to fail. 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 value to
00.
Our IT systems include central business computing and ancillary
business computing systems, payroll systems and manufacturing systems. Our
non-IT systems, those with embedded technology such as microcontrollers, include
time reporting systems, alarm and security systems, telecommunication systems,
plant machinery controls and electronic data interfaces. We have analyzed the
impact of the Year 2000 issues on our systems and have, or are in the process
of, addressing the issues identified by our analysis.
Page 18 of 25
Our products do not include date-sensitive software or embedded
technology. As a result, we do not expect to experience product warranty or
return issues relating to the Year 2000 problem.
State of Readiness
As a result of our decentralized segment structure and the diversified
systems employed by each segment and the corporate location, the Year 2000 issue
is being managed by each group separately. Oversight and status reviews are
performed by corporate personnel and, ultimately, the audit committee and board
of directors. Corporate, the ECS and the MCS are in varying stages of addressing
Year 2000 issues. We have defined the stages of progress for Year 2000 readiness
as follows: awareness, assessment, renovation, validation and implementation.
Corporate, the ECS and the MCS are generally in the implementation stage. Both
the ECS and MCS have assessed and are addressing Year 2000 issues related to
their 1998 acquisitions.
Corporate
The IT systems at our corporate location are primarily purchased
programs. Periodically, these programs are updated with new releases. As a
result of these updates and discussions with vendors, we believe that internal
IT systems used at the corporate location are Year 2000 ready in all material
respects.
We maintain electronic interfaces with external vendors, including
banks, insurance companies, employee benefit providers and many other parties.
In addition, we are dependent on parties such as our transfer agent and the New
York Stock Exchange to provide for uninterrupted trading of our securities.
Based on discussions with their personnel, we believe these highly regulated
institutions are or will be Year 2000 ready, although we have received no such
guarantees. We have requested Year 2000 readiness statements from these vendors.
In the event that these parties experience Year 2000 problems, the consequences
to us are unknown.
We believe that corporate non-IT systems are Year 2000 ready, although
the use of non-IT systems at the corporate level is not critical to our
operations.
ECS
In mid-1997, the ECS formed a working group to address Year 2000 issues
facing this segment. All of the ECS's corporate applications were reviewed to
determine whether to repair, re-engineer, replace, or retire each system. All
recommended reprogramming steps to achieve Year 2000 readiness have been
completed. In addition, the ECS completed compliance implementations and related
testing for infrastructure-related issues with the operating systems, computer
networks, and telecommunications equipment and services, as well as the ECS's
facilities and security systems. To the extent problems develop, the ECS expects
that its IT department, with the assistance of external consultants, will be
able to address those problems on a timely basis.
Regarding the FEE acquisition, the ECS has completed an assessment of
Year 2000 issues related to FEE's IT and non-IT systems. Year 2000 issues were
Page 19 of 25
identified and are currently being addressed by internal resources.
Implementation of necessary changes and testing of those changes are expected to
be completed by the end of the third quarter of 1999 without material
expenditures.
Prior to our acquisition of GTI, GTI completed the installation of an
enterprise resource planning system which addressed GTI's Year 2000 issues
related to their information systems. Any potential Year 2000 issues related to
GTI's facilities or non-IT systems will be addressed by our plans to integrate
GTI's operations into our facilities, which we believe are Year 2000 ready.
The ECS is still in the process of contacting vendors and suppliers,
including hardware, software, telecommunications, networking, security, data and
service providers, regarding the Year 2000 readiness status of their companies
and products. To the extent that a supplier is not able to become Year 2000
ready, alternative supply sources will be identified and contacted, and their
Year 2000 readiness status verified within the next quarter. The ECS expects
that its major vendors or suppliers will be Year 2000 ready.
Aggregate external costs incurred to address Year 2000 issues within
the ECS have approximated $380,000. About $280,000 of this amount was paid to
consultants and expensed when incurred. The remainder of the costs related to
accelerated purchases of licenses and software, and was capitalized in
accordance with existing company policy. Future costs related to the ECS Year
2000 issues are expected to be immaterial to the ECS.
MCS
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 is in the process of completing the
installation of a worldwide enterprise resource planning system. The system went
"live" as planned in early April in Germany and most of North America. The
vendor has warranted that the software is Year 2000 ready.
The MCS is utilizing both internal and external resources to identify,
correct or reprogram and test remaining IT and non-IT systems for Year 2000
compliance, including those systems in Mexico acquired in July of 1998. It is
anticipated that all reprogramming efforts will be completed in a time period
sufficient to allow for appropriate testing.
A Year 2000 readiness review of manufacturing systems is also under
way. The MCS's manufacturing systems include furnace controls, computer
integrated manufacturing systems, shop floor data collection and test equipment.
Some of these systems include embedded systems. It is anticipated that any
material Year 2000 problems will be identified and corrected by December of 1999
without material expense.
Excluding the costs of implementing the ERP system, the total
incremental costs -- incurred and to be incurred -- associated with addressing
the Year 2000 issues within the MCS are estimated to be $150,000. Those costs
are being expensed as incurred. The cost of implementing the ERP system is
significant to us; however, such costs have been budgeted and approved in the
Page 20 of 25
ordinary course of business and are being expensed or capitalized in accordance
with existing policy. While we expect that problems will develop from time to
time during the course of the ERP changeover, we do not believe that these
problems will have a material adverse effect on our operations or that they
necessarily will be Year 2000 related.
The MCS has formalized questionnaires and sent those to vendors
requesting information regarding Year 2000 readiness. The MCS has received
completed surveys from a number of its suppliers. The identification of
alternative supply sources is our intended corrective action with regard to
non-compliant suppliers.
Contingency Plans
As the corporate location and the ECS believe their aggressive action
with respect to Year 2000 problems will mitigate material problems, overall
contingency plans have not been developed.
In the event that there is a failure of the ERP system, the MCS's
contingency plans include reverting to existing financial systems that are Year
2000 ready. Other financial and non-financial applications would be run manually
and problems would be addressed as identified.
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. For example, if a utility company were unable to deliver power, or
if a major vendor were unable to deliver product, the operations of the affected
segment could be disrupted or even temporarily shut down. However, in each
segment, our manufacturing facilities and locations are more geographically
diverse than those of most of our competitors. This diversity provides a natural
hedge against those Year 2000 problems which may affect a given supplier or
utility. In the unlikely event that such failures occur, they could materially
and adversely affect our results of operations, liquidity and financial
condition. Due to the general uncertainty of the Year 2000 problem, including
the uncertainty of the Year 2000 readiness of third-party suppliers and
customers, we are unable to determine with complete certainty at this time
whether the consequences of Year 2000 failures will have a material impact on
our results of operations, liquidity or financial condition. Although there can
be no assurance that we have identified and corrected, or will identify and
correct, every Year 2000 problem existing in IT and non-IT systems, we believe
that we have programs in place to identify and correct any such material
problems and that our actions have significantly decreased the risks associated
with the Year 2000 problem.
Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and the Euro. We refer to the 11 countries as the participating countries and
the participating countries' sovereign currencies as the legacy currencies. The
Euro now trades on currency exchanges and is available for non-cash
transactions.
Page 21 of 25
The legacy currencies are scheduled to remain legal tender in the
participating countries as denominations of the Euro between January 1, 1999 and
July 1, 2002. During this transition period, public and private parties may pay
for goods and services using either the Euro or a legacy currency. Beginning
January 1, 2002, the participating countries will issue new Euro-denominated
bills and coins for use in cash transactions. By July 1, 2002, the participating
countries will withdraw all bills and coins denominated in the legacy
currencies, so that the legacy currencies no longer will be legal tender for any
transactions. The conversion to the Euro will then be complete.
We have developed plans to ensure, to the extent possible, the Euro
will not negatively impact our operations. As of July 2, 1999, no significant
problems have occurred. On a company-wide basis, those efforts have been
coordinated by the corporate Treasurer and have included internal personnel as
well as external consultants. The ECS is continually evaluating the impact of
the Euro on the operations located in Europe. The MCS is in the renovation and
implementation stages of addressing Euro conversion related system issues so
that optimal customer services relating to Euro transactions can be provided to
its European customers.
The failure to correct a material Euro conversion issue could result in
an interruption in, or failure of, certain normal business activities. Such
failures could materially and adversely affect our results of operations,
liquidity and financial condition. Due to the general uncertainty inherent in
the conversion to the Euro, we are unable to determine at this time whether the
consequences of Euro conversion failures will have a material impact on our
results of operations, liquidity or financial condition. During 1999, we have
not encountered any material Euro conversion problems.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
There were no material changes in market risk exposures that affect the
quantitative and qualitative disclosures presented in our Form 10-K for the year
ended December 31, 1998.
Page 22 of 25
Part II. Other Information
Item 1 Legal Proceedings None
Item 2 Changes in Securities and Use of Proceeds None
Item 3 Defaults Upon Senior Securities None
Item 4 Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on May 19, 1999.
Messrs. J. Barton Harrison and Graham Humes were elected to a
three-year term as directors of the Company. KPMG LLP was selected as
the Company's independent public accountants for the year ending
December 31, 1999. The results of the votes were as follows:
For Withhold Authority
--- ------------------
J. Barton Harrison 13,891,439 57,309
Graham Humes 13,869,180 79,568
For Against Abstain
--- ------- -------
KPMG LLP 13,676,139 229,589 12,788
In addition, each of the following directors continued in office
after the meeting: Stanley E. Basara, John E. Burrows, Jr., Rajiv L.
Gupta, Roy E. Hock, Edward M. Mazze, and James M. Papada, III.
Item 5 Other Information None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibit Index is on page 24
(b) Reports On Form 8-K None
Page 23 of 25
Exhibit Index
Document
- --------
3.(i) Articles of Incorporation Incorporated by reference to Form
8-A/A dated April 10, 1998
(ii) By-laws Attached to this Form 10-Q
4. Instruments defining rights of Incorporated by reference from Form
10-K for the year security holders
ended December 31, 1995 and from
Exhibit 4 of Form 8-K dated
August 30, 1996
27. Financial Data Schedule Electronic Filing Only
- --------------------------------------------------------------------------------
Page 24 of 25
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Technitrol, Inc.
----------------------------------------------
(Registrant)
August 11, 1999 /s/Albert Thorp, III
- ----------------------- ----------------------------------------------
(Date) Albert Thorp, III
Vice President - Finance and
Chief Financial Officer
(Principal Financial Officer)
August 11, 1999 /s/Drew A. Moyer
- ----------------------- ----------------------------------------------
(Date) Drew A. Moyer
Corporate Controller and Secretary
(Principal Accounting Officer)
Page 25 of 25