Exhibit index
is on Page 17
UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended March 31, 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 March 31, 1998: 16,168,584
Page 1 of 18
<PAGE>
TECHNITROL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and December 31, 1997
(Unaudited)
(In thousands of dollars)
March 31, 1998 Dec. 31, 1997
-------------- -------------
Assets
------
Current Assets:
Cash and cash equivalents $ 52,870 $ 48,803
Trade receivables 57,996 53,990
Inventories 52,694 50,623
Prepaid expenses and other current assets 5,791 3,995
-------- --------
Total current assets 169,351 157,411
Property, plant and equipment 108,911 106,803
Less accumulated depreciation 49,983 47,140
-------- --------
Net property, plant and equipment 58,928 59,663
Deferred income taxes 8,159 7,582
Excess of cost over net assets acquired, net 29,032 29,571
Other assets 1,015 1,107
-------- --------
$266,485 $255,334
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt $ 2,027 $ 2,025
Accounts payable 10,421 11,319
Accrued expenses 65,756 61,288
-------- --------
Total current liabilities 78,204 74,632
Long-term liabilities:
Long-term debt, excluding current installments 29,783 30,932
Other long-term liabilities 7,192 7,395
Shareholders' equity:
Common stock and additional paid-in capital 44,975 43,148
Retained earnings 110,329 101,800
Other (3,998) (2,573)
-------- --------
Total shareholders' equity 151,306 142,375
-------- --------
$266,485 $255,334
======== ========
See accompanying Notes to Consolidated Financial Statements.
Page 2 of 18
<PAGE>
TECHNITROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands of dollars, except share data)
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
Net sales $110,748 $92,207
Costs and expenses applicable to sales
Cost of goods sold 74,606 63,292
Selling, general and administrative expenses 20,836 18,576
-------- -------
Total costs and expenses applicable to sales 95,442 81,868
-------- -------
Operating profit 15,306 10,339
Other income (expense)
Interest, net (45) (325)
Other 4 96
-------- -------
Total other income (expense) (41) (229)
-------- -------
Earnings before taxes 15,265 10,110
Income taxes 5,887 3,557
-------- -------
Net earnings from continuing operations 9,378 6,553
Discontinued operations:
Earnings from operations of the Test &
Measurement Products Segment (less income
taxes of $214 in 1997) -- 281
-------- -------
Net earnings $ 9,378 $ 6,834
======== =======
Earnings per share from continuing operations:
Basic .58 .41
Diluted .58 .40
Net earnings per share:
Basic .58 .43
Diluted .58 .42
Dividends declared per share $ .06 $ .0525
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
TECHNITROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1998 and 1997
(Unaudited)
(In thousands of dollars)
March 31, March 31,
--------- ---------
1998 1997
---- ----
Cash flows from operating activities:
Net earnings $ 9,378 $ 6,834
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 3,538 2,865
Changes in assets and liabilities net of effect of
discontinued operations:
Accounts payable and accrued expenses 3,211 8,585
Accounts receivable (4,310) (14,433)
Inventories (2,495) (2,808)
Other, net (305) 1,166
------- -------
Net cash provided by operating activities 9,017 2,209
------- -------
Cash flows from investing activities:
Acquisitions, net of cash acquired (886) (7,751)
Capital expenditures, exclusive of acquired business (2,618) (2,741)
------ ------
Net cash used in investing activities (3,504) (10,492)
------ -------
Cash flows from financing activities:
Dividends paid (847) (799)
Proceeds of long-term borrowings -- 8,148
Principal payments of long-term debt (506) (9,861)
Net repayments of short-term debt -- (1,161)
Proceeds from exercise of stock options -- 248
------- -------
Net cash used in financing activities (1,353) (3,425)
------- -------
Net effect of exchange rate changes on cash (93) (1,312)
------- -------
Net increase (decrease) in cash and cash equivalents 4,067 (13,020)
Cash and cash equivalents at beginning of year 48,803 43,531
------- -------
Cash and cash equivalents at March 31 $52,870 $30,511
======= =======
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
<TABLE>
<CAPTION>
TECHNITROL, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
March 31, 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
------ ------ -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 16,135 $43,148 $101,800 $(1,178) $(1,395)
Stock options, awards and related compensation 34 1,280 -- (1,124) --
Tax benefit of stock compensation -- 547 -- -- --
Currency translation adjustments -- -- -- -- (301) $ (301)
Net earnings -- -- 9,378 -- -- 9,378
------
Comprehensive income -- -- -- -- -- $9,077
======
Dividends declared ($.06 per share) -- -- (849) -- --
------ ------- -------- ------ -------
Balance at March 31, 1998 16,169 $44,975 $110,329 (2,302) $(1,696)
====== ======= ======== ====== =======
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
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<PAGE>
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 three months ended March 31, 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).
Three Months Ended
March 31, 1997
--------------
Net sales $101,255
Net earnings $6,877
Diluted earnings per share $.43
Page 6 of 18
<PAGE>
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(2) Acquisitions and Divestitures, continued
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. The sales of the Test &
Measurement Products Segment were approximately $6.9 during the three months
ended March 31, 1997.
(3) Inventories
Inventories consisted of the following (in thousands):
March 31, December 31,
--------- ------------
1998 1997
---- ----
Finished goods $20,719 $18,897
Work in process 13,333 11,852
Raw materials and supplies 18,642 19,874
------- -------
$52,694 $50,623
======= =======
(4) Derivatives and Other Financial Instruments
At March 31, 1998, the Company had two forward contracts outstanding, one
to purchase 349,000 Irish punt and the other to purchase 105,000 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 46,000 and
86,000 at March 31, 1998 and 1997, respectively. Earnings per share calculations
are as follows (in thousands, except per share amounts):
Page 7 of 18
<PAGE>
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(6) Earnings Per Share, continued
Three Months Ended
March 31,
---------
1998 1997
---- ----
Net earnings $ 9,378 $ 6,834
Basic earnings per share:
Shares 16,141 16,020
Per share amount $ .58 $ .43
Diluted earnings per share:
Shares 16,187 16,106
Per share amount $ .58 $ .42
(7) Business Segment Information
At March 31, 1998 and 1997, there were no intersegment revenues, and
there has not been a material change in Segment assets from December 31, 1997,
to March 31, 1998. In addition, the basis for determining Segment financial
information has not changed from 1997. Specific Segment data is as follows:
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
Net sales:
Electronic Components $ 50,070 $37,331
Metallurgical Components 60,678 54,876
-------- -------
Total $110,748 $92,207
======== =======
Earnings before income taxes:
Electronic Components $ 10,190 $ 7,070
Metallurgical Components 5,116 3,269
-------- -------
Operating profit 15,306 10,339
Other income (expense), net (41) (229)
-------- -------
Earnings (from continuing operations)
before income taxes $ 15,265 $10,110
======== =======
Page 8 of 18
<PAGE>
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. Manufacturing occurs in the United States, Ireland, Malaysia, Taiwan,
Thailand, the Philippines and the People's Republic of China.
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.
In 1996, the Company acquired a majority equity interest in Netwave
Technologies, Inc. ("Netwave") which was organized in 1996 to acquire the assets
of the wireless local area network products business formerly conducted by
Xircom, Inc. The Company made a capital contribution to Netwave of cash and
assets. On December 31, 1997, the Company sold a significant portion of its
ownership interest back to Netwave, while retaining a 19% (non diluted)
interest. The Company concluded that Netwave, while continuing to represent an
attractive long-term opportunity, required more time and capital than that which
was appropriate for the Company to provide in light of its focus on building the
value of its core businesses.
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 and Spain.
Page 9 of 18
<PAGE>
In late 1996, in furtherance of its strategy of creating critical mass
in and further geographical penetration of its metallurgical businesses, the
Company acquired the assets of Doduco GmbH ("Doduco"), which is engaged in the
manufacture in Germany and Spain of precious metal contacts, bimetal products
and certain contact assemblies. These operations were combined with the
Company's metallurgical component operations within the MCS and now operate
globally under the name AMI Doduco. The Company believes that the MCS now
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 in which it
identified products which did not fit into its core businesses. Those product
lines will be 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 March 31, 1998, was $91.1 million, an increase
of $8.3 million from the working capital of $82.8 million at December 31, 1997.
Worldwide, cash on-hand at March 31, 1998, was $52.9 million.
Cash Flows from Operating Activities
Cash flow from operations was $9.0 million for the quarter ended March
31, 1998. Accounts receivable increased by $4.3 million during the first three
months of 1998 as a result of the record sales level of the Company as a whole
and increased accounts receivable at the newly acquired magnetic components
operations of Nortel. The Company acquired an insignificant level of accounts
receivable as part of the Nortel acquisition. The increase in that operation's
accounts receivable, along with other elements of working capital requirements,
occurred in December 1997 and the first quarter of 1998. (See Note 2 of Notes to
Consolidated Financial Statements.) Inventories increased by $2.5 million during
the quarter and reflect the customer-driven reduction in lead times, continued
push to just-in-time delivery and inventories required to support the increase
in telecom and power conversion business. Accounts payable and accrued expenses
increased in 1998 as a result of the Company's higher sales and profits and
increased inventory level.
Page 10 of 18
<PAGE>
Cash Flows from Investing Activities
Cash used by investing activities was $3.5 million during the first
three months of 1998. Approximately $.9 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 $2.6 million during the first three months 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 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. The Company's foreign operations are conducted in Canada,
China, Europe, Hong Kong, Malaysia, the Philippines, Singapore, Taiwan and
Thailand. The Company is currently expanding its manufacturing facilities in
China and Thailand. 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 of incorporation. 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 these
entities referred to above 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 recent years, 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 committed unused lines of credit from domestic banks aggregating
approximately $54.0 million.
Cash Flows from Financing Activities
Long-term debt repayments during the first three months of 1998 totaled
$.5 million. Those repayments relate to the Company's domestic term debt. The
borrowings under the Company's multi-currency facility at March 31, 1998, were
exclusively denominated in Deutsche marks. The borrowings 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 $.8 million were paid during the first quarter of
1998. Quarterly dividends are expected to continue to be paid during the
foreseeable future. During the first quarter of 1998, the Company increased its
quarterly dividend from $.0525 to $.06 per share.
Foreign Currency Effects
During the first three months 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 March
31, 1998, the exchange rate between the U.S. dollar and the Deutsche mark was
approximately the same as at December 31, 1997.
Page 11 of 18
<PAGE>
Over the past nine months, 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 March 31, 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.
Results of Operations
Sale of the Test & Measurement Products Segment
The results of the Test & Measurement Products Segment are reported as
discontinued operations in the accompanying financial statements. That Segment
was sold by the Company on June 4, 1997. The first quarter 1997 sales of the
Test & Measurement Products Segment were approximately $6.9 million.
Revenues
Sales attributable to continuing operations were $110.7 million during
the first quarter of 1998 and $92.2 million in the comparable prior-year
quarter. The increased sales in 1998 reflect the acquisition of the Company's
production operations in Malaysia and Thailand and consequent increases in
telecom and power conversion business. In addition, the MCS made a significant
contribution to the record sales during the quarter as sales originating from
AMI Doduco's European operations were higher than in the prior year.
The sales of the ECS during the first quarter of 1997 include the sales
of Netwave, which were insignificant. During 1998, the consolidated sales of the
Company exclude the sales of Netwave, since the Company's equity interest in
Netwave is now 19%. In 1997, that interest was 80%.
Sales of the ECS were 34.1% ahead of the prior-year period, reflecting
the expansion of product lines that address the telecommunications and power
conversion equipment markets. This reflects the Segment's strategy of reducing
sales of local area network ("LAN") products as a percentage of total sales
while maintaining its leadership position in the LAN market. However,
first-quarter shipments exceeded orders in the ECS and the Segment's backlog was
reduced accordingly during the quarter from both the end of the comparable
quarter in 1997 and at the end of 1997. As noted in the past, backlog has become
a less reliable predictor of near-term sales as customers have demanded - and
received - increasingly short lead times, driven by their constantly changing
needs and the Company's increased manufacturing flexibility. This trend applies
to both Segments of the Company.
Page 12 of 18
<PAGE>
ECS orders for LAN product lines were weak in the first quarter,
generally continuing a trend that began in mid-1997 and reflecting 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. Nevertheless, 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 telecom and power conversion
product lines were much stronger than last year, reflecting underlying growth as
well as the addition of operations in Malaysia and Thailand.
Sales in the MCS were up 10.6% compared with prior-year levels, as
economic conditions for the construction and durable goods industries continued
to be favorable. The sales of $60.7 million for the MCS in the first quarter of
1998 include the effect on sales of AMI Doduco's German operations of a
quarterly average Deutsche mark-to-dollar exchange rate that was 9.3% lower than
it was in the first quarter of 1997. 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. European sales
for the MCS reflect the positive impact of efforts to improve the overall
performance of European operations, notwithstanding the significant
strengthening of the dollar against the Deutsche mark since the beginning of
1997. The higher sales in 1998 also reflect increased market demand in Eastern
European countries, especially for the Segment's stamped parts and rivets, many
of which originate from AMI Doduco's production facility in Spain. The
integration of the worldwide operations of the MCS is continuing. The Segment's
product rationalization plan may result in annual revenue decreases for the
Segment in the near term of up to $10 million (at current exchange rates) which
may be largely offset by sales growth of the continuing products of the Segment.
Cost of Sales
During the first quarter of 1998, the Company's gross margin from
continuing operations was 32.6%, an increase from 31.4% in the first quarter of
1997. The gross margin of the ECS was slightly lower in 1998 relative to 1997 as
the addition of operations acquired from Nortel expanded the Company's telecom
and power conversion product lines, which generally have lower margins than LAN
products, and drove margins higher in dollars, but lower as a percentage of
sales. Overall, ECS margins remained strong relative to management and industry
expectations, due in a large part to increased manufacturing efficiencies
continuing to keep pace with downward price pressures exerted by customers. ECS
margins also reflect favorable exchange rates during the period. Margins in the
MCS improved from the comparable prior-year period as a result of favorable
product mix and continued integration of the various businesses in this Segment.
Further long-term margin improvement is expected in the MCS as integration and
the product rationalization plan is completed. The industries served by the
Segment, however, remain characterized by aggressive competition and constant
pressure on sales prices resulting from on-going customer cost reduction
activities.
Operating Expenses
Total selling, general and administrative expenses for the first three
months of 1998 were $20.8 million, or 18.8% of sales, compared to $18.6 million
or 20.1% of sales in the comparable 1997 period. General and administrative
expenses during the 1998 quarter were lower than anticipated, and the
integration and consolidation of Nortel's operations have proceeded much faster
than originally planned. Also, the ECS is no longer negatively affected by
expenses and operating losses generated by Netwave.
In the first quarter of 1998, research, development & engineering
expenses ("RD&E"), which are included in general and administrative expenses,
were $2.5 million (5.0% of sales) for the ECS and $1.4 million (2.3% of sales)
for the MCS. In 1997, the comparable amounts were $2.3 million (6.2% of sales)
for the ECS and $1.8 million (3.3% of sales) for the MCS. The ECS spending in
1997 reflects RD&E at Netwave, which had relatively high RD&E expenses in
relation to its sales. Neither Segment plans any significant reduction in RD&E
efforts and differences are reflective generally of the timing and expenses of
projects underway at any given time.
Page 13 of 18
<PAGE>
Interest
Net interest expense amounts were less than $.1 million in 1998 and
approximately $.3 million in the comparable 1997 quarter. Total outstanding
borrowings were approximately $31.8 million at March 31, 1998, compared to $33.0
million at December 31, 1997, and $38.9 million at March 31, 1997. Higher
interest expense during the first quarter of 1997 related to Netwave's debt,
higher outstanding balances associated with AMI Doduco's European operations and
a higher balance of domestic term debt. 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
Technitrol's effective tax rate for the first quarter of 1998 was
38.6%, compared with 35.2% for the same period in 1997. The increase was 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. In general, Technitrol continues to benefit from favorable offshore tax
treatments.
Other issues
The MCS uses precious metal in the manufacturing of electrical
contacts, rivets and other products. Silver is a primary component of many
products produced by the MCS. 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 consigning precious metals 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 owned precious metals inventories can be substantial. During the
first quarter of 1998, the global demand for silver increased significantly and
the market price of silver and the associated leasing costs also 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
consigned. 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 as well.
Page 14 of 18
<PAGE>
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. 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 15 of 18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS NONE
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS NONE
ITEM 3 DEFAULTS UPON SENIOR SECURITIES NONE
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE
ITEM 5 OTHER INFORMATION NONE
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibit Index is on page 17
(b) Reports on Form 8-K NONE
Page 16 of 18
<PAGE>
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 from Form 10-K
of security holders for the year ended December 31, 1995
and from Exhibit 4 of Form 8-K
dated August 30, 1996
27. Financial Data Schedule Electronic Filing Only
- --------------------------------------------------------------------------------
Page 17 of 18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHNITROL, INC.
-------------------------------------------
(Registrant)
May 5, 1998 /s/Albert Thorp, III
- --------------------------- -------------------------------------------
(Date) Albert Thorp, III
Vice President - Finance and
Chief Financial Officer
(Principal Financial Officer)
May 5, 1998 /s/Drew A. Moyer
- --------------------------- -------------------------------------------
(Date) Drew A. Moyer
Corporate Controller and Secretary
(Principal Accounting Officer)
Page 18 of 18
<PAGE>
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<LEGEND>
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<PERIOD-TYPE> 3-MOS
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<LEGEND>
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