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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 September 30, 1998, or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period
from ______________ to ______________.
Commission File No. 1-5375
TECHNITROL, INC.
(Exact name of registrant as specified in Charter)
PENNSYLVANIA 23-1292472
(State or other jurisdiction of incorporation (IRS Employer Identification
or organization) Number)
1210 Northbrook Drive, Suite 385
Trevose, Pennsylvania 19053
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 215-355-2900
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days. YES [X] NO [ ]
Common Stock - Shares Outstanding as of September 30, 1998: 16,180,581
Page 1 of 23
<PAGE>
TECHNITROL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and December 31, 1997
(In thousands)
Sept. 30, Dec. 31,
1998 1997
---- ----
Assets (unaudited)
------
Current Assets:
Cash and cash equivalents $ 41,754 $ 48,803
Trade receivables 68,755 53,990
Inventories 62,897 50,623
Prepaid expenses and other current assets 5,965 3,995
-------- --------
Total current assets 179,371 157,411
Property, plant and equipment 131,358 106,803
Less accumulated depreciation 56,699 47,140
-------- --------
Net property, plant and equipment 74,659 59,663
Deferred income taxes 9,024 7,582
Excess of cost over net assets acquired, net 34,192 29,571
Other assets 1,808 1,107
-------- --------
$299,054 $255,334
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt $ 5,526 $ 2,025
Accounts payable 16,046 11,319
Accrued expenses 73,647 61,288
-------- --------
Total current liabilities 95,219 74,632
Long-term liabilities:
Long-term debt, excluding current
installments 28,884 30,932
Other long-term liabilities 6,992 7,395
Shareholders' equity:
Common stock and additional paid-in capital 45,283 43,148
Retained earnings 124,121 101,800
Other (1,445) (2,573)
-------- --------
Total shareholders' equity 167,959 142,375
-------- --------
$299,054 $255,334
======== ========
See accompanying Notes to Consolidated Financial Statements.
Page 2 of 23
<PAGE>
<TABLE>
<CAPTION>
TECHNITROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except share data)
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $113,349 $102,127 $328,985 $298,261
Costs and expenses applicable to sales:
Cost of goods sold 78,403 69,440 224,738 203,013
Selling, general and administrative expenses 22,848 22,430 63,244 61,865
-------- -------- -------- --------
Total costs and expenses applicable to sales 101,251 91,870 287,982 264,878
-------- -------- -------- --------
Operating profit 12,098 10,257 41,003 33,383
Other income (expense):
Interest, net (341) 324 (696) (169)
Other (322) 342 (106) 314
-------- -------- -------- --------
Total other income (expense) (663) 666 (802) 145
-------- -------- -------- --------
Earnings before taxes 11,435 10,923 40,201 33,528
Income taxes 3,993 3,785 14,968 11,937
-------- -------- -------- --------
Net earnings from continuing operations 7,442 7,138 25,233 21,591
Discontinued operations:
Earnings from operations of the Test &
Measurement Products Segment, net of
income taxes -- -- -- 258
Gain on disposal of discontinued business
(less income taxes of $11,064) -- -- -- 11,502
-------- -------- -------- --------
Net earnings $ 7,442 $ 7,138 $ 25,233 $ 33,351
======== ======== ======== ========
Earnings per share from continuing operations:
Basic $ .47 $ .44 $ 1.58 $ 1.34
Diluted $ .46 $ .44 $ 1.56 $ 1.34
Net earnings per share:
Basic $ .47 $ .44 $ 1.58 $ 2.07
Diluted $ .46 $ .44 $ 1.56 $ 2.07
Dividends declared per share $ .06 $ .0525 $ .18 $ .1575
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
Page 3 of 23
<PAGE>
<TABLE>
<CAPTION>
TECHNITROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1998 and 1997
(Unaudited)
(In thousands)
Sept. 30, Sept. 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $25,233 $33,351
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 13,289 9,940
Gain on sale of Test & Measurement Products Segment -- (11,502)
Changes in assets and liabilities, net of effect
of acquisitions and discontinued operations:
Accounts receivable (5,083) (13,000)
Inventories (3,190) (12,365)
Accounts payable and accrued expenses 5,239 13,508
Other, net 21 (1,119)
-- -------
Net cash provided by operating activities 35,509 18,813
------- -------
Cash flows from investing activities:
Proceeds from the sale of discontinued operations,
net of cash sold and expenses paid -- 32,393
Acquisitions, net of cash acquired (16,816) (8,100)
Capital expenditures, exclusive of acquired business (13,565) (10,991)
Proceeds from sale of property, plant and equipment -- 332
------- -------
Net cash provided by (used in) investing activities (30,381) 13,634
------- -------
Cash flows from financing activities:
Dividends paid (2,788) (2,490)
Proceeds of long-term borrowings 5,890 12,301
Principal payments of long-term debt (16,042) (18,587)
Net borrowings of short-term debt, net -- 1,774
Proceeds from exercise of stock options 97 300
Other -- 100
------- -------
Net cash used in financing activities (12,843) (6,602)
------- -------
Net effect of exchange rate changes on cash 666 (2,071)
--- -------
Net increase (decrease) in cash and cash equivalents (7,049) 23,774
Cash and cash equivalents at beginning of year 48,803 43,531
------- -------
Cash and cash equivalents at September 30 $41,754 $67,305
======= =======
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
Page 4 of 23
<PAGE>
<TABLE>
<CAPTION>
TECHNITROL, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
September 30, 1998
(Unaudited)
(In thousands, except per share data)
Other
-----------------------------
Accumu-
Common stock and lated other
paid-in capital Deferred compre- Compre-
------------------- Retained compen- hensive hensive
Shares Amount earnings sation income income
------ ------ -------- ------ ------ ------
<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 46 1,435 -- (786) --
Tax benefit of stock compensation -- 700 -- -- --
Currency translation adjustments -- -- -- -- 1,914 $ 1,914
Net earnings -- -- 25,233 -- -- 25,233
-------
Comprehensive income -- -- -- -- -- $27,147
=======
Dividends declared ($.18 per share) -- -- (2,912) -- --
------- ------- -------- ------- -------
Balance at September 30, 1998 16,181 $45,283 $124,121 (1,964) $ 519
======= ======= ======== ======= =======
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
Page 5 of 23
<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 nine months ended September 30, 1998, and 1997,
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 three months and nine months
ended September 30, 1998 are not necessarily indicative of annual results.
Certain amounts in the 1997 financial statements have been reclassified
to conform with the current year's presentation.
(2) Acquisitions and Divestitures
FEE Technology, S.A. ("FEE"): On July 3, 1998, the Company purchased
all of the capital stock of FEE. FEE designs and manufactures magnetic
components for telecommunications and power conversion equipment. The total
purchase price including assumed debt and transaction costs approximated $20
million and was funded by cash on-hand. The fair value of the net assets
acquired was approximately $2.7 million resulting in goodwill of approximately
$5.8 million. The total purchase price is subject to adjustment as expenses and
details of the transaction are finalized. Adjustments to the purchase price
allocation are not expected to have a material impact on the Company's
consolidated results of operations for 1998 or 1999. FEE is now part of the
Electronic Components Segment. The acquisition was accounted for by the purchase
method of accounting and, as such, 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 than 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 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.
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 continues 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 $8.0 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.
Page 6 of 23
<PAGE>
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(2) Acquisitions and Divestitures, continued
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).
Nine Months Ended
September 30, 1997
------------------
Net sales $325,404
Net earnings $ 22,564
Diluted earnings per share $ 1.40
GTI Corporation ("GTI"): On May 27, 1998, the Company entered into a
definitive agreement to acquire all of the outstanding shares of GTI for
approximately $34.0 million. In August of 1998, the Company informed GTI that
the Company believed there had been a material breach of certain of GTI's
material representations and warranties in the Agreement. GTI filed a petition
seeking a court order requiring Technitrol to close the acquisition of GTI
pursuant to the Agreement. Subsequently, the Company and GTI were able to
resolve their differences and the transaction is expected to occur in accordance
with the Agreement on or about November 16, 1998.
GTI manufactures magnetics-based components for signal processing and
power transfer functions primarily in equipment for local area networking, but
also for telecommunications and broadband applications. The acquisition will be
accounted for by the purchase method of accounting and results of GTI will be
included with those of the Company beginning as of the closing date.
Test & Measurement Products Segment: On June 4, 1997, the Company
completed the sale of the companies that formed its Test & Measurement Products
Segment to an affiliate of AMETEK, Inc. for approximately $34.0 million in cash
and a resulting gain of approximately $11.5 million (net of income taxes of
approximately $11.1 million) was realized in the second quarter of 1997. As a
result of the foregoing, the Company discontinued its manufacturing and
marketing of test and measurement products (including force-measurement gauges,
rheology test systems and weighing devices) and the Test & Measurement Products
Segment is reported as a discontinued operation in 1997.
(3) Inventories
Inventories consisted of the following (in thousands):
September 30, December 31,
1998 1997
---- ----
Finished goods $22,884 $18,897
Work in process 15,314 11,852
Raw materials and supplies 24,699 19,874
------- -------
$62,897 $50,623
======= =======
Page 7 of 22
<PAGE>
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(4) Derivatives and Other Financial Instruments
The Company utilizes derivative financial instruments, primarily forward
exchange contracts, to manage foreign currency risks. While these hedging
instruments are subject to fluctuations in value, such fluctuations are
generally offset by the value of the underlying exposures being hedged. The
terms of the contracts outstanding as of September 30, 1998 are of a short-term
nature. 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. See
"Management's Discussion and Analysis - Foreign Currency Effects."
(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 (excluding
restricted shares) during the period. For calculating diluted earnings per
share, common share equivalents and restricted shares 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 equivalents were
34,100 and 50,600 for the three months ended September 30, 1998 and 1997,
respectively, and 36,100 and 47,580 for the nine month periods then ended.
Earnings per share calculations are as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $ 7,442 $ 7,138 $25,233 $33,351
Basic earnings per share:
Shares 15,996 16,115 15,979 16,079
Per share amount $ .47 $ .44 $ 1.58 $ 2.07
Diluted earnings per share:
Shares 16,216 16,165 16,201 16,127
Per share amount $ .46 $ .44 $ 1.56 $ 2.07
</TABLE>
Page 8 of 23
<PAGE>
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(6) Business Segment Information
For the three months and nine months ended September 30, 1998 and 1997,
there were no material intersegment revenues. In addition, the basis for
determining Segment financial information has not changed from 1997; although,
as of July 3, 1998, Electronic Components includes the operations of FEE and
Metallurgical Components includes the operations of those certain assets
acquired from Metales. Specific Segment data is as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales:
Electronic Components $ 57,150 $ 48,515 $153,443 $132,484
Metallurgical Components 56,199 53,612 175,542 165,777
-------- -------- -------- --------
Total $113,349 $102,127 $328,985 $298,261
======== ======== ======== ========
Earnings before income taxes:
Electronic Components $ 9,075 $ 7,146 $ 28,031 $ 23,417
Metallurgical Components 3,023 3,111 12,972 9,966
-------- -------- -------- --------
Operating profit 12,098 10,257 41,003 33,383
Other income (expense), net (663) 666 (802) 145
-------- -------- -------- --------
Earnings (from continuing
operations) before income taxes $ 11,435 $ 10,923 $ 40,201 $ 33,528
======== ======== ======== ========
</TABLE>
Page 9 of 23
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations, as well as other sections of this Report, contains
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 ECS provides a broad array of magnetics-based components, miniature
chip inductors and modules for use primarily in local area network,
telecommunication and power-conversion products. As of September 30, 1998,
manufacturing facilities were located in the United States, Ireland, France,
Poland, Malaysia, 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 to form the ECS. Also in 1996, a majority of the Company's
manufacturing capacity in Taiwan was relocated to the Philippines. In late 1997,
the Company acquired the magnetic components business of Northern Telecom Ltd.
("Nortel"). That business, which became part of the ECS, includes manufacturing
facilities in Malaysia and Thailand and a design engineering group in Canada.
Additional manufacturing facilities were added on July 3, 1998 in France,
Thailand, and Poland as a result of the acquisition of FEE Technology, S.A.
("FEE"). FEE designs and manufactures magnetic components for telecommunications
and power conversion equipment. As of the date of acquisition, FEE became part
of the ECS. The Company believes that these acquisitions have positioned the ECS
as a global market leader in the development, manufacture and sale of components
for local area network, telecommunication and power-conversion products, and
that no other producer of similar components possesses the breadth and scope of
ECS' operations.
GTI Corporation ("GTI")
On May 27, 1998, the Company and GTI signed an Agreement and Plan of
Merger ("Agreement") whereby GTI would become an indirect wholly-owned
subsidiary of the Company. In August of 1998, the Company informed GTI that the
Company believed there had been a material breach of certain of GTI's material
representations and warranties in the Agreement. GTI filed a petition seeking a
court order requiring Technitrol to close the acquisition of GTI pursuant to the
Agreement. Subsequently, the Company and GTI were able to resolve their
differences and the transaction is expected to occur in accordance with the
Agreement on or about November 16, 1998.
GTI manufactures magnetics-based components for signal processing and
power transfer functions primarily in local area networking equipment, but also
for telecommunications and broadband applications. The acquisition will
complement ECS' existing business. GTI will become a part of the ECS and
integrated into existing ECS facilities.
Page 10 of 23
<PAGE>
Metallurgical Components Segment ("MCS")
MCS is a broad-based manufacturer of precious metal electrical
contacts, bonded or clad metals and contact assemblies. These electrical
components are used in a variety of applications which include residential,
commercial and industrial circuit breakers, motor controls, relays, wiring
devices, temperature controls, appliances, automotive and various electrical
products. This Segment also engages in sophisticated electroplating and metal
refining services. Manufacturing takes place in the United States, Puerto Rico,
Germany, Spain and, with the recent acquisition of certain assets of Metales y
Contactos, S.A. de C.V. ("Metales"), Mexico. The Company believes that no other
company in the industry possesses the breadth and scope of MCS's operations.
In late 1996, in furtherance of its strategy of creating critical mass
in and further effecting geographical penetration of its metallurgical
businesses, the Company acquired the assets of Doduco GmbH ("Doduco"), which 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. In July of 1998, the Company
acquired certain assets of Metales. With operations located near Mexico City,
Metales designed and manufactured precious and semi-precious metal contacts used
mainly in automobiles and other durable goods. The operations of Metales are now
part of AMI Doduco. The Company believes that the MCS possesses the critical
mass necessary to enable this Segment to capitalize on advantages in the global
markets for metallurgical contacts, bimetals and related products.
In 1997, the MCS began a product rationalization effort by which it
identified products which did not fit into its core businesses. Those product
lines are in the process of being moved, sold or discontinued. In addition, in
1997, the MCS formed global teams to examine and pursue the synergies made
available to the MCS by virtue of its global position (i.e., technology,
information systems, manufacturing, purchasing and selling). These efforts are
on-going.
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
Working capital at September 30, 1998, was $84.2 million, an increase
of $1.4 million from working capital of $82.8 million at December 31, 1997.
Worldwide cash on-hand at September 30, 1998, was $41.8 million approximately
$7.0 million less than on December 31, 1997. Cash on-hand of approximately $23.6
million was used in early July 1998 for the purchase of the capital stock of
FEE, repayment of certain FEE related debt and the purchase of certain assets of
Metales. The Company anticipates using cash on-hand as well as its available
bank lines of credit to finance the approximate $34.0 million purchase price
for GTI.
Page 11 of 23
<PAGE>
Cash Flows from Operating Activities
Cash provided by operating activities for the nine months ended
September 30, 1998, was $35.5 million. Net earnings, adjusted for depreciation
and amortization, for the first nine months of 1998 in combination with an
increase in accounts payable and accrued expenses, net of the effect of 1998
acquisitions, were the main factors contributing to the positive cash flow.
Partially offsetting these positive cash flow factors were increases in accounts
receivable and inventory, net of the effect of 1998 acquisitions. The changes in
these operating assets and liabilities can be primarily attributed to increased
business activity in the magnetic components business acquired from Nortel and
the positive business growth of AMI Doduco's European operations. Offsetting a
portion of these increases in operating assets was the change in operating
assets at FEE from July 3, 1998 to September 30, 1998. Due to the normal summer
holidays in France, FEE was essentially idled for a good portion of August
resulting in a decrease in accounts receivable, inventories and accounts payable
and accrued expenses from July 3, 1998, to the end of the period.
Cash Flows from Investing Activities
Cash used by investing activities was $30.4 million during the first
nine months of 1998. Approximately $15.6 million was used to acquire FEE and
certain operating assets of Metales. Also included as part of cash used for
acquisitions was approximately $1.2 million in payments of previously accrued
expenses related to the acquisition of Nortel's magnetic components business.
Cash payments for capital expenditures totaled approximately $13.6
million during the first nine months of 1998, in line with budgeted capital
expenditures. Further capital expenditures are expected during the remainder of
1998 for purposes of expanding production capacity, improving the operating
efficiency of the Company's businesses and upgrading information technology
systems. The expansion of production capacity and/or the acquisition of other
businesses or product lines may result in the Company conducting business in
countries where it does not currently have operating facilities. For instance,
with the acquisition of FEE and certain operating assets of Metales, the Company
now has operating facilities in France, Poland and Mexico in addition to the
numerous countries where it had existing operations.
With the exception of approximately $3.2 million of retained earnings
in China which have been restricted in accordance with Chinese regulations,
substantially all unremitted earnings held abroad are free from legal or
contractual restrictions in the country where they are held. The Company has not
experienced any significant liquidity restrictions in any country in which it
operates and none are foreseen. However, foreign exchange ceilings imposed by
local governments and the sometimes lengthy approval processes which certain
governments require for international cash transfers may potentially delay cash
remittances from time to time. The earnings of foreign subsidiaries represent a
material portion of the Company's liquid assets and are likely to be reinvested
outside of the United States. As has been the case in the recent past,
management expects that a significant portion of the Company's opportunities for
growth in the coming years will be outside of the United States. Accordingly,
the Company's policy with regard to foreign earnings is generally to invest them
abroad. If such earnings were repatriated, significant tax liabilities could be
incurred in the United States. In the event that certain 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. In November,
the Company entered into a line of credit with a consortium of banks increasing
its line of credit to $125 million in order to provide the Company with
additional financial flexibility. The facility is a multi-currency revolving
credit line with a variable interest rate based, at the Company's option, on
either the prime rate or the LIBOR rate. The facility terminates in November,
2000. The line of credit is secured by a pledge of the stock of certain of the
Company's domestic subsidiaries. The Company currently has unused lines of
credit from banks aggregating approximately $137.0 million.
Page 12 of 23
<PAGE>
Cash Flows from Financing Activities
Long-term debt repayments during the first nine months of 1998 totaled
$16.0 million. Approximately $8.0 million of those repayments relate to assumed
debt from the acquisition of FEE and approximately $1.0 million relate to the
Company's domestic term debt. The remaining payments relate to borrowings under
the Company's separate multi-currency facility which, at September 30, 1998,
were exclusively denominated in Deutsche marks. In July 1998, the Company
entered into a DM10.0 million unsecured loan facility with a German bank in
order to convert a portion of its outstanding credit from a variable-rate,
revolver to fixed-rate, term debt. This loan is for a term of five years, bears
interest at a fixed rate of 5.57% and is non-amortizing. The borrowings for both
facilities are expected to continue to be repaid from the cash flows of AMI
Doduco's German operation and, since the functional currency of that operation
is Deutsche marks, the Company does not believe that it has significant foreign
currency exposure related to this facility.
Dividends of $2.8 million were paid during the first nine months of
1998. Quarterly dividends are expected to continue to be paid during the
foreseeable future.
Foreign Currency Effects
During the first nine months of 1998, the Company did not experience
any significant foreign currency gains or losses in the consolidated statement
of earnings, although as a result of the Deutsche mark and French franc
strengthening against the U.S. dollar, particularly in the second half of
September, the Company experienced a positive translation adjustment. 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. If the Deutsche
mark maintains its strength relative to the U.S. dollar throughout the fourth
quarter, AMI Doduco sales and earnings will be positively impacted when
converted to U.S. dollars.
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 September 30, 1998, the Company had several forward contracts
outstanding. All were short-term in duration and immaterial to the Company's
financial position. The Company will continue to monitor the use of currency
exchange forward contracts, considering the amount of sales and purchases made
in local currencies and the type of currency, and considering 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 are intended to result in reducing the Company's risks
associated with significant exchange rate fluctuations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. This
standard is effective for quarters of fiscal years beginning after June 15,
1999. Adoption of this standard is not expected to have a material effect on the
Company's operating results or liquidity and any effect on the Company's
consolidated balance sheet will be dependent upon the amount, if any, of hedging
activity outstanding on the date of adoption.
Page 13 of 23
<PAGE>
Results of Operations
Results of operations from continuing operations for the three month
and nine month periods ending September 30, 1998 and 1997, are as follows (in
thousands)1:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales:
Electronic Components $ 57,150 $ 48,515 $153,443 $132,484
Metallurgical Components 56,199 53,612 175,542 165,777
-------- -------- -------- --------
Total $113,349 $102,127 $328,985 $298,261
======== ======= ======== ========
Earnings before income taxes:
Electronic Components2 $ 9,075 $ 7,146 $ 28,031 $ 23,417
Metallurgical Components 3,023 3,111 12,972 9,966
-------- -------- -------- --------
Operating profit 12,098 10,257 41,003 33,383
Other income (expense), net (663) 666 (802) 145
-------- -------- -------- --------
Earnings (from continuing
operations) before income taxes $ 11,435 $ 10,923 $ 40,201 $ 33,528
======== ======== ======== ========
</TABLE>
Revenues
Sales for the third quarter of 1998 increased by $11.2 million or 11.0%
when compared to the prior year third quarter. Sales for the first nine months
of 1998 increased 10.3% from the comparable period of 1997. The increases are
primarily attributable to the sales contributed by: (i) the magnetic components
business purchased from Nortel in late 1997, (ii) the operations of FEE and
Metales since July 3, 1998, and (iii) AMI Doduco's European operations.
The ECS sales in the third quarter of 1998 were $8.6 million, or 17.8%,
higher than the comparable period in 1997 and $21.0 million, or 15.8%, higher
than the first nine months of 1997. The increases result from ECS's acquisition
of the magnetic components business from Nortel in late 1997 and the acquisition
of FEE in the third quarter of 1998. Partially offsetting these increases was
the worldwide softness in local area network ("LAN") component markets during
1998. This softness in 1998 contrasts to high levels of shipments during the
first nine months of 1997. Additionally, order entry in the telecommunication
markets was somewhat less than projected in the second and third quarters of
1998 as some Asian infrastructure programs (particularly those undertaken by
European equipment suppliers) remain temporarily on hold.
The ECS order entries and shipments improved throughout the third
quarter of 1998, particularly in the closing weeks, when compared to the second
quarter of 1998. Sequentially, the ECS's third quarter sales were 23.6% higher
than 1998 second quarter sales of $46.2 million. Net of FEE sales included since
July 3, 1998, ECS still posted a sequential-quarter sales increase. This trend
appears to be continuing into the fourth quarter.
- --------
1 The results of the Test & Measurement Products Segment are reported as
discontinued operations in the accompanying financial statements. That Segment
was sold by the Company on June 4, 1997. The sales and operating income, net of
income taxes, of the Test & Measurement Products Segment in 1997 were
approximately $11.8 million and $.3 million prior to the divestiture.
2 The sales of the ECS during the third quarter and first nine months of 1997
include the sales of Netwave Technologies, Inc. ("Netwave"), which were
insignificant. During 1998, the consolidated sales of the Company exclude the
sales of Netwave as the Company reduced its equity interest from 80% to 19% as
of December 31, 1997. The remaining 19% interest was subsequently sold in the
second quarter of 1998.
Page 14 of 23
<PAGE>
The increase of $2.6 million, or 4.8%, in MCS sales from the third
quarter of 1997 to the third quarter of 1998 was due to the acquisition of
certain assets of Metales on July 3, 1998, and stronger sales volume from MCS'
European operations. Sales increased from 1997 despite Hurricane Georges, which
caused substantial damage to the Company's facilities and customer facilities in
Puerto Rico. The Company's plant in Puerto Rico was effectively shut down for
approximately two weeks in late September but resumed operations in early
October.
The 5.9% increase in year-to-date MCS sales from the prior year
reflects those third quarter factors noted above and favorable economic
conditions in 1998 for the construction, automotive and durable goods industries
in North America and most of Western Europe offset by softness in demand for
powder metal products in North America which are generally related to housing
and the General Motors strike in North America. The sales for the MCS in the
first nine months of 1998 also include the effect on sales of AMI Doduco's
German operations of a year-to-date average Deutsche mark-to-dollar exchange
rate that was approximately 4% lower than it was in the comparable period of
1997. As noted above, the European sales and earnings reported by AMI Doduco are
subject to the fluctuating exchange rate between the U.S. dollar and European
currencies, particularly the Deutsche mark.
Cost of Sales
During the third quarter of 1998, the Company's gross margin was 30.8%,
a slight decrease from 32.0% in 1997. On a year-to-date basis, the gross margin
was essentially unchanged at 31.7% in 1998 compared to 31.9% in 1997.
For the third quarter and first nine months of 1998, the gross margins
of the ECS were lower when compared to the same periods in 1997. ECS third
quarter 1998 margins were unfavorably affected by the acquisition of FEE while
the three and nine month periods ended September 30, 1998 are impacted by the
late 1997 addition of operations acquired from Nortel. These most recent
acquisitions are primarily in the telecommunications and power conversion
markets in which components generally have somewhat lower margins than LAN
products. In addition, the softness in the LAN market resulted in lower volumes
of higher margin LAN sales. Also, third quarter ECS margin was affected by
higher than anticipated costs related to completing the standardization of
production activity reporting and conversion of information systems in the
recently acquired operations in Malaysia and Thailand. Partially offsetting
these factors for the year to date results were favorable exchange rates. ECS's
markets are characterized by significant pressure by customers to constantly
reduce prices and the need of ECS to stay ahead of the technology curve. ECS
believes that the product rationalization phase of the Nortel and FEE
acquisitions (i.e. the movement of products to the optimum manufacturing
facility and the concomitant closing of redundant facilities) is less than 25%
complete. While further activities in these areas should have favorable impacts
on gross margins, this may be offset in whole or in part by continued pressure
by customers to reduce prices.
The MCS gross margins for the three and nine month periods ended
September 30, 1998, were essentially unchanged compared to the same periods
ended September 30, 1997. Product mix and the continued integration of the
various businesses in this Segment positively impacted the year-to-date gross
margins. These positive factors were offset by the impact of Hurricane Georges
on the Puerto Rico operations, unabsorbed overhead during the transfer of
certain production from Europe to the United States (part of MCS's on-going
product rationalization activities), and costs associated with the integration
of the operation of certain assets acquired from Metales in July 1998. The
industries served by this Segment remain characterized by aggressive competition
and constant pressure on sales prices resulting from customer's on-going cost
reduction activities.
Page 15 of 23
<PAGE>
Operating Expenses
Total selling, general and administrative expenses for the third
quarter of 1998 were $22.8 million, or 20.2% of sales, compared to $22.4 million
or 22.0% of sales in the comparable 1997 period. For the nine months ended
September 30, 1998 and 1997, total selling, general and administrative expenses
were $63.2 million and $61.9 million, respectively, or 19.2% and 20.7% of sales.
As a percentage of sales, selling, general and administrative expenses during
the third quarter and first nine months of 1998 were lower due to a variety of
factors. The principal factor was the absence of Netwave which negatively
affected selling, general and administrative expenses during 1997. On the other
hand, MCS expenses for the implementation of the SAP enterprise resource
planning tool and on-going personnel recruitment efforts have had a noticeable
impact on the third quarter and nine months administrative and general expenses.
For the quarter and nine months ended September 30, 1998, research,
development & engineering expenses ("RD&E"), which are included in selling,
general and administrative expenses, were $3.0 million (5.2% of sales) and $8.1
million (5.3% of sales) for the ECS and $1.4 million (2.5% of sales) and $4.2
million (2.4% of sales) for the MCS. For the comparative periods in 1997, the
amounts were $2.9 million (6.0% of sales) and $7.8 million (5.9% of sales) for
the ECS and $1.3 million (2.4% of sales) and $4.4 million (2.7% of sales) for
the MCS. While ECS dollar spending in the third quarter and first nine months of
1998 was virtually unchanged from levels in the comparable 1997 periods, the ECS
dollar spending in 1997 includes RD&E at Netwave, which had relatively high RD&E
expenses in relation to its sales. The ECS spending for RD&E actually increased
significantly in 1998 as this Segment continues to invest in new technologies
and related improvements. Neither Segment plans any significant increase nor
reduction in RD&E efforts.
Interest
Net interest expense was approximately $.3 million during the third
quarter of 1998, compared with approximately $.3 million of interest income
during the third quarter of 1997. For the nine months ended September 30, 1998,
net interest expense was approximately $.7 compared to $.2 million in the
comparable period in 1997. The 1998 third quarter interest expense is consistent
with the 1998 second quarter. The 1997 third quarter interest income amount is
reflective of a higher than customary level of funds invested in short-term
deposit instruments as a result of the cash received from the sale of the Test &
Measurement Products Segment on June 4, 1997.
The majority of the Company's credit facilities have variable interest
rates. Accordingly, interest expense may increase if the rates associated with
(or the amounts borrowed under) the Company's credit facilities move higher
during subsequent quarters. In addition, the Company may pursue additional or
alternative credit to finance further growth opportunities in one or both
Segments. The Company may use interest rate swaps or other financial derivatives
in order to manage the risk associated with changes in market interest rates;
however, the Company has not used any such instruments thus far.
Income taxes
The effective income tax rate for continuing operations during the
third quarter of 1998 was 34.9%, consistent with the effective rate of 34.7%
during the comparable prior year period. For the nine months ended September 30,
1998, the Company's effective income tax rate for continuing operations was
37.2%, compared to 35.6% in the prior year period. The year-to-year increase is
due mainly to two factors: 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, and increased earnings in Germany which has a
relatively high corporate income tax rate. In general, the Company continues to
benefit from favorable offshore tax treatments.
Page 16 of 23
<PAGE>
Other issues
Precious Metal
The MCS uses precious metal (primarily silver) in the manufacturing of
electrical contacts, rivets and other products. Historically, the Company has
leased (or taken on consignment) the silver and certain other metals used in its
operations from banks or other financing organizations unrelated to the Company.
The rates paid for leasing or taking precious metals on consignment have
historically been substantially below the alternative financing costs that would
be associated with borrowing the funds necessary to purchase the metals. In
addition, the market risk associated with owning precious metals inventories can
be substantial. As has been the case from time to time in the past, during the
first quarter of 1998, the global demand for silver increased significantly at a
time when the supply of silver decreased significantly and the market price of
silver and the associated leasing costs predictably increased. While the terms
of sale within the MCS provide for sale prices to reflect the current market
value of silver, the degree to which leasing and other associated costs can be
recovered from customers is less certain and is subject to a number of essential
factors including competitive conditions. The Company has thus far been
successful in managing the costs associated with its precious metals and, while
limited amounts have been purchased for use in production during 1998, the vast
majority of its precious metal inventory continues to be leased or held on
consignment. If leasing/consignment fees incurred by the Company increase
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.
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.
The Company's IT systems include central business computing and
ancillary business computing systems, payroll systems and manufacturing systems.
The Company's non-IT systems, those with embedded technology such as
microcontrollers, include time reporting systems, alarm and security systems,
telecommunication systems and electronic data interfaces. The Company has
analyzed the impact of the Year 2000 issues on its systems and is in the process
of addressing the issues raised by its analysis.
The Company's products do not include date-sensitive software or
embedded technology. As a result the Company does not expect to experience
product warranty or return issues relating to the Year 2000 problem.
State of Readiness
As a result of the decentralized segment structure of the Company and
the diversified systems employed by each Segment and the Corporate location, the
Year 2000 issue is managed by each group separately while oversight and status
reviews are performed by Corporate personnel and ultimately, the Audit Committee
and Board of Directors. Corporate, ECS and MCS are in varying stages of
addressing Year 2000 issues. The Company has defined the stages of progress for
Year 2000 readiness as follows: awareness, assessment, renovation, validation
and implementation. Corporate and ECS are in the implementation stages while MCS
is in the assessment and renovation stages.
Page 17 of 23
<PAGE>
Corporate
The IT systems at the Company's Corporate location are primarily
purchased programs. Periodically, these programs are updated to remain current
on new releases. As a result of this updating and discussions with vendors, the
Company believes that internal IT systems used at the Corporate location are
Year 2000 compliant in all material respects.
The Company maintains interfaces with external vendors, including
banks, insurance companies, employee benefit providers and many other parties.
In addition, the Company is dependent on parties such as its transfer agent and
the NYSE to provide for uninterrupted trading of its securities. Based on
discussions with personnel at these highly regulated institutions, the Company
believes these external vendors are or will be Year 2000 compliant, although the
Company has received no such guarantees. In the unlikely event that these
parties experience Year 2000 problems, the consequences to the Company are
unknown.
The use of non-IT systems at Corporate is not critical to the
operations of the Company, however, the Company believes those non-IT systems
are Year 2000 compliant.
ECS
In mid 1997, ECS formed a Year 2000 Working Group to address Year 2000
issues facing this Segment. All of 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 are completed. In
addition, 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 ECS's facilities and
security systems. To the extent problems develop, ECS expects that its IT
department, with the assistance of external consultants, will be able to address
those problems on a timely basis without material expenditures.
Regarding the FEE acquisition, ECS has completed an assessment of Year
2000 issues related to FEE's IT and non-IT systems. Year 2000 issues were
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 first quarter of 1999 without material
expenditures.
ECS is still in the process of contacting vendors and suppliers,
including hardware, software, telecommunications, networking, security, data and
service providers, regarding their company and product Year 2000 compliance
status. To the extent that a supplier is not able to become Year 2000 compliant,
alternative supply sources will be identified, contacted, and their Year 2000
compliance status verified within the next two quarters. The ECS does not expect
that any of its major vendors or suppliers will not be Year 2000 compliant.
Aggregate external costs incurred to address Year 2000 issues have
approximated $350,000. About $250,000 of this amount was paid to consultants and
was 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.
Page 18 of 23
<PAGE>
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 has begun installing a worldwide Enterprise
Resource Planning ("ERP") system which is scheduled to be operational in the
second to third quarter of 1999. MCS is utilizing both internal and external
resources to identify, correct or reprogram, and test both IT and non-IT systems
for Year 2000 compliance. It is anticipated that all reprogramming efforts will
be completed in a time period sufficient to allow for appropriate testing.
The ERP is expected to be installed and operational in Germany and the
U.S. by the Spring of 1999. The project is on schedule and the vendor has
warranted that the software is Year 2000 compliant. This is software which is
not unique to MCS and and is in use in many Fortune 1000 companies. MCS is in
the process of accessing the systems in Mexico to determine the extent of any
Year 2000 issues, but any compliance issues are expected to be immaterial.
A Year 2000 compliance review of manufacturing systems is also
currently underway. 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.
All remaining IT and non-IT systems are expected to be repaired,
reprogrammed or replaced by the end of the first quarter of 1999. The total
costs - incurred and to be incurred - associated with addressing the Year 2000
issues, excluding the costs of implementing the ERP system, are estimated to be
$150,000. Those costs are being expensed as incurred. The cost of implementing
the ERP system is significant to the Company; however, such costs have been
budgeted and approved in the ordinary course of business and are being expensed
or capitalized in accordance with existing Company policy. The most significant
software and licensing costs were paid early in 1998. The ERP project is within
the approved budget and on schedule. While the Company expects that problems
will develop from time to time during the course of the ERP change over, it does
not believe that these problems will have a material adverse effect.
MCS is currently formalizing questionnaires to send to vendors and
customers requesting information regarding Year 2000 compliance. MCS expects to
have completed surveys from suppliers by the end of 1998. The customer survey
process is expected to be completed by April 1999. Corrective action with regard
to non-compliant suppliers will be the identification of alternative supply
sources.
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, MCS's
contingency plans include reverting to existing financial legacy systems that
have been reprogrammed in the U.S. to be Year 2000 compliant and which were Year
2000 compliant in Germany. Non-financial applications would be run manually.
Other 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 was unable to deliver power, or if
a major vendor was unable to deliver product, the operations of the affected
Segment could be disrupted or even completely curtailed. However, in each
Segment, the Company possesses manufacturing facilities and locations which are
more geographically diverse and spread out than any of their competition. This
provides a natural hedge to Year 2000 problems which may affect a certain
supplier or utility. In the unlikely event such failures occurred, they could
materially and adversely affect the Company's results of operations, liquidity
and financial condition. Due to the general uncertainty inherent in the Year
2000 problem, resulting in part from the uncertainty of the Year 2000 readiness
of third-party suppliers and customers, the Company is unable to determine with
complete certainty at this time whether the consequences of Year 2000 failures
will have a material impact on the Company's results of operations, liquidity or
financial condition. Although there can be no assurance that the Company has
identified and corrected, or will identify and correct, every Year 2000 problem
found in IT and non-IT systems, the Company believes that it has programs in
place to identify and correct any such problems and that its actions have
significantly decreased the risks associated with the Year 2000 problem.
Page 19 of 23
<PAGE>
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the
European Union (the "participating countries") are scheduled to establish fixed
conversion rates between their existing sovereign currencies (the "legacy
currencies") and the euro. The euro will then trade on currency exchanges and be
available for non-cash transactions.
Following introduction of the euro, the legacy currencies are scheduled
to remain legal tender in the participating countries as denominations of the
euro between January 1, 1999 and January 1, 2002 (the "transition period").
During this transition period, public and private parties may pay for goods and
services using either the euro or the participating country's legacy currency.
Beginning January 1, 2002, the participating countries will issue new
euro-denominated bills and coins for use in cash transactions. No later than
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, making conversion to the euro
complete.
To ensure that the Company is prepared for the euro, the Company has
been assessing the impact the euro will have on operations and developing plans
to ensure, to the extent possible, the Company's operations will not be
negatively impacted by the euro. On a Company-wide basis, those efforts have
been led by the Corporate Treasurer and have included personnel within the
Company as well as external consultants. At the Segment level, the ECS and the
MCS are at varying stages of addressing issues related to the euro conversion.
The ECS is in the preliminary stages of evaluating the impact of the euro on the
operations located in Ireland and France. The MCS is in the renovation and
implementation stage of addressing system issues related to the euro conversion.
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 the Company's results of
operations, liquidity and financial condition. Due to the general uncertainty
inherent in the conversion to the euro, the Company is unable to determine at
this time whether the consequences of euro conversion failures will have a
material impact on the Company's results of operations, liquidity or financial
condition.
Global Activities
As a diversified global enterprise engaged in manufacturing activities,
certain risks are inherent to the Company's business. One such risk is its
operations in developing countries. The vast majority of the Electronic
Components Segment's manufacturing is performed in developing countries. While
the governments in countries where the Company operates have been quite
receptive to foreign investment for manufacturing, there are no assurances that
these receptive policies will continue and, if they do not continue, that they
will not be replaced by economic, tax and/or labor policies which are less
favorable to a foreign manufacturing presence than are the current policies. If
the government of any country in which the Company has significant operations
should adopt economic, legal, or trading policies harmful to private industry or
foreign investment, or, if a country should take any other action that would
jeopardize the value of foreign investments, it could have a material adverse
effect on the Company.
Contingencies
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 20 of 23
<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
Shareholder Proposals and Business
Shareholders of the Company are entitled to submit
proposals on matters appropriate for shareholder action
consistent with regulations of the Securities and Exchange
Commission ("SEC") and the Company's bylaws. Should a
shareholder wish to have a proposal considered for inclusion
in the proxy statement for the Company's 1999 annual meeting,
under the regulations of the SEC, such proposal must be
received by the Company on or before December 18, 1998.
In connection with the Company's 1999 annual meeting
and pursuant to recently amended SEC Rule 14a-4, if the
shareholder's notice is not received by the Company on or
before February 9, 1999, the Company (through management
proxy holders) may exercise discretionary voting authority
when the proposal is raised at the annual meeting without any
reference to the matter in the proxy statement.
All shareholder proposals and notices should be
directed to the Company's Corporate Secretary at 1210
Northbrook Drive, Suite 385, Trevose, PA 19053.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibit Index is on page 22
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on August 13,
1998, regarding the potential acquisition of GTI Corporation.
Page 21 of 23
<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 to Form 10-K
of security holders for the year ended December 31, 1995,
and to Form 8-A/A dated April 10, 1998
10. Technitrol, Inc. Board of Incorporated by reference to the
Directors Stock Plan Registrant's Definitive Proxy Statement
dated March 27, 1998
27. Financial Data Schedule Electronic Filing Only
- --------------------------------------------------------------------------------
Page 22 of 23
<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)
November 13, 1998 /s/Albert Thorp, III
- --------------------------------- ---------------------------------------
(Date) Albert Thorp, III
Vice President - Finance and
Chief Financial Officer
(Principal Financial Officer)
November 13, 1998 /s/Drew A. Moyer
- --------------------------------- ---------------------------------------
(Date) Drew A. Moyer
Corporate Controller and Secretary
(Principal Accounting Officer)
Page 23 of 23
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Note - EPS information has been prepared in accordance with Statement
of Financial Accounting Standard No. 128, and basic and diluted EPS have been
entered in place of primary and fully diluted, respectively.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 41754
<SECURITIES> 0
<RECEIVABLES> 68755
<ALLOWANCES> 0
<INVENTORY> 62897
<CURRENT-ASSETS> 179371
<PP&E> 131358
<DEPRECIATION> 56699
<TOTAL-ASSETS> 299054
<CURRENT-LIABILITIES> 95219
<BONDS> 28884
<COMMON> 2023
0
0
<OTHER-SE> 165936
<TOTAL-LIABILITY-AND-EQUITY> 299054
<SALES> 328985
<TOTAL-REVENUES> 328985
<CGS> 224738
<TOTAL-COSTS> 224738
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 696
<INCOME-PRETAX> 40201
<INCOME-TAX> 14968
<INCOME-CONTINUING> 25233
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25233
<EPS-PRIMARY> 1.58
<EPS-DILUTED> 1.56
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 67305
<SECURITIES> 0
<RECEIVABLES> 52907
<ALLOWANCES> 0
<INVENTORY> 48809
<CURRENT-ASSETS> 172617
<PP&E> 104476
<DEPRECIATION> 45207
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0
0
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