UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _______________
Commission File No. 1-5375
TECHNITROL, INC.
(Exact name of registrant as specified in Charter)
PENNSYLVANIA 23-1292472
(State of Incorporation) (IRS Employer Identification 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each Exchange on which registered
------------------- -----------------------------------------
Common Stock
par value $.125 per share New York Stock Exchange
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates as of
February 24, 1998 is $581,871,000 computed by reference to the closing price
on the New York Stock Exchange on such date.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of February 24, 1998.
Number of shares outstanding
Title of each class February 24, 1998
- ------------------- -----------------
Common stock 16,135,074
par value $.125 per share
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
DOCUMENT REFERENCE
- ------------------------------------------------ -------------------
The Registrant's definitive Proxy Statement, dated Part III
March 27, 1998, to be used in connection with Page 21 of 48 pages
Registrant's 1998 Annual Meeting of Shareholders
Page 1 of 48
<PAGE>
PART I
ITEM 1 BUSINESS
Business Segment Information
Technitrol, Inc. and its consolidated subsidiaries (collectively the
"Company") segments its business into two areas: Electronic Components and
Metallurgical Components (previously, Metallurgical Products). Management has
chosen to organize the Company based on the products and services provided by
each Segment. Each Segment is managed by a Segment president who reports to
the Chief Executive Officer of the Company. There are no additional operating
Segments which have been aggregated for presentation in this Report. Prior to
June 4, 1997, the Company had a third business Segment, the Test & Measurement
Products Segment. The Company sold its Test & Measurement Products Segment
following an exhaustive evaluation process resulting in the decision to focus
its resources on its core businesses in the Electronic Components and
Metallurgical Components Segments. Prior to its divestiture, the Test &
Measurement Products Segment manufactured a comprehensive range of material
testing systems, force measurement products and weighing devices. The
remaining two business Segments are described in further detail below.
The Electronic Components Segment (the "ECS") designs, manufactures and
markets electronic components and modules primarily for manufacturers of local
area network ("LAN") equipment and telecommunications systems. The ECS
includes the worldwide operations of Pulse Engineering, Inc. ("Pulse"). Pulse
was acquired by the Company on September 29, 1995, and significantly increased
the size of this Segment. Subsequent to the acquisition of Pulse, the
existing operations of the ECS (previously known as the Fil-Mag Group and
Technitrol's Components Division) were combined with Pulse to form a unified
business throughout the world. On November 30, 1997, the Company acquired the
magnetic components business of Nortel (Northern Telecom, Ltd.), including
manufacturing plants in Malaysia and Thailand and a design engineering group
in Canada. This business is being integrated into the operations of Pulse,
further increasing the size of the ECS. During 1997, the ECS also included
Netwave Technologies, Inc. ("Netwave"), a business developing wireless LAN
solutions. Netwave was a majority-owned subsidiary which began operations on
August 30, 1996 when Netwave acquired all of the wireless LAN business assets
of Xircom, Inc. On December 31, 1997, the Company sold a majority of its
ownership interest in Netwave and retained a 19% interest.
The Metallurgical Components Segment (the "MCS") manufactures electrical
contacts and assemblies, contact materials, thermostatic bimetals, clad metal
products and precision contact sub-assemblies for a wide range of industrial
and consumer product manufacturers. The MCS operates its business globally
under the new name AMI Doduco. Prior to the adoption of this name in early
1998, the MCS operated principally under the names of Advanced Metallurgy,
Inc., Chace Precision Metals, Inc. and Doduco GmbH. Doduco GmbH was acquired
in late 1996 and significantly increased the size of the MCS.
The Company's products are sold to customers through its two Segments
described above. All revenues are generally recognized when products are
shipped. The majority of the Company's sales are subject to credit terms
prevalent in the industries it serves. Receivables are provided for or
written off when an account is considered to be doubtful of collection.
Management believes there are no significant concentrations of credit risk
related to its accounts receivable. Depending on its level of cash reserves,
the Company may maintain significant cash investments at certain financial
institutions.
Page 2 of 48
<PAGE>
Business Segment Financial Information (in thousands)
1997 1996 1995
-------- --------- --------
Net sales from continuing operations
Electronic Components $179,772 $142,791 $ 68,358
Metallurgical Components 217,295 100,521 75,304
-------- --------- --------
Total $397,067 $243,312 $143,662
======== ========= ========
Operating profit before income taxes
Electronic Components $ 30,865 $ 22,536 $ 10,698
Metallurgical Components 14,888 4,983 1,846
-------- --------- --------
Total operating profit $ 45,753 $ 27,519 $ 12,544
Items not used in determining the
measure of Segment profit used by
management(1) 1,011 (316) (1,133)
-------- --------- --------
Earnings from continuing operations
before income taxes $ 46,764 $ 27,203 $ 11,411
======== ========= ========
Assets at end of year
Electronic Components $115,467 $ 77,017 $ 77,631
Metallurgical Components 83,023 78,327 34,761
-------- --------- --------
Segment assets $198,490 $155,344 $112,392
Assets of discontinued operations -- 12,307 14,253
Corporate assets and assets not
included in the measure of Segment
assets used by management(2) 56,844 50,696 18,295
-------- --------- --------
Total $255,334 $218,347 $144,940
======== ========= ========
Capital expenditures
Electronic Components $ 11,888(3) $ 5,568(3) $ 23,953(3)
Metallurgical Components 5,928 12,664(4) 2,248
Discontinued operations 322 710 846
-------- --------- --------
Total $ 18,138 $ 18,942 $ 27,047
======== ========= ========
Depreciation and amortization
Electronic Components $ 7,195 $ 5,384 $ 2,430
Metallurgical Components 5,668 3,160 3,149
Discontinued operations 284 579 666
-------- --------- --------
Total $ 13,147 $ 9,123 $ 6,245
======== ========= ========
(1) Items include interest income, interest expense and other non-operating
items as disclosed in the Company's Consolidated Statements of Earnings.
(2) Corporate assets are principally cash and cash equivalents. Assets
excluded from the measurement of Segment assets used by management are
primarily net deferred tax assets.
(3) Includes property, plant and equipment acquired as part of the
acquisitions of the magnetic components business of Nortel, Netwave and
Pulse Engineering, Inc. in 1997, 1996 and 1995, respectively. See Note 2
of Notes to Consolidated Financial Statements.
(4) Includes property, plant and equipment acquired as part of the acquisition
of Doduco GmbH. See Note 2 of Notes to Consolidated Financial Statements.
Page 3 of 48
<PAGE>
No significant intercompany revenue is realized by either business
Segment. Interest income and expense are not included in the measure of
Segment profit reviewed by management. Income taxes are also not included in
the measure of Segment operating profit reviewed by management; however, pro
forma income tax expense amounts are allocated to operating profits for the
determination of certain performance measurement statistics such as return on
employed capital and economic value added. The following disclosure of pro
forma income tax expense amounts for each Segment is based on simplified
assumptions and includes allocations of corporate tax items. Such allocations
are based on the proportionate share of total tax expense for each Segment,
obtained by multiplying the respective Segment's operating profit by the
estimated effective tax rate for the year. The allocated tax expense amounts
for the ECS were (in thousands) $10,022, $6,874 and $3,419 in 1997, 1996 and
1995, respectively. For the MCS, they were (in thousands) $7,656, $2,191 and
$641 in 1997, 1996 and 1995, respectively.
In 1997 and 1996, no customer accounted for more than 10% of the
Company's consolidated sales. In 1995, one customer accounted for slightly
more than 10% of consolidated sales. The customer is a Fortune 150 entity
principally doing business with the MCS. Sales to the Company's ten largest
customers accounted for 24% of sales in 1997, 41% of sales in 1996 and 47% of
sales in 1995.
Geographic Information
There has been no concentration of sales to any particular domestic or
international geographic area. The Company's products are sold domestically
and into many countries throughout the world. The following table includes
the sales to customers attributed to the United States and other countries for
which such sales are individually significant. Sales to countries which are
not individually significant are aggregated into regions. Sales to customers
are attributed to the country to which the sales invoice is addressed. In
most cases, that country also represents the location to which the Company's
product is shipped. (Amounts are in thousands.)
1997 1996 1995
-------- -------- --------
Sales to customers in:
United States $177,701 $155,450 $110,104
European countries other than Germany 97,122 39,834 13,109
Germany 76,026 16,897 2,481
Asia 33,375 17,052 10,575
Other countries in North America 9,945 11,139 5,169
Other 2,898 2,940 2,224
-------- -------- --------
Total $397,067 $243,312 $143,662
======== ======== ========
The following table includes net property, plant and equipment
(representing all relevant long-lived assets of the Company) which are located
in the United States and other countries in which such assets are individually
significant. Net property, plant and equipment in countries which are not
individually significant are aggregated into regions. (Amounts are in
thousands.)
1997 1996 1995
------- ------- -------
Net property, plant and equipment
located in:
United States $18,476 $18,929 $20,652
Germany 12,608 9,640 --
Asian countries other than China 11,818 6,983 6,723
China 11,320 11,496 11,448
Other countries in Europe 5,276 4,579 3,935
Other 165 -- --
Assets of discontinued operations -- 2,511 2,370
------- ------- -------
Total $59,663 $54,138 $45,128
======= ======= =======
Page 4 of 48
Global Activities
As a diversified global enterprise engaged in manufacturing activities,
many of which are located in developing countries in the Asia Pacific region,
certain risks are inherent in the Company's businesses. One such risk
pertains to its operations in developing countries. A significant portion of
the ECS's manufacturing is performed in the People's Republic of China (the
"PRC") and the Philippines. Although the PRC is one of the world's fastest
growing economies, its potential economic, political and labor developments
provide a number of uncertainties and risks. While the current PRC and
Philippine governments 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 less favorable to a foreign manufacturing
presence than are the current policies. If the government of the PRC or the
Philippines (or any other 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.
In addition to the PRC and the Philippines, the Company has manufacturing
operations in Malaysia, Thailand and, to a lesser extent, Taiwan. During
the latter part of 1997, countries in this region of Asia experienced
significant economic difficulty and dramatic currency devaluations. For
various reasons, the most significant of which are discussed within
Management's Discussion and Analysis in Item 7 of Part II of this Report, the
economic difficulty and currency devaluations did not have a negative impact
on the Company during 1997. Management continues to monitor the business
conditions in Asia and in other areas in which the Company operates; however,
the inherent unpredictability of economic forces and government policies in
each country may cause future operating conditions to be different from those
that have been experienced by the Company in recent years.
Sales and Marketing
Sales and marketing are accomplished by sales management, district
managers, direct salesmen, representatives and agents. Within the ECS,
products are sold primarily by the Segment's direct field sales force to
customers in the computer, local area network (LAN) and telecommunication
markets. The field sales personnel are technically trained and actively
involved in product development and customer applications. Customers of the
MCS, which include manufacturers of circuit protection, power control and
power distribution equipment, purchase the Company's products primarily
through this Segment's direct sales employees.
Competition
The businesses of the Company are highly competitive, and with respect to
each of its Segment's products, it faces competition from numerous firms. For
most of the Company's products, the markets are international in nature and
its competition is worldwide.
Backlog
As of December 31, 1997, the Company's backlog of orders was $76.9
million compared to $84.8 million at the end of 1996. The backlog at December
31, 1996, included orders of the Test & Measurement Products Segment which was
sold during 1997. Substantially all of the current backlog is scheduled for
shipment during the first six months of 1998. The Company believes that
backlog levels have become less reliable indicators of future business volume
as customer order patterns have changed and lead times have been reduced
significantly in both business Segments. Most orders are subject to
cancellation upon payment of normal cancellation charges. Normal delivery
time for the Company's products varies depending on the Segment, but is
generally less than thirteen weeks. No material portion of the Company's
business is seasonal in nature.
Page 5 of 48
Raw Materials
None of the Company's Segments is dependent upon any particular source of
supply. However, there are relatively few suppliers of the ferrite materials
used in electronic components, powder metals used in electrical contacts, and
the specialty steel used in metal laminates. The Company has not encountered
any significant difficulties in obtaining adequate supplies of these raw
materials for manufacture of its products. The MCS engages in a business that
utilizes silver and other precious metals as raw material components. These
materials have historically been readily available. However, early in 1998,
the demand for silver increased significantly and the market price of silver
and the associated financing costs also increased. While the terms of sale
within the MCS provide for sales prices to reflect the current market value of
silver, the degree to which financing and other associated costs can be
recovered from customers is less certain. The Company has thus far been
successful in managing the costs associated with its precious metals. If the
terms and conditions under which the Company obtains silver or other precious
metals change significantly in a short period of time, and the Company is
unable to recover costs through increased sales prices for its products, it
could have a negative impact on the future operating results of the Company.
Research and Development
The Company does not engage in any basic research activities.
Development activity is conducted within each Segment principally by that
Segment's engineering personnel and is directed primarily toward the
development of new products related to its current product lines and the
improvement and enhancement of existing products. Although the Company
possesses numerous patents, trademarks and tradenames which are used in the
conduct of its businesses, the Company does not consider its consolidated
earnings to be materially dependent upon any one patent, trademark or license.
Environment
Expenditures required for the Company to meet or exceed Federal, state
and local provisions regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment, are
charged to earnings or capitalized, as appropriate, when incurred and are not
expected to have any material effect on planned capital expenditures, earnings
or the Company's competitive position.
The Company is involved in several matters relating to superfund sites,
none of which belong to the Company. The Company's involvement has generally
arisen from the alleged disposal at these sites by licensed waste haulers of
very small amounts of waste material many years ago. The Company has
established reserves which it believes to be sufficient to cover the aggregate
amount of the ultimate liability, if any, which the Company believes to be
reasonably probable at this time. Such reserves are not material to the
Company's current financial position.
Employees
Certain operations of the Company, particularly in the Asia Pacific
region, are labor intensive. At December 31, 1997, the Company had
approximately 14,400 full time employees compared with 11,200 at the end of
1996. The total number of employees at the end of 1996 included employees of
the Test & Measurement Products Segment. The number of persons employed by
that Segment was not significant to the total employment of the Company.
Energy
The Company did not experience any curtailment of supplies of
electricity, gas or oil in 1997, and does not expect any curtailment in 1998.
Certain developing countries in which the ECS operates may experience short
interruptions of electrical service or other utilities from time to time. The
Company's facilities in those countries generally maintain independent power
supply back-up through the use of generators. As a result of back-up
procedures and other factors, power interruptions in foreign countries have
not had and are not expected to have a material effect on the Company's
results of operations.
Page 6 of 48
<PAGE>
Products
Within each Segment, the primary products sold are similar in design,
material content, production process, application and customer base. Each
Segment is continually changing its individual product offerings in response
to customer needs and changes within the markets served. Further delineation
of its product lines is not meaningful in gaining an understanding of the
Company's business risks and opportunities. The ECS primarily produces
magnetic-based electronic components and modules for use in local area
networking, telecommunications and power-conversion applications. The MCS's
main product offerings are electrical contacts, contact materials,
thermostatic bimetals, precision contact subassemblies and thermostatic clad
metal products.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
Outlook: Issues and Uncertainties
The Company does not provide forecasts of future financial performance.
While the Company's management is optimistic about the Company's long-term
prospects, the following issues and uncertainties, among others, should be
considered in evaluating the Company's prospects for the future.
Rapid Technological Changes
The industry in which the ECS operates is characterized by rapid change,
consolidation, uncertainty and constant new and emerging technologies.
Generally, product life cycles are short. The acceleration of change in
recent years due to the Internet, on-line services and expansion of networking
makes it necessary for the ECS to maintain a strong engineering and
development program to avoid product obsolescence and continue to succeed.
Accordingly, engineering and development expenses are expected to increase and
there are no assurances that the Company's efforts in these areas will
continue to be successful.
Market Growth Rate for ECS Products
The growth rate for the market into which ECS sells its products (LAN,
telecommunication devices and power-conversion products) changes rapidly. It
is difficult to accurately access worldwide demand for upgrades or replacement
of networks or the pace at which telecommunication infrastructure will
progress throughout the world. The markets may counterbalance one another in
terms of growth or they may, at times, move in the same direction. All of
this will impact, positively or negatively, ECS growth.
Housing, Construction and Auto Sales
The growth rates of housing, construction, appliance and auto sales,
which are highly cyclical in the United States and Europe, will impact the
revenue growth of the MCS.
Prices
Future prices which the Company can obtain for its products may decrease
from historical levels, depending on competition and other factors.
Costs of Sales
Cost of sales as a percentage of sales is different for each Segment and,
within each Segment, may vary based on product mix and method of distribution.
Mix factors may increase costs of sales as a percentage of sales in the
future.
Page 7 of 48
Raw Materials
If the Company is unable to obtain sufficient quantities of raw
materials, including precious metals used by the MCS, or if the cost of those
materials increases significantly and is not offset by higher sales prices for
the Company's products, future operating results of the Company could differ
materially from management's expectations. Please refer to the discussion of
raw materials in Item 1 of Part I of this Report.
Integration of Acquisitions
The Company completed the acquisition of Doduco GmbH in October 1996 and
the magnetic components business of Northern Telecom, Ltd. in November 1997.
The degree of success of these acquisitions depends on the Company's ability
to successfully integrate the acquired operations into its existing Segments
and to identify and take advantage of cost reduction opportunities and further
penetrate the market for the products acquired. Integration of acquisitions
may take longer than expected and may never be achieved to the extent
anticipated, resulting in growth which may be less than anticipated or
manufacturing costs which are higher than anticipated. In addition, the
timing, price, structure and success of all acquisitions are inherently
uncertain and unpredictable.
Global Activities
The Company is a multi-national enterprise and as such certain risks
related to its operations in developing countries are inherent to the
Company's business. Please refer to the discussion of global activities in
Item 1 of Part I of this Report.
Other Factors
In addition to the factors discussed above, other factors which could
materially affect actual results are: business conditions and the degree of
optimism affecting the economy generally; competitive factors such as rival
manufacturers seeking increased market share based on price; manufacturing
efficiencies and capacity; the risk of obsolescence due to shifts in market
demand; year 2000 problems related to the computer systems of the Company, its
suppliers or customers (see management's Discussion and Analysis in Item 7 of
Part II of this Report); and the timing of customer hardware and software
introductions.
The Company believes that it has the product offerings, facilities,
personnel and competitive and financial resources for continued business
success, but future events, costs, margins, product mix and profits are all
influenced by inherently unpredictable factors such as those discussed above.
Page 8 of 48
ITEM 2 PROPERTIES
The following properties were owned or leased by the Company at December
31, 1997. Except for the corporate headquarters in Trevose, PA, all
properties are used exclusively in one Segment, as identified. Certain small
locations of the Company, such as regional sales offices, have been excluded
from this listing.
<TABLE>
<CAPTION>
Approx. Owned/ Lease % Used
Location Square Ft. Leased Ending for Mfg. Comments
-------- ----------- ------ ------ -------- ------------------------
<S> <C> <C> <C> <C> <C>
Trevose, PA 6,000 Leased 2001 0 Corporate headquarters
Electronic Components
----------------------
Dongguan, People's
Republic of China 215,000 Leased 2006 95
Bristol, PA 12,000 Leased 2002 0
Tuam, Ireland 60,000 Owned 35
Kaohsiung, Taiwan 45,000 Owned 10 Building is owned; land is
leased through 2003
Cavite, Philippines 59,000 Owned 75 Buildings are owned; land
is leased through 2007
San Diego, CA 68,000 Owned 0 Includes 18,000 sq. feet of
office space leased
through 1999
Greensboro, MD 20,000 Owned 95
Hong Kong 6,000 Leased 1999 0
Sungai Petani, Malaysia 76,000 Owned 60 Building is owned; land is
leased through 2037
Phuket, Thailand 25,000 Owned 75
Metallurgical Components
------------------------
Pforzheim, Germany 490,000 Owned 65
Reidsville, NC 250,000 Owned 70
Sinsheim, Germany 222,000 Owned 55
Export, PA 115,000 Leased 2001 80
Cedar Knolls, NJ 48,000 Owned 65
Luquillo, P.R. 32,000 Owned 80
Madrid, Spain 32,000 Owned 90
Delmont, PA 30,000 Owned 90
McKeesport, PA 23,000 Leased 2004 100
Huchenfeld, Germany 16,000 Leased 1998 100
Lancaster, PA 15,000 Leased 1998 85
Luquillo, P.R. 12,000 Leased 1998 40
</TABLE>
The Company believes its facilities to be adequate for its present needs,
although additional manufacturing capacity may be pursued for certain
products.
Page 9 of 48
ITEM 3 PENDING LEGAL PROCEEDINGS
The Company is a defendant in several lawsuits which it considers to be
in the normal course of business, none of which is expected to have a material
adverse effect on the Company.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NONE
PART II
ITEM 5 MARKET PRICE OF REGISTRANT'S COMMON STOCK AND RELATED SECURITY MATTERS
Technitrol, Inc.'s common stock commenced trading on the New York Stock
Exchange on November 4, 1996, and previously was traded on the American Stock
Exchange. The following table reflects the high and low sales prices on the
relevant Exchange and the dividends paid to shareholders in each quarterly
period during Technitrol's last two fiscal years. The amounts have been
adjusted to reflect the two-for-one stock split effective on February 28,
1997.
QUARTER 1ST 2ND 3RD 4TH
- ------------------- ------ ------ ------ ------
1997 HIGH $24.94 $28.88 $41.00 $43.13
1997 LOW $17.13 $17.88 $27.00 $28.50
1997 DIVIDENDS PAID $.0500 $.0525 $.0525 $.0525
1996 HIGH $14.56 $21.88 $20.81 $20.31
1996 LOW $ 9.56 $13.56 $12.50 $13.69
1996 DIVIDENDS PAID $.0500 $.0500 $.0500 $.0500
As of January 9, 1998, there were approximately 900 holders of record of
Technitrol, Inc.'s common stock (par value $.125 per share), its only class of
stock outstanding.
Page 10 of 48
ITEM 6 SELECTED FINANCIAL DATA (in thousands, except per share data)
1997(a) 1996(a) 1995(a) 1994(a) 1993
-------- -------- -------- -------- -------
Net sales(b) $397,067 $243,312 $143,662 $117,707 $73,310
Net earnings(b) $ 29,086 $ 18,138 $ 7,351 $ 5,180 $ 2,441(c)
Earnings per share(b):
Basic $ 1.81 $ 1.14 $ .57 $ .43 $ .20(c)
Diluted $ 1.80 $ 1.13 $ .56 $ .43 $ .20(c)
Total assets $255,334 $218,347 $144,940 $ 84,755 $58,572
Total long-term debt $ 32,957 $ 41,701 $ 17,125 $ 15,146 $ 5,167
Shareholders' equity $142,375 $103,590 $ 84,761 $ 45,757 $40,294
Net worth per share $ 8.82 $ 6.48 $ 5.41 $ 3.80 $ 3.37
Working capital $ 82,779 $ 74,787 $ 43,242 $ 32,676 $24,056
Current ratio 2.1 to 1 2.1 to 1 2.1 to 1 2.5 to 1 2.8 to 1
Number of shares outstanding:
Weighted average,
including common
stock equivalents 16,137 16,096 13,076 12,030 11,978
Year end 16,135 15,975 15,672 12,042 11,972
Dividends declared
per share $ .210 $ .200 $ .198 $ .188 $ .187
Price range per share:
High $ 43.13 $ 21.88 $ 11.88 $ 8.00 $ 5.06
Low $ 17.13 $ 9.56 $ 6.63 $ 4.94 $ 3.79
(a) The Company acquired the magnetic components business of Nortel in 1997,
Doduco GmbH in 1996, Pulse Engineering, Inc. in 1995 and the Fil-Mag Group
in 1994. See Note 2 to Consolidated Financial Statements.
(b) Amounts reflect continuing operations. See Note 2 to Consolidated
Financial Statements.
(c) Excludes cumulative effect of a change in accounting for income taxes.
Information relating to shares outstanding and per share amounts has been
restated to reflect the two-for-one stock split effective February 28, 1997
and the three-for-one stock split effective September 18, 1994.
Page 11 of 48
<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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% 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.
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.
Page 12 of 48
In 1997, the MCS began a product rationalization effort in which it
identified products which did not fit into its core businesses. These 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). Management expects these efforts to
continue through 1998.
Discontinued Operations
During the first quarter of 1996, the Company sold the assets of its
Products Division (part of the Test & Measurement Products Segment) which
manufactured currency counters and dispensers. In June 1997, the Company
completed the sale of the remainder of its Test & Measurement Products
Segment, which previously 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.
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) with respect to the Company's
results of operations, financial condition and other operational matters.
Words or phrases denoting the anticipated results of future events -- such as
"anticipate," "believe," "estimate," "expect," "will likely," "are expected
to," "will continue," "project," and similar expressions that denote
uncertainty -- are intended to identify such forward-looking statements.
Actual results may differ materially: (1) as a result of risks and
uncertainties identified in connection with those forward-looking statements,
including those factors identified in the section captioned "Commitments and
Contingencies" in Note 8 of the Notes to Consolidated Financial Statements and
those factors set forth elsewhere in this Report under the caption "Business -
Cautionary Statement For Purposes of the 'Safe Harbor' Provisions of the
Private Securities Litigation Reform Act of 1995"; (2) as a result of factors
over which the Company has little or no control, including the strength of
domestic and foreign economies, market growth, competition and certain cost
increases; or (3) if the factors on which the Company's expectations are
based do not prove to be correct. The data herein are published solely for
the information of the Company's shareholders. No statement in this Report is
made for the purpose of inducing the purchase or sale of any security issued
by the Company.
Liquidity and Capital Resources
In June 1997, the Company completed the sale of its Test & Measurement
Products Segment for approximately $34.0 million in cash. Taxes related to the
gain on the sale of the Segment were primarily U.S. income taxes and the
majority of those taxes were paid during the third quarter of 1997. The net
proceeds of the sale were invested in short-term deposit instruments when
received, and approximately $22.5 million of these proceeds were then used in
early December 1997 to purchase the magnetic components business of Nortel.
(See Note 2 of Notes to Consolidated Financial Statements.)
Total working capital at December 31, 1997, was $82.8 million, an increase
of $8.0 million from the working capital of $74.8 million at December 31, 1996.
Worldwide, cash on-hand at December 31, 1997, was $48.8 million.
Page 13 of 48
<PAGE>
Cash Flows from Operating Activities
Cash flow from operations was $23.7 million for the year ended December
31, 1997. This includes the effect of Netwave's operating losses. As noted
below in "Results of Operations," the Company reduced its ownership interest
in Netwave from 80% to 19% on December 31, 1997. The operations of Netwave
will not have a significant impact on the Company's consolidated cash flows in
1998. Accounts receivable increased by $15.4 million during 1997 as a result
of the record sales level of the Company as a whole and increased accounts
receivable at the newly acquired European operations of AMI Doduco. The
Company did not acquire accounts receivable in Germany as part of the Doduco
purchase, and the increase in accounts receivable, along with other elements
of Doduco's working capital requirements, occurred into the first part of
1997. (See Note 2 of Notes to Consolidated Financial Statements.)
Inventories increased by $12.3 million during the year and reflect strong
customer demand, as well as the customer-driven reduction in lead times and
continued push to just-in-time delivery. Accounts payable and accrued
expenses increased significantly in 1997 as a result of the Company's higher
sales and profits, increased inventory level, higher income taxes payable and
increased working capital requirements at AMI Doduco's European operations.
These changes in assets and liabilities are net of the effect of discontinued
operations and do not reflect the acquisition of the magnetic components
business of Nortel.
Cash Flows from Investing Activities
Cash used by investing activities was $6.9 million during 1997. The
proceeds of the sale of the Test & Measurement Products Segment were received
in early June and, for the total year, were offset by payments related to the
Doduco acquisition, the acquisition of the magnetic components business of
Nortel and by the Company's investment in capital equipment and facilities.
Approximately $8.1 million was used for the purchase of Doduco real estate and
for the payment of acquisition expenses previously accrued. Although the
acquisition of Doduco was completed on October 31, 1996, a portion of the real
estate acquired was not transferred until early in 1997 as a result of legal
proceedings and documentation that are customary in Germany.
Cash payments for capital expenditures excluding acquisitions totaled
approximately $13.4 million, or about 3% of revenues, ($18.1 million including
the Nortel acquisition) during 1997. Further capital expenditures are expected
during 1998 for purposes of expanding production capacity and improving the
operating efficiency of the Company's businesses. 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. In addition to operating companies in Europe, the
Company's foreign operations are conducted in Canada, China, 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 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 its credit facilities will be sufficient to
satisfy the Company's cash requirements for the foreseeable future.
Page 14 of 48
<PAGE>
Cash Flows from Financing Activities
Long-term debt repayments in 1997 totaled $19.1 million, comprising a
significant portion of the total cash used in financing activities. Those
repayments relate to the Company's domestic term debt, domestic revolving
credit facility, local debt in Spain (assumed in connection with the
acquisition of Doduco) and its multi-currency facility. Long-term borrowings
of $15.5 million were incurred in 1997 under the Company's multi-currency
facility. The borrowings under that facility at December 31, 1997, were
exclusively denominated in Deutsche marks. The borrowings are expected to
continue to be repaid from the cash flows of AMI Doduco's German operations
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. The net repayments of short-term debt (as shown on
the Consolidated Statement of Cash Flows at December 31, 1997) include
additional interim borrowings and the December 31, 1997, repayment under the
separate line of credit for Netwave, as well as payments made on local debt in
Spain. Under all credit facilities in place at December 31, 1997, the Company
had approximately $53.1 million available for additional borrowing. Dividends
of $3.3 million were paid during 1997. 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.
The Company received $.3 million from the exercise of stock options
during 1997. The options exercised were among those assumed in connection
with the acquisition of Pulse and no new options have been granted by the
Company.
Foreign Currency Effects
During 1997, the Company did not experience any significant foreign
currency gains or losses. However, as a result of denominating a significant
amount of sales in currencies other than the U.S. dollar (and especially the
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. At December 31, 1997, the Deutsche mark
was approximately 14% weaker relative to the dollar than at December 31, 1996.
This currency movement had the effect of lowering the U.S. dollar-reported
amount of sales and profits of AMI Doduco.
During 1997, 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
depreciation of those currencies has not had a significant negative impact on
the results of operations of the Company. For the most part, the Company's
sales originating in those countries, as well as the majority of raw material
purchases, are denominated in U.S. dollars, while expenses in those countries,
particularly labor and overhead, are denominated and paid in local currencies.
As a result, the devaluation of local currencies favorably affects the
Company's profitability by reducing the manufacturing costs paid in those
currencies. Consolidated 1997 sales into Asia were only approximately 8% of
the Company's total sales. Moreover, many of the components that are sold
into Asia are incorporated in devices exported to North America and Europe.
In view of these factors, the Company remains optimistic about its prospects
in the Asia Pacific region and is committed to its presence there over the
long term. The widespread manufacturing presence of the Company in Asia (which
is much broader than that of any of the major competitors of the ECS) has been
a key factor in the success of the Company and management believes that it
will continue to be so in the future. Nevertheless, management of the Company
is aware of the potential seriousness (and inherent unpredictability) of the
current economic situation in Asia and is paying careful attention to related
developments.
Page 15 of 48
<PAGE>
In order to reduce the Company's exposure resulting from currency
fluctuations, the Company may purchase currency exchange forward contracts.
These contracts guarantee a predetermined exchange rate at the time the
contract is purchased. This allows the Company to shift the risk, whether
positive or negative, of currency fluctuations from the date of the contract
to a third party. The only outstanding forward contract at December 31, 1997,
related to an equipment purchase for approximately 116,000 British pounds
sterling. Its impact on the Company's financial statements was immaterial.
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.
New Accounting Pronouncements
In the fourth quarter of 1997, the Company adopted Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standard ("SFAS")
No. 128, "Earnings Per Share." This statement specifies the computation,
presentation and disclosure requirements for earnings per share. Earnings
per share for the Company in prior years have been restated to conform with
this Statement.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The Company elected to implement these new accounting
standards for the year ended December 31, 1997. These standards have no impact
on the results of operations, financial condition or long-term liquidity.
SFAS No. 130 requires that all items required to be recognized as components
of comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. Items that are not
currently included in the Company's statement of earnings, but which are
defined as components of comprehensive income, include currency translation
gains or losses and certain other items which have historically been charged
or credited directly to shareholders' equity. SFAS No. 131 establishes
standards for reporting information about operating Segments in annual
financial statements and requires selected information about operating
Segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company's related disclosures are
included in the sections entitled "Business Segment Information" and
"Geographic Information" in this report. Prior year amounts have been
restated to conform to the presentation required by SFAS No. 130 and SFAS No.
131.
Results of Operations
Sale of the Test & Measurement Products Segment
The results of the Test & Measurement Products Segment are reported as
discontinued operations in the accompanying financial statements. The
Products Division, which was sold during the first quarter of 1996, was
included in the Test & Measurement Products Segment. The divestiture of the
Products Division occurred prior to the Company's decision to divest the
entire Segment, and financial information for the Division had not been
separately reported in previous financial statements. Accordingly, the gain
on the sale of that Division was included in income from continuing
operations. The 1997 sales of the Test & Measurement Products Segment were
approximately $11.8 million prior to the divestiture on June 4, 1997.
Page 16 of 48
Revenues
Sales attributable to continuing operations were $397.1 million, $243.3
million and $143.7 million in 1997, 1996 and 1995, respectively. In 1996,
sales increased by 69.3% over 1995, and 1997 sales further increased by 63.2%
over 1996. The increased sales in 1997 are primarily attributable to the
acquisition of AMI Doduco's European manufacturing operations. In addition,
the ECS made a significant contribution to the record sales during 1997. The
sales increase in 1996 over 1995 was driven by the inclusion of a full year of
operations of Pulse (which was acquired in September 1995) and the significant
demand from Pulse's customers in the local area network ("LAN"),
telecommunication and computer markets. As noted above, this demand continued
into most of 1997 and contributed to the further sales growth during the year.
The sales of the ECS during the fourth quarter of 1996 and the full year
of 1997 include the sales of Netwave which were not significant to the total
sales of the ECS or the Company as a whole. During 1998 and beyond, the
consolidated sales of the Company will not include the sales of Netwave.
In the third quarter of 1997, ECS revenues reached a record level driven
by the higher level of incoming orders during most of the first half of the
year. In this Segment, incoming orders began to decline in the third quarter
of 1997, particularly in the North American LAN market. During the third
quarter of 1996, the sales level in this Segment declined somewhat, reflecting
the lower order rate in the second and part of the third quarter of that year.
That decline in orders (occurring primarily in the United States and to a
lesser extent in Asia at that time) was the result of widely observed
inventory level adjustments and project deferrals occurring within the
industry. While there has been significant sustained growth within the ECS
over a long period of time, sudden changes in customer demand often occur
during a given year. Those changes relate to inventory adjustments,
technology changes (actual and expected), the desire of end users to update
local area networks, new product introductions and other factors. The backlog
of the Segment at December 31, 1997, was approximately 13% lower than the
level at the end of the second quarter, but only about 1% lower than at the
end of 1996. During 1997, the significance of backlog levels as an indicator
of future business activity was reduced as a result of changing customer order
patterns and significantly shorter lead times. The backlog at December 31,
1997, includes orders for the magnetic components business acquired from
Nortel on November 30, 1997.
Total sales of the MCS, which includes AMI Doduco's European operations,
were $217.3 million in 1997 compared with $100.5 million in 1996 and $75.3
million in 1995. As noted above, the European sales reported by AMI Doduco
(which account for the large increase in sales of the Segment) are subject to
the fluctuating exchange rate between the U.S. dollar and European currencies,
particularly the Deutsche mark. European sales for 1997 exceeded management's
earlier expectations and reflected the positive impact of efforts to improve
the overall performance of recently acquired European operations,
notwithstanding the significant strengthening of the dollar against the
Deutsche mark since the beginning of 1997. The integration of the worldwide
operations of the MCS is continuing. The product rationalization plan may
result in revenue decreases for the Segment in the near term of up to $10
million (at current exchange rates and assuming an immediate impact) which may
be largely offset by sales growth of the continuing products of the Segment.
Cost of Sales
During 1997, the Company's gross margin for continuing operations was
32.2%, a slight increase from 31.7% in 1996. The gross margin in 1996
represented an increase from the gross margin of 27.5% in 1995. The gross
margin of the ECS has improved notably in 1997 relative to 1996 and 1995, and
the margin improvement in that Segment has more than offset the impact of the
acquisition of AMI Doduco's European operations and the growth of the MCS
which generally has a lower gross margin than the ECS. In general, long-term
margin improvement is expected in the MCS as the European operations are
integrated with the other operations of the Segment and the product
rationalization plan is completed. Some of this improvement was evidenced in
the results of the MCS during the fourth quarter of 1997, when the MCS had
more favorable operating margins than in any of the first three quarters of
the year. At the same time, however, the industries served by the Segment are
characterized by aggressive competition and constant pressure on sales prices
resulting from on-going customer cost reduction activities.
Page 17 of 48
The favorable cost impact of the relocation of a major portion of the
ECS's manufacturing capacity from Taiwan to the Philippines also contributed
to higher margins in 1997. That relocation occurred during 1996 and also
contributed to the improved margins of 1996 (especially in the second half of
the year) relative to 1995. In both 1997 and 1996, the ECS benefited from
higher volumes and improved manufacturing efficiencies at its production
facilities, particularly in China. While 1997 included one month of activity
of the operations acquired from Nortel, the effect of that activity was
immaterial to the Company's results of operations. During 1998 and beyond,
the ECS may experience some reduction in gross margin percentages, as the
Segment expands into more diversified telecommunication and power-conversion
product lines and pricing competition for the Segment's existing products
becomes more intense within the industry. The ECS continues to devote
considerable efforts to cost reduction activities through selected automation,
worldwide materials sourcing, product design and related activities.
Operating Expenses
Total selling, general and administrative expenses for 1997, 1996 and
1995 were $82.3 million, $49.5 million and $26.9 million, respectively. The
1997 spending represents an increase of 66.0% over 1996 which, in turn, was
84.2% higher than in 1995. As a percentage of sales, these costs were 20.7%
of sales in 1997, 20.4% in 1996 and 18.7% in 1995. In total dollars, the
increases noted above are primarily attributable to the incremental volumes
gained via the significant acquisitions by the Company. Since Pulse was
acquired on September 30, 1995, only one quarter of associated spending was
included in the Company's 1995 results. Similarly, Doduco was acquired at the
end of October in 1996, and a full year of related spending for that operation
is included in the 1997 results. The costs associated with restructuring
certain Far East operations of the ECS were included in the 1996 results.
That Segment's 1996 operating profits were negatively impacted by
approximately $2.1 million of costs related to the shift of production
capacity from Taiwan to the Philippines. During 1997, administrative costs
also reflect the higher spending required to support the higher level of sales
and increased global activities of the Company. These costs include
substantial tax and related consulting costs (principally related to the Asia
Pacific region), increased levels of administrative support at both the
corporate and Segment level, as well as significant travel expenses related to
business development opportunities and the investigation of capacity expansion
options in various countries.
During 1997, operating expenses attributable to Netwave increased at a
rate substantially higher than revenue growth of that business and the losses
incurred by that product line are included in the results of the ECS.
Although management of the Company believes that the market opportunity with
respect to wireless LAN continues to appear attractive, the time frame, effort
and investment required to achieve acceptable returns exceeded original
expectations and the Company decided to sell a majority of its interest in
Netwave prior to the end of 1997. The sale did not have any material impact
on the Company's financial position or results of operations. The Company
retains a 19% ownership interest in Netwave. The carrying value of the
remaining investment in Netwave in the Company's financial statements is based
on cost, but is subject to value impairment analysis by the Company on an
ongoing basis. Its carrying value at December 31, 1997, was immaterial.
In 1997, research, development & engineering expenses ("RD&E"), which are
included in general and administrative expenses, were $10.6 million for the
ECS and $5.8 million for the MCS. For the ECS, the comparable amounts were
$6.6 million in 1996 and $2.6 million in 1995. For the MCS, RD&E spending was
$2.4 million in 1996 and $1.8 million in 1995. These amounts include
expenditures for new product development and for product and process
improvements. RD&E expenses have increased in 1997 relative to 1996, and
further increases may occur, particularly in the ECS, as the importance of new
product development is recognized throughout the Company.
Page 18 of 48
Interest
Interest expense amounts were approximately $2.4 million, $1.2 million,
and $1.4 million, in 1997, 1996 and 1995, respectively. Additional borrowings
were made late in 1996 in connection with the acquisition of Doduco. These
additional borrowings caused the interest charge to increase for the Company
during 1997. Borrowings were also made in connection with the acquisition of
Pulse in 1995. However, as a result of the positive cash flow from operations
and the cash received from the sale of the Test & Measurement Products Segment
on June 4, 1997, the Company has also had a much higher than historical level
of funds invested and the earnings on those short-term deposit instruments
have generated correspondingly higher amounts of interest income. Interest
income decreased very late in 1997 after cash was consumed to complete the
acquisition of the magnetic components business of Nortel. Interest income
amounts were $2.5 million, $.9 million and $.3 million during 1997, 1996 and
1995, respectively. 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. 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 1997 was
37.8%, compared to effective rates of 33.3% in 1996 and 35.6% in 1995. The
increase in the Company's effective tax rate for 1997 reflects the additional
taxable income of AMI Doduco's operations in relatively high-rate
jurisdictions, particularly Germany. The increase during 1997 has been
somewhat less pronounced than expected, however, as a result of higher
earnings in various tax-free and low-tax jurisdictions in which the ECS
operates.
Other issues
The MCS uses precious metal in the manufacturing of electrical contacts,
rivets and other products. Silver in particular is a primary component of
many products produced by the MCS. Historically, the Company has leased 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
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 and carrying costs
associated with owned precious metals inventories can be substantial. Early
in 1998, the 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. 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. 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
these costs through higher sale prices for its products, it could have a
negative impact on the Company's results of operations and liquidity.
Page 19 of 48
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 recently began
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 by early 1999,
allowing 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 has begun to make 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 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -
NOT APPLICABLE
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements, notes to the
consolidated financial statements, together with the opinion of the Company's
independent auditors and the supplementary financial information required by
this item are attached hereto and made part hereof.
ITEM 9 DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - NONE
Page 20 of 48
<PAGE>
PART III
CROSS REFERENCE INDEX
FORM 10-K
ITEM NUMBER AND CAPTION INCORPORATED MATERIAL
---------------------------- -----------------------------
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, REGISTRANT'S DEFINITIVE PROXY
PROMOTERS & CONTROL PERSONS STATEMENT
ITEM 11 EXECUTIVE COMPENSATION REGISTRANT'S DEFINITIVE PROXY
STATEMENT
ITEM 12 SECURITY OWNERSHIP OF CERTAIN REGISTRANT'S DEFINITIVE PROXY
BENEFICIAL OWNERS AND STATEMENT
MANAGEMENT
ITEM 13 CERTAIN RELATIONSHIPS AND REGISTRANT'S DEFINITIVE PROXY
RELATED TRANSACTIONS STATEMENT
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Earnings - Years ended December 31, 1997,
1996 and 1995
Consolidated Statements of Cash Flows - Years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity - Years
ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Financial Statement Schedules
Schedule II, Valuation and Qualifying Accounts
(b) Reports on Form 8-K
None
(c) Exhibits
(21) Subsidiaries of the Registrant
(23) Consent of Certified Public Accountants
(27) Financial Data Schedule (electronic filing only)
Page 21 of 48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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.
By /s/Thomas J. Flakoll
------------------------------------
Thomas J. Flakoll
Chief Executive Officer and Director
Date March 18, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/Stanley E. Basara By /s/Drew A. Moyer
--------------------------- ----------------------------------
Stanley E. Basara Drew A. Moyer
Director Corporate Controller and Secretary
(Principal Accounting Officer)
Date March 18, 1998 Date March 18, 1998
By /s/John E. Burrows, Jr. By /s/James M. Papada, III
--------------------------- ----------------------------------
John E. Burrows, Jr. James M. Papada, III
Director Chairman of the Board of Directors
Date March 18, 1998 Date March 18, 1998
By /s/J. Barton Harrison By /s/Albert Thorp, III
--------------------------- ----------------------------------
J. Barton Harrison Albert Thorp, III
Director Vice President - Finance and Chief
Financial Officer
(Principal Financial Officer)
Date March 18, 1998 Date March 18, 1998
By /s/Roy E. Hock
---------------------------
Roy E. Hock
Director
Date March 18, 1998
By /s/Graham Humes
---------------------------
Graham Humes
Director
Date March 18, 1998
By /s/Edward M. Mazze
---------------------------
Edward M. Mazze
Director
Date March 18, 1998
Page 22 of 48
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Earnings - Years ended December 31, 1997,
1996 and 1995
Consolidated Statements of Cash Flows - Years ended December 31, 1997,
1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity -
Years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
Page 23 of 48
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Technitrol, Inc.:
We have audited the consolidated financial statements of Technitrol, Inc. and
subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Technitrol, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
February 27, 1998
Page 24 of 48
<PAGE>
TECHNITROL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
In thousands, except for share data
Assets 1997 1996
------ ---- ----
Current assets:
Cash and cash equivalents $ 48,803 $ 43,531
Trade receivables, net 53,990 46,537
Inventories 50,623 48,028
Prepaid expenses and other current assets 3,995 4,530
-------- --------
Total current assets 157,411 142,626
Property, plant and equipment 106,803 96,792
Less accumulated depreciation 47,140 42,654
-------- --------
Net property, plant and equipment 59,663 54,138
Deferred income taxes 7,582 6,834
Excess of cost over net assets acquired, net 29,571 13,851
Other assets 1,107 898
-------- --------
$255,334 $218,347
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt $ 2,025 $ 2,024
Notes payable -- 2,911
Accounts payable 11,319 11,694
Accrued expenses 61,288 51,210
-------- --------
Total current liabilities 74,632 67,839
Long-term liabilities:
Long-term debt, excluding current installments 30,932 39,677
Other long-term liabilities 7,395 7,241
Commitments and contingencies (Note 8)
Shareholders' equity:
Common stock: 75,000,000 and 30,000,000 shares
authorized in 1997 and 1996, respectively;
16,135,074 and 15,974,918 outstanding in 1997
and 1996, respectively; $.125 par value per share
and additional paid-in capital 43,148 40,638
Retained earnings 101,800 64,339
Other (2,573) (1,387)
-------- --------
Total shareholders' equity 142,375 103,590
-------- --------
$255,334 $218,347
======== ========
See accompanying Notes to Consolidated Financial Statements.
Page 25 of 48
<PAGE>
TECHNITROL, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended December 31, 1997, 1996 and 1995
In thousands, except per share data
1997 1996 1995
---- ---- ----
Net sales $397,067 $243,312 $143,662
Cost of sales 269,050 166,246 104,222
-------- -------- --------
Gross profit 128,017 77,066 39,440
Selling, general and administrative expenses 82,264 49,547 26,896
-------- -------- --------
Operating profit 45,753 27,519 12,544
Other income (expense):
Interest income 2,469 948 272
Interest expense (2,387) (1,162) (1,381)
Other, net 929 (102) (24)
-------- -------- --------
1,011 (316) (1,133)
-------- -------- --------
Earnings before income taxes 46,764 27,203 11,411
Income taxes (17,678) (9,065) (4,060)
-------- -------- --------
Net earnings from continuing operations 29,086 18,138 7,351
Discontinued operations, net of
income taxes:
Earnings from operations of the Test &
Measurement Products Segment 258 2,289 1,989
Gain on disposal 11,502 -- --
-------- -------- --------
Net earnings $ 40,846 $ 20,427 $ 9,340
======== ======== ========
Earnings per share from continuing
operations:
Basic $ 1.81 $ 1.14 $ .57
======== ======== ========
Diluted $ 1.80 $ 1.13 $ .56
======== ======== ========
Net earnings per share:
Basic $ 2.54 $ 1.28 $ .72
======== ======== ========
Diluted $ 2.53 $ 1.27 $ .71
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
Page 26 of 48
<PAGE>
TECHNITROL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
In thousands
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net earnings $40,846 $20,427 $ 9,340
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
Depreciation and amortization 13,147 9,123 6,245
Benefit from deferred taxes (748) (2,702) (1,098)
Gain on sale of Products Division
assets -- (1,471) --
Gain on sale of Test & Measurement
Products Segment (11,502) -- --
Changes in assets and liabilities net
of effect of acquisitions and
divestitures:
Accounts receivable (15,440) (10,777) 1,346
Inventories (12,329) 6,991 (2,769)
Accounts payable 1,633 2,634 1,216
Accrued expenses 9,406 1,734 1,704
Other, net (1,279) (332) 2,195
------- ------- -------
Net cash provided by operating
activities 23,734 25,627 18,179
------- ------- -------
Cash flows from investing activities:
Proceeds from the sale of discontinued
operations, net of cash sold and
expenses paid 32,362 3,671 --
Acquisitions, net of cash acquired (26,514) (11,677) (5,872)
Capital expenditures, exclusive
of acquisitions (13,447) (7,775) (5,864)
Proceeds from sale of property,
plant and equipment 668 466 158
------- ------- -------
Net cash used in investing activities (6,931) (15,315) (11,578)
------- ------- -------
Cash flows from financing activities:
Principal payments on long-term debt (19,093) (9,023) (7,022)
Net borrowings (repayments) of
short-term debt (2,911) 520 (756)
Proceeds of long-term borrowings 15,536 30,233 9,000
Dividends paid (3,336) (3,182) (2,534)
Proceeds from exercise of stock options 317 2,090 --
Purchase of Technitrol stock -- (1,022) --
Contributions from minority interest
in subsidiary 100 100 --
------- ------- -------
Net cash provided by (used in)
financing activities (9,387) 19,716 (1,312)
Net effect of exchange rate changes on cash (2,144) (391) (111)
------- ------- -------
Net increase in cash and cash equivalents 5,272 29,637 5,178
Cash and cash equivalents at beginning
of year 43,531 13,894 8,716
------- ------- -------
Cash and cash equivalents at end of year $48,803 $43,531 $13,894
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
Page 27 of 48
<PAGE>
<TABLE>
<CAPTION>
TECHNITROL, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1997, 1996 and 1995
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, 1995 6,021 $ 5,325 $41,472 $ (573) $ (467)
Stock issued 1,785 29,232 -- -- --
Stock options, awards and
related compensation 30 3,513 35 (137) --
Tax benefit of stock compensation -- 60 -- -- --
Currency translation adjustments -- -- -- -- (293) $ (293)
Net earnings -- -- 9,340 -- -- 9,340
-------
Comprehensive income -- -- -- -- -- $ 9,047
=======
Dividends declared ($.198 per share) -- -- (2,746) -- --
------- ------- ------- ------- -------
Balance at December 31, 1995 7,836 $38,130 $48,101 $ (710) $ (760)
======= ======= ======= ======= =======
Purchase of common stock (37) (5) (1,017) -- --
Stock options, awards and
related compensation 189 968 19 (90) --
Tax benefit of stock compensation -- 1,545 -- -- --
Currency translation adjustments -- -- -- -- 173 $ 173
Net earnings -- -- 20,427 -- -- 20,427
-------
Comprehensive income -- -- -- -- -- $20,600
=======
Dividends declared ($.20 per share) -- -- (3,191) -- --
Two-for-one stock split declared
in February 1997 7,987 -- -- -- --
------- ------- ------- ------- -------
Balance at December 31, 1996 15,975 $40,638 $64,339 $ (800) $ (587)
======= ======= ======= ======= =======
Stock options, awards and
related compensation 160 1,354 -- (378) --
Tax benefit of stock compensation -- 1,156 -- -- --
Currency translation adjustments -- -- -- -- (808) $ (808)
Net earnings -- -- 40,846 -- -- 40,846
-------
Comprehensive income -- -- -- -- -- $40,038
Dividends declared ($.21 per share) -- -- (3,385) -- --
------- ------- ------- ------- -------
Balance at December 31, 1997 16,135 $43,148 $101,800 $(1,178) $(1,395)
======= ======= ======= ======= =======
<FN>
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
Page 28 of 48
<PAGE>
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Technitrol,
Inc. (the "Company") and all of its subsidiaries. All material intercompany
accounts and transactions are eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include funds invested in a variety of liquid
short-term investments with a maturity of three months or less.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method. In addition to the
inventories included in the accompanying balance sheets, the Company has
custody of inventories under consignment-type leases from suppliers
($38,416,000 at December 31, 1997, and $34,391,000 at December 31, 1996).
This inventory consists primarily of precious metals which are used in the
Company's metallurgical component manufacturing business.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is based
upon the estimated useful life of the assets on both the accelerated and the
straight-line methods. The estimated useful lives range from 5 to 30 years
for buildings and improvements and from 3 to 10 years for machinery and
equipment. Expenditures for maintenance and repairs are charged to operations
as incurred, and major renewals and betterments are capitalized. Upon sale or
retirement, the cost of the asset and related accumulated depreciation are
removed from the balance sheet, and any resulting gains or losses are included
in earnings.
Excess of Cost over Net Assets
Excess of cost over net assets acquired is related to acquisitions within
the Electronic Components Segment ("ECS") and is amortized on a straight-line
basis over 15 years. The recoverability of its carrying value is evaluated on
a recurring basis by determining whether the amortization of its remaining
balance can be recovered through future operating undiscounted cash flows of
the acquired operation.
Foreign Currency Translation
Certain foreign subsidiaries of the Company use the U.S. dollar as the
functional currency and others use a local currency. For subsidiaries using
the U.S. dollar as the functional currency, monetary assets and liabilities
are translated at year-end exchange rates while non monetary items are
translated at historical rates. Income and expense accounts are translated at
the average rates in effect during the year, except for depreciation and cost
of sales, which are translated at historical rates. Gains or losses from
changes in exchange rates are recognized in earnings in the year of
occurrence. For entities using a local currency as the functional currency,
net assets are translated at year-end rates while income and expense accounts
are translated at average exchange rates. Adjustments resulting from these
translations are reflected directly in shareholders' equity.
(continued)
Page 29 of 48
<PAGE>
2
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
Financial Instruments and Derivative Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable,
short-term borrowings, accounts payable and accrued expenses are a reasonable
estimate of their fair value due to the short-term nature of these
instruments. The carrying value of long-term debt approximates its fair value
after taking into consideration current rates offered to the Company for
similar debt instruments of comparable maturities. The fair values of
financial instruments have been determined through information obtained from
quoted market sources and management estimates. The Company does not hold or
issue financial instruments or derivative financial instruments for trading
purposes.
The Company is exposed to market risk from changes in interest rates,
foreign currency exchange rates and precious metal prices. To modify the risk
from these changes, the Company periodically enters into hedging transactions
which have been authorized pursuant to the Company's policies and procedures.
To date, such transactions have been limited to foreign currency forward
exchange contracts, but in the future these transactions may also be related
to interest rates or precious metal prices. The contracts used during the
year hedge certain foreign currency denominated receivables and payables and
foreign currency commitments. Gains and losses on these contracts are
deferred and recognized as part of the cost of the underlying transaction
being hedged. There was one contract open at December 31, 1997, and none open
at December 31, 1996. The outstanding forward contract at December 31, 1997,
related to an equipment purchase for approximately 116,000 British pounds
sterling. Its impact on the Company's financial statements was immaterial.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions may affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Reclassifications
Certain amounts in the prior year financial statements have been
reclassified to conform with the current-year presentation.
(2) Acquisitions and Divestitures
Acquisitions
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.
(continued)
Page 30 of 48
<PAGE>
3
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(2) Acquisitions and Divestitures, continued
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, 1996, 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).
Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
Net sales $430,242 $281,312
Net earnings $30,275 $20,435
Diluted earnings per share $1.88 $1.27
Doduco GmbH: On October 31, 1996, the Company acquired certain operating
assets of the metallurgical business of Doduco GmbH located in Germany, as
well as all of the capital stock of Doduco Espana located in Madrid, Spain.
Doduco produces electrical contacts, contact materials, thermostatic bimetals,
and precision contact sub-assemblies made from precious and non-precious
metals by wrought as well as powdered metallurgical processes. Its contact-
producing operations are complemented by broad capabilities in electroplating
and precious metals refining.
The assets purchased consist of real property in Pforzheim and Sinsheim,
Germany and Madrid, inventories, fixed assets and intangibles. The
liabilities assumed consisted of vacation and bonus payments due to employees.
The acquisition of Doduco was accounted for by the purchase method of
accounting. The purchase price for the assets acquired was approximately
$20.5 million, including transaction expenses. In addition, the Company
entered into consignment-type leases with third-party leasing companies for
approximately $19.0 million of precious metals previously owned by Doduco and
used in its operations. The conditions of the leases are essentially the same
as those of the leases previously in effect elsewhere within the Company's
MCS. The fair value of the net assets acquired approximated $89 million. The
purchase price was funded primarily by bank credit provided under a $30.0
million multi-currency temporary acquisition facility which was substantially
refinanced with a $40.0 million permanent multi-currency facility.
(continued)
Page 31 of 48
<PAGE>
4
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(2) Acquisitions and Divestitures, continued
Doduco experienced significant financial difficulty for a number of years
and entered into bankruptcy during June of 1996 and Receivership in August of
1996. The assets of Doduco which were acquired by the Company were acquired
from a Receiver and, prior to the Company's purchase of those assets, other
isolated assets and product lines of Doduco were sold or abandoned by Doduco
or the Receiver. In addition, significant restructuring occurred after
December 31, 1995, which related to both the product lines acquired by the
Company as well as those otherwise disposed of or abandoned by the Receiver.
The net assets acquired by the Company relate to product lines and operations
which were not operated as a separate business entity but rather were an
integral part of Doduco GmbH and its subsidiary, Doduco Espana. As a result,
management of the Company does not believe that the following unaudited pro
forma financial information, which includes discontinued operations and
assumes that Doduco was acquired on January 1, 1995, is indicative of the
results that actually would have occurred if the acquisition had been
consummated on the date indicated or which may be attained in the future (in
thousands, except for earnings per share).
Year Ended Year Ended
Dec. 31, 1996 Dec. 31, 1995
------------- -------------
Net sales $407,475 $352,311
Net earnings $23,567 $10,152
Diluted earnings per share $1.46 $.78
Pulse Engineering, Inc.: On September 29, 1995, the Company completed
the acquisition of Pulse Engineering, Inc. ("Pulse"). Pulse, headquartered in
San Diego, California, and with operations at the time of acquisition in Hong
Kong, the People's Republic of China and Ireland, designs, manufactures and
markets electronic components and modules primarily for manufacturers of local
area networks and telecommunications systems.
The acquisition was accounted for by the purchase method of accounting.
The total purchase price approximated $60.6 million and consisted of cash paid
to the former Pulse stockholders, stock issued to the former Pulse
stockholders, stock options assumed, and related acquisition costs. The fair
value of the assets acquired and liabilities assumed approximated $65.5
million and $17.4 million, respectively. The excess of cost over net assets
acquired approximated $12.5 million. Approximately 3,570,000 shares of
Technitrol common stock at a fair market value of $8.19 per share were issued
to former holders of Pulse common stock. (These amounts are restated to
reflect the two for one stock split on February 28, 1997). The cash portion
of the purchase price, including cash paid to the former stockholders of Pulse
and related acquisition costs, was approximately $27.6 million. In addition,
all outstanding options to purchase Pulse common stock were assumed by the
Company. At the date of acquisition, approximately 538,000 shares of
Technitrol common stock were issuable upon exercise of such options and,
except for approximately 66,000 options which were not yet vested, all assumed
options were exercisable immediately at prices ranging from $.87 to $7.81. At
December 31, 1997, there were 55,775 options which remained outstanding. The
options have various expiration dates, the latest of which is in April 2001.
In conjunction with the Pulse acquisition, the Company established a
credit facility with a group of banks which authorized Technitrol to borrow up
to $50.0 million on an unsecured basis. The Company initially used
approximately $18.0 million of this credit facility to refinance existing
indebtedness and, separately, approximately $4.0 million of the credit
facility to partially fund the cash portion of the merger consideration. On
December 29, 1995, the credit facility was amended in conjunction with a
partial repayment, and the total facility was reduced to $45.0 million,
including $10.0 million under a fixed-rate term loan and a $35.0 million
variable-rate revolving credit facility.
(continued)
Page 32 of 48
<PAGE>
5
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(2) Acquisitions and Divestitures, continued
Divestitures
Test & Measurement Products Segment: On June 4, 1997, the Company
completed the sale of the companies that formed its Test & Measurement
Products Segment to an affiliate of Ametek, Inc. for approximately $34.0
million in cash, and a resulting gain of approximately $11.5 million (net of
income taxes of approximately $11.1 million) was realized in the second
quarter of 1997. Transaction expenses were paid by the Company from the gross
proceeds of the sale and are reflected in the net gain realized on the sale.
As a result of the foregoing, the Company discontinued its manufacturing and
marketing of test & measurement products and the Test & Measurement Products
Segment is reported as a discontinued operation in the accompanying
Consolidated Statements of Earnings and in these Notes to Consolidated
Financial Statements. Where applicable, prior-year amounts have been restated
to exclude the effect of the discontinued operations. The net assets of the
Segment consisted primarily of accounts receivable, inventories and fixed
assets, net of accounts payable and other accrued operating expenses. The
sales of this Segment were approximately $11.8 million in 1997 prior to the
divestiture and were $30.8 million in 1996 and $32.8 million in 1995.
On February 27, 1996, the Company sold certain assets of its Products
Division to an unrelated party. As a result of the sale, the Company
discontinued its production and marketing of document counters and dispensers.
The divestiture of the Products Division, which was included in the Test &
Measurements Products Segment, occurred prior to the Company's decision to
divest the entire Segment, and financial information for the Products Division
had not been separately reported in previous financial statements.
Accordingly, its operating results and the gain on the sale of that Division
were previously included in income from continuing operations. Those items
have been reclassified and are now included as a part of the discontinued
operations. The earnings from operations of the Test & Measurement Products
Segment for the year ended December 31, 1996, include a gain of approximately
$699,000 (net of income taxes of approximately $772,000) realized on the
disposal of the Products Division.
The impact of the divestiture on earnings per share was as follows:
Year Ended December 31
-------------------------
1997 1996 1995
------ ------ ------
Earnings per share from continuing operations:
Basic 1.81 1.14 .57
Diluted 1.80 1.13 .56
Discontinued operations, net of tax:
Earnings per share from operations -
basic and diluted .02 14 .15
Gain per share on disposal - basic and diluted .71 -- --
Earnings per share
Basic 2.54 1.28 .72
Diluted 2.53 1.27 .71
(continued)
Page 33 of 48
<PAGE>
6
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(2) Acquisitions and Divestitures, continued
Netwave Technologies, Inc.: On August 30, 1996, a then majority-owned
subsidiary of the Company, Netwave Technologies, Inc. ("Netwave"), completed
the purchase of all of the wireless local area network business assets of
Xircom, Inc. The Company's ownership interest of Netwave during most of 1997
was 80%. On December 31, 1997, the Company sold a majority of its ownership
interest in Netwave to Netwave. The Company retained a 19% interest.
(3) Financial Statement Details
The following provides details for certain financial statement captions
at December 31, 1997 and 1996 (in thousands):
1997 1996
---- ----
Inventories
Finished goods $ 18,897 $16,513
Work in progress 11,852 14,641
Raw materials and supplies 19,874 16,874
-------- -------
$ 50,623 $48,028
======== =======
Property, plant and equipment, at cost
Land $ 4,036 $ 3,714
Buildings and improvements 25,437 25,036
Machinery and equipment 77,330 68,042
-------- -------
$106,803 $96,792
======== =======
Accrued expenses
Income taxes payable $ 23,538 $ 9,853
Dividends payable 847 799
Accrued compensation 11,398 5,759
Accrual for purchase of Doduco real estate -- 7,720
Other accrued expenses 25,505 27,079
-------- -------
$ 61,288 $51,210
======== =======
(continued)
Page 34 of 48
<PAGE>
7
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(4) Notes Payable and Long-term Debt
Prior to the December 31, 1997, sale of its majority interest in Netwave,
the Company guaranteed the borrowings of Netwave under a line of credit with a
domestic bank. At December 31, 1996, a total of $520,000 was outstanding under
the line of credit. The borrowings increased in 1997 prior to the Company's
repayment of all outstanding borrowings on December 31, 1997.
At December 31, 1997 and 1996, long-term debt was as follows (in thousands):
1997 1996
---- ----
Bank Loans
Fixed-rate term loan (6.65%) due December 29, 2000 $ 6,000 $ 8,000
Variable-rate revolving credit facility with
$35.0 million maximum draw, due September 29, 1998 -- 6,439
Variable-rate (LIBOR plus 0.625%) multi-currency bank
loan facility with $40.0 million maximum draw, due
December 31, 2001 (4.34% rate at December 31, 1997) 26,879 24,028
Long-term debt in Spain (denominated in pesetas)
repaid in 1997 -- 3,132
------- -------
Total bank loans 32,879 41,599
Mortgage Notes, secured by mortgages on land,
buildings, and certain equipment:
4.5% mortgage notes, due in monthly
installments until 2000 78 102
------- -------
Total long-term debt 32,957 41,701
Less current installments 2,025 2,024
------- -------
Long-term debt excluding current installments $30,932 $39,677
======= =======
At the Company's option, interest on the revolving credit facility may be
based on the prime rate or on the LIBOR rate plus 0.625%. Outstanding
borrowings under the Company's multi-currency facility consist entirely of
Deutsche marks.
(continued)
Page 35 of 48
<PAGE>
8
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(4) Notes Payable and Long-term Debt, continued
Principal payments due within the next five years are as follows (in
thousands):
1998 $ 2,025
1999 2,026
2000 2,027
2001 26,879
2002 --
The Bank Loan facilities are unsecured and contain certain covenants
requiring maintenance of minimum net worth and other customary and normal
provisions. The Company is in compliance with all such covenants.
(5) Research, Development and Engineering Expenses
Research, development and engineering expenses ("RD&E") are included in
selling, general and administrative expenses and were $16.4 million, $9.0
million, and $4.4 million in 1997, 1996, and 1995, respectively, for
continuing operations. RD&E includes costs associated with new product
development, product and process improvement, engineering follow-through
during early stages of production, design of tools and dies, and the
adaptation of existing technology to specific situations and customer
requirements. The research and development component of RD&E, which generally
includes only those costs associated with new technology, new products or
significant changes to current products or processes, was $7.2 million, $5.6
million, and $3.3 million, in 1997, 1996, and 1995, respectively.
(6) Restructuring Charges
Restructuring and related costs are recognized in accordance with
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." During the second quarter of
1996, the Company initiated a restructuring plan aimed at reducing the costs
of manufacturing within its ECS. Accordingly, reserves were established for
employee separation costs related to the relocation of a majority of the
production capacity of the Company's production facility in Taiwan to the
Company's production facility in the Philippines. Charges of $2,108,000 were
included in selling, general and administrative expenses for 1996.
Substantially all required payments were made prior to December 31, 1996, and
no material provision existed at the end of that year. A total of 263 direct
and 46 indirect employees were included in the restructuring plan.
(7) Income Taxes
Earnings before income taxes were as follows (in thousands):
1997 1996 1995
------- ------- -------
Domestic $23,306 $ 8,350 $ 1,941
Non U.S. 46,537 22,666 12,600
------- ------- -------
Total $69,843 $31,016 $14,541
======= ======= =======
Earnings attributable to continuing operations were $46,764, $27,203 and
$11,411 in 1997, 1996 and 1995, respectively.
(continued)
Page 36 of 48
<PAGE>
9
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(7) Income Taxes, continued
Income tax expense was as follows (in thousands):
1997 1996 1995
---- ---- ----
Current:
Federal $14,080 $ 7,310 $ 2,019
State and local 2,214 1,029 651
Non-U.S. 13,451 5,014 3,629
------- ------- -------
29,745 13,353 6,299
Deferred (benefit) (748) (2,702) (1,098)
------- ------- -------
$28,997 $10,651 $ 5,201
======= ======= =======
Income tax expense amounts attributable to continuing operations were (in
thousands) $17,678, $9,065 and $4,060 in 1997, 1996 and 1995, respectively.
Income tax expense amounts of $11,319, $1,586, and $1,141 for 1997, 1996 and
1995, respectively, are included in the results of discontinued operations.
Amounts credited to Additional Paid-In Capital include the tax benefit of
certain components of employee compensation related to the Company's common
stock. Such items include dividends paid on restricted stock, the change in
value from the award date to the release date of restricted stock which was
released during the period, and employee compensation related to the exercise
of stock options.
A reconciliation of the statutory Federal income tax rate with the
effective income tax rate follows:
1997 1996 1995
Statutory Federal income tax rate 35% 35% 34%
Increase (decrease) resulting from:
Tax-exempt earnings of subsidiaries in
Puerto Rico (1) (2) (2)
State and local income taxes, net of
federal benefit 2 2 3
Non-deductible expenses and other
foreign income subject to U.S.
income tax 7 5 1
Foreign (3) (7) (3)
Other, net 2 1 3
--- --- ---
Effective tax rate 42% 34% 36%
=== === ===
For continuing operations, the Company's effective tax rates were
approximately 38%, 33% and 36% in 1997, 1996 and 1995, respectively. The
effective tax rate of 42% for all operations of the Company in 1997 reflects
significant taxes attributable to the gain on the sale of discontinued
operations.
(continued)
Page 37 of 48
<PAGE>
10
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(7) Income Taxes, continued
Deferred tax assets and liabilities included the following (in
thousands):
1997 1996
---- ----
Assets:
Inventories $ -- $ 746
Plant and equipment 1,032 --
Vacation pay and other compensation 824 868
Pension expense 1,318 1,288
Stock awards 393 853
Accrued liabilities 4,591 3,438
Other 660 363
------ ------
Total deferred tax assets $8,818 $7,556
====== ======
Liabilities:
Inventories $ 819 $ --
Plant and equipment -- 305
Other 417 417
------ ------
Total deferred tax liabilities $1,236 $ 722
------ ------
Net deferred tax assets $7,582 $6,834
====== ======
Based on the Company's history of taxable income and its projection of future
earnings, management believes that it is more likely than not that sufficient
taxable income will be generated in the foreseeable future to realize the
deferred tax assets.
(8) Commitments and Contingencies
The Company conducts a portion of its operations from leased premises and
also leases certain equipment under operating leases. Total rental expense
amounts for the years ended December 31, 1997, 1996 and 1995 were $3,612,000,
$2,820,000, and $1,465,000, respectively. The aggregate minimum rental
commitments under non-cancelable leases in effect at December 31, 1997, are as
follows (in thousands):
Year ending
December 31
-----------
1998 $ 3,515
1999 3,088
2000 2,715
2001 2,441
2002 1,834
Thereafter 5,841
-------
$19,434
=======
(continued)
Page 38 of 48
<PAGE>
11
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(8) Commitments and Contingencies, continued
The Company is involved in several legal actions relating to waste
disposal sites. The Company's involvement in these matters has generally
arisen from the alleged disposal by licensed waste haulers of small amounts of
waste material many years ago. In addition, the Company is subject to various
lawsuits, claims and proceedings which arise in the ordinary course of its
business. The Company accrues costs associated with environmental and legal
matters when they become probable and reasonably estimable. Accruals are
established based on the estimated undiscounted cash flows to settle the
obligations and are not reduced by any potential recoveries from insurance or
other indemnification claims. Management believes that any ultimate liability
with respect to these actions in excess of amounts provided will not
materially affect the Company's operations or consolidated financial position.
(9) Shareholders' Equity
On January 22, 1997, the Company's Board of Directors approved a two-for-
one split of the Company's common stock in the form of a 100% common stock
dividend for shareholders of record as of February 7, 1997. A total of
10,925,774 shares were issued in connection with the split. The stated par
value of each share was not changed from $.125. All relevant share and per
share amounts have been restated to retroactively reflect the stock split.
The retained earnings of the Company at December 31, 1997, include
approximately $3.2 million which has been reserved as an appropriation in
accordance with the laws of the Peoples Republic of China (PRC). This amount,
which is based on the earnings of the Company's subsidiary in the PRC, may not
be available for distribution to the U.S. parent company or its shareholders.
The Company has a Shareholder Rights Plan. The Rights are currently not
exercisable, and automatically trade with the Company's Common Shares.
However, after a person or group has acquired 15% or more of the Common
Shares, the Rights will become exercisable and separate certificates
representing the Rights will be distributed. In the event that any person or
group acquires 15% of the Common Shares, each holder of two Rights (other than
the Rights of the acquiring person) will have the right to receive, for $135,
that number of Common Shares having a market value equal to two times the
exercise price of the Rights. Alternatively, in the event that, at any time
following the date in which a person or group acquires ownership of 15% or
more of the Common Shares, the Company is acquired in a merger or other
business combination transaction, or 50% or more of its consolidated assets or
earning power is sold, each holder of two Rights (other than the Rights of
such acquiring person or group) will thereafter have the right to receive,
upon exercise, that number of shares of common stock of the acquiring entity
having a then market value equal to two times the exercise price of the
Rights. The Rights may be redeemed by the Company at a price of $.005 per
Right at any time prior to becoming exercisable. Rights that are not
redeemed or exercised will expire on September 9, 2006.
(continued)
Page 39 of 48
<PAGE>
12
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(10) 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 year.
For calculating diluted earnings per share, common share equivalents are added
to the weighted average number of common shares outstanding. Common share
equivalents are incremental shares attributed to outstanding options to
purchase common stock as calculated using the treasury stock method. Such
amounts were 44,000, 139,000 and 98,000 in 1997, 1996 and 1995, respectively.
Relevant share amounts and earnings per share have been restated to reflect a
two-for-one stock split effective on February 28, 1997. Earnings per share
calculations are as follows (in thousands, except per share amounts):
1997 1996 1995
---- ---- ----
Net income $40,846 $20,427 $ 9,340
Basic earnings per share:
Shares 16,093 15,957 12,978
Per share amount $2.54 $1.28 $.72
Diluted earnings per share
Shares 16,137 16,096 13,076
Per share amount $2.53 $1.27 $.71
(11) Employee Benefit Plans
The Company and certain of its subsidiaries maintain defined benefit
pension plans and make contributions to multi-employer plans covering certain
union employees. Certain non-U.S. subsidiaries have varying types of
retirement plans providing benefits for substantially all of their employees.
Pension expense was as follows (in thousands):
1997 1996 1995
---- ---- ----
Principal defined benefit plans $420 $1,024 $1,449
Multi-employer and other non U.S. plans 40 61 210
---- ------ ------
$460 $1,085 $1,659
==== ====== ======
The expense for the principal defined benefit pension plans include the
following components (in thousands):
1997 1996 1995
---- ---- ----
Service cost - benefits earned
during the period $1,172 $1,417 $1,369
Interest cost on projected
benefit obligation 1,332 1,465 1,319
Actual return on plan assets (5,202) (2,714) (3,867)
Net amortization and deferral 3,118 856 2,628
------ ------ ------
Net periodic pension cost $ 420 $1,024 $1,449
====== ====== ======
(continued)
Page 40 of 48
<PAGE>
13
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(11) Employee Benefit Plans, continued
The financial status of the principal defined benefit plans at December
31, 1997 and 1996, was as follows (in thousands):
1997 1996
---- ----
Actuarial present value of obligations:
Accumulated benefit obligation (including vested
benefits of $14,252 in 1997 and $12,805 in 1996) $14,504 $13,477
------- -------
Projected benefit obligation for services to date 20,486 19,270
Plan assets at fair value 26,379 22,303
------- -------
Plan assets in excess of projected benefit obligation 5,893 3,033
Unrecognized:
Net gains (8,784) (5,372)
Prior service costs 454 506
Net translation obligation 24 28
-------- --------
Accrued pension costs at December 31 $(2,413) $(1,805)
======== ========
Benefits are based on years of service and average final compensation.
For U.S. plans, the Company funds, annually, at least the minimum amount
required by the Employee Retirement Income Security Act of 1974. Depending on
the investment performance of Plan assets and other factors, the funding
amount may be zero. Plan assets consist principally of short-term investments
and listed bonds and stocks. Assumptions used to develop data for 1997 and
1996 were as follows:
Discount rates 7.0% to 7.5%
Annual compensation increases 4.8% to 7.0%
Expected long-term rates of return on plan assets 7.0% to 9.0%
The Company maintains defined contribution 401(k) plans covering
substantially all U.S. employees not affected by certain collective bargaining
agreements. Under the primary 401(k) plan, the Company contributes a matching
amount equal to $.50 for each $1.00 of the participant's contribution not in
excess of 3% of the participant's annual wages. The total contribution
expense under the 401(k) plans for employees of continuing operations was
$524,000, $440,000, and $296,000, in 1997, 1996 and 1995, respectively.
The Company does not provide any significant post-retirement benefits
other than the pension plans and 401(k) plans described above.
(continued)
Page 41 of 48
<PAGE>
14
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(12) Stock-Based Compensation
The Company has an incentive compensation plan for key employees of the
Company and its subsidiaries. One component of this plan grants the recipient
the right of ownership of Technitrol, Inc. common stock, conditional on
continued employment with the Company. A summary of the shares under the
incentive compensation plan is as follows:
Available to
be Granted
------------
Shares authorized 1,200,000
Awarded during years prior to 1997,
net of cancellations (831,340)
---------
Balance at December 31, 1996 368,660
Awarded during 1997, net of cancellations (41,985)
---------
Balance available at December 31, 1997 326,675
=========
During the years ended December 31, 1997, 1996 and 1995, the Company
issued to employees, net of cancellations, incentive compensation shares
having an approximate fair value at date of issue of $1,037,000, $438,000, and
$375,000, respectively. Shares are held by the Company until the continued
employment requirement has been attained. The market value of the shares at
the date of grant is charged to expense during the vesting period on a
straight-line basis. Amounts charged to expense as a result of the incentive
compensation plan and related expenses were $912,000 in 1997, $976,000 in
1996, and $1,517,000 in 1995. The total grants and expenses noted above
include awards made to employees of the Test & Measurement Products Segment.
Separately, in connection with the Pulse acquisition, options which had
been granted for the purchase of Pulse common shares were assumed by the
Company and converted into options to purchase Technitrol common stock.
Additional information about the options assumed is provided in Note 2. At
December 31, 1997, 55,775 options remained outstanding. No additional options
are expected to be granted under the assumed plans.
The Company has not issued any stock options to employees, except for
those options assumed in connection with the acquisition of Pulse. The fair
value of those options was included in the purchase price of the acquisition,
and, accordingly, is amortized as part of the goodwill associated with the
acquisition. The options have no additional impact on the earnings of the
Company under the provisions of Statement of Financial Accounting Standard No.
123, "Accounting for Stock-based Compensation."
(continued)
Page 42 of 48
<PAGE>
15
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(13) Supplementary Information
Charged directly to costs and expenses (in thousands, for continuing
operations):
1997 1996 1995
---- ---- ----
Depreciation $11,874 $7,317 $5,313
Amortization of intangible assets 1,379 1,228 417
Advertising 1,510 777 344
Repairs and maintenance 5,868 3,914 2,099
Bad debt expense 328 135 31
Cash payments made (in thousands,
for all operations):
Income taxes $13,668 $9,205 $3,559
Interest 2,353 1,106 1,428
Accumulated other comprehensive income as disclosed in the Consolidated
Statements of Changes in Shareholders' Equity consists principally of foreign
currency translation items. In 1997, as a result of the Company's sale of its
Test & Measurement Products Segment (which included Lloyd Instruments, Ltd., a
U.K. Company), a reclassification adjustment was made as follows:
Unrealized currency translation loss arising during period $ (1,341)
Less: Reclassification adjustment for losses included in the
gain on the sale of the Test & Measurement Products Segment 533
--------
Net currency translation adjustment $ (808)
========
(14) Segment Information
The "Business Segment Information" and "Geographic Information" sections
on pages 2, 3 and 4 of this Form 10-K are integral parts of the Company's
financial statements.
Page 43 of 48
<PAGE>
16
TECHNITROL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(15) Quarterly Financial Data (Unaudited)
Quarterly results of operations (unaudited) for 1997 and 1996 are
summarized as follows (in thousands, except per share data):
Quarter ended
Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- ------- -------
1997:
Net sales $92,207 $103,927 $102,127 $98,806
Gross profit 28,915 33,646 32,687 32,769
Net earnings from continuing
operations 6,553 7,900 7,138 7,495
Earnings per share from continuing
operations:
Basic .41 .49 .44 .47
Diluted .40 .49 .44 .46
Net earnings per share:
Basic .43 1.20 .44 .47
Diluted .42 1.20 .44 .46
1996:
Net sales $54,990 $60,120 $51,277 $76,925
Gross profit 17,617 20,173 16,210 23,066
Net earnings from continuing
operations 4,636 4,842 3,599 5,061
Earnings per share from continuing
operations:
Basic .29 .30 .22 .32
Diluted .29 .30 .22 .31
Net earnings per share:
Basic .34 .33 .27 .34
Diluted .34 .33 .27 .34
Earnings per share amounts have been restated to reflect a two-for-one stock
split effective on February 28, 1997.
Page 44 of 48
<PAGE>
<TABLE>
<CAPTION>
TECHNITROL, INC. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)
Additions (Deductions)
----------------------------------------
Charged to Write-offs
Balance costs and & Balance
Description January 1 expenses payments Other December 31
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Reserve for obsolete and slow-
moving inventory $4,671 $6,536 $(7,487) $ -- $3,720
====== ====== ======= ====== ======
Reserve for doubtful accounts $ -- $ 328 $ (126) $ -- $ 202
====== ====== ======= ====== ======
Year ended December 31, 1996:
Reserve for obsolete and slow-
moving inventory $3,012 $2,534 $ (875) $ -- $4,671
====== ====== ======= ====== ======
Reserve for doubtful accounts $ -- $ 135 $ (135) $ -- $ --
====== ====== ======= ====== ======
</TABLE>
Page 45 of 48
<PAGE>
EXHIBIT INDEX
DOCUMENT
- --------
3. (a) Articles of Incorporation Incorporated by reference to Form
10-K for the year ended
December 31, 1995
(b) By-laws Incorporated by reference to Form
10-K for the year ended
December 31, 1995
4. Instruments defining rights of Incorporated by reference to Form
security holders 10-K for the year ended
December 31, 1982.
21. Subsidiaries of Registrant Page 47
23. Consent of Certified Public
Accountants Page 48
27. Financial Data Schedule Electronic Filing Only
Page 46 of 48
<PAGE>
EXHIBIT (21) SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT
Technitrol, Inc., which has no parent, has the following subsidiaries:
Name Incorporation Percent Owned
---- ----------------------- -------------
Advanced Metallurgy, Inc. Pennsylvania 100%
Chace Precision Metals, Inc. Delaware 100%
Doduco Espana Spain 100%
Doduco GmbH Germany 100%
Dongguan Pulse Electronics Co., Ltd. Peoples Republic of China 100%
Pulse Canada Ltd. Canada 100%
Pulse Electronics, Ltd. Hong Kong 100%
Pulse Engineering Distribution, Ltd. Ireland 100%
Pulse Engineering, Inc. Delaware 100%
Pulse Philippines Corporation Philippines 100%
Pulse Production (Malaysia) Sdn. Bhd. Malaysia 100%
Pulse Production (Thailand) Ltd. Thailand 100%
Pulse Taiwan Corporation Taiwan 100%
Technitrol Delaware, Inc. Delaware 100%
Technitrol International, Inc. Delaware 100%
Technitrol Singapore Holdings Pte. Ltd. Singapore 100%
Page 47 of 48
<PAGE>
Consent of Independent Certified Public Accountants
The Board of Directors
Technitrol, Inc.:
We consent to the incorporation by reference in the registration statement on
Form S-8 of Technitrol, Inc. of our report dated February 27, 1998, relating
to the consolidated balance sheets of Technitrol, Inc. and subsidiaries as of
December 31, 1997 and 1996 and the related consolidated statements of
earnings, cash flows, changes in shareholders' equity and the financial
statement schedule for each of the years in the three-year period ended
December 31, 1997, which report appears in the December 31, 1997 annual report
on Form 10-K of Technitrol, Inc.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
March 19, 1998
Page 48 of 48
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 48803
<SECURITIES> 0
<RECEIVABLES> 54192
<ALLOWANCES> 202
<INVENTORY> 50623
<CURRENT-ASSETS> 157411
<PP&E> 106803
<DEPRECIATION> 47140
<TOTAL-ASSETS> 255334
<CURRENT-LIABILITIES> 74632
<BONDS> 30932
<COMMON> 2017
0
0
<OTHER-SE> 140358
<TOTAL-LIABILITY-AND-EQUITY> 255334
<SALES> 397067
<TOTAL-REVENUES> 397067
<CGS> 269050
<TOTAL-COSTS> 269050
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2387
<INCOME-PRETAX> 46764
<INCOME-TAX> 17678
<INCOME-CONTINUING> 29086
<DISCONTINUED> 11760
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40846
<EPS-PRIMARY> 1.81
<EPS-DILUTED> 1.80
</TABLE>
