Exhibit Index
is on page 24
UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 29, 2000, or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ______________ to
______________.
Commission File No. 1-5375
TECHNITROL, INC.
(Exact name of registrant as specified in Charter)
PENNSYLVANIA 23-1292472
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1210 Northbrook Drive, Suite 385
Trevose, Pennsylvania 19053
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 215-355-2900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. YES [X] NO [ ]
Common Stock - Shares Outstanding as of October 27, 2000: 16,613,769
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Technitrol, Inc. and Subsidiaries
Consolidated Balance Sheets
September 29, 2000 and December 31, 1999
In thousands
<TABLE>
<CAPTION>
Sept. 29, Dec. 31,
Assets 2000 1999
------ ---- ----
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 135,962 $ 88,161
Trade receivables 106,087 77,514
Inventories 76,515 65,101
Prepaid expenses and other current assets 11,691 8,512
--------- ---------
Total current assets 330,255 239,288
Property, plant and equipment 164,504 150,926
Less accumulated depreciation 76,694 68,204
--------- ---------
Net property, plant and equipment 87,810 82,722
Deferred income taxes 10,290 8,615
Excess of cost over net assets acquired, net 44,332 48,666
Other assets 1,456 1,948
--------- ---------
$ 474,143 $ 381,239
========= =========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt $ 132 $ 167
Accounts payable 33,088 26,186
Accrued expenses 91,786 71,084
--------- ---------
Total current liabilities 125,006 97,437
Long-term liabilities:
Long-term debt, excluding current installments 43,980 60,329
Other long-term liabilities 10,845 7,838
Shareholders' equity:
Common stock and additional paid-in capital 65,763 48,263
Retained earnings 237,447 171,278
Other (8,898) (3,906)
--------- ---------
Total shareholders' equity 294,312 215,635
--------- ---------
$ 474,143 $ 381,239
========= =========
</TABLE>
[FN]
See accompanying Notes to Unaudited Consolidated Financial Statements.
</FN>
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<PAGE>
Technitrol, Inc. and Subsidiaries
Consolidated Statements of Earnings
(Unaudited)
In thousands, except per share data
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 29, Oct. 1, Sept. 29, Oct. 1,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 170,674 $ 137,032 $ 486,553 $ 390,119
Costs and expenses applicable to sales:
Cost of goods sold 102,125 92,980 301,321 267,900
Selling, general and administrative expenses 33,863 27,668 97,133 79,157
Restructuring and other non-recurring items -- -- 3,305 --
--------- --------- --------- ---------
Total costs and expenses applicable to
sales 135,988 120,648 398,454 347,057
--------- --------- --------- ---------
Operating profit 34,686 16,384 84,794 43,062
Other income (expense):
Interest, net 954 (338) 1,475 (1,517)
Other (658) 73 (439) (177)
--------- --------- --------- ---------
Total other income (expense) 296 (265) 1,036 (1,694)
--------- --------- --------- ---------
Earnings before income taxes 34,982 16,119 85,830 41,368
Income taxes 7,198 3,901 16,330 10,139
--------- --------- --------- ---------
Net earnings $ 27,784 $ 12,218 $ 69,500 $ 31,229
========= ========= ========= =========
Net earnings per share:
Basic $ 1.70 $ .76 $ 4.29 $ 1.95
Diluted $ 1.69 $ .75 $ 4.24 $ 1.92
Dividends declared per share $ .0675 $ .0675 $ .2025 $ .1950
</TABLE>
[FN]
See accompanying Notes to Unaudited Consolidated Financial Statements.
</FN>
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<PAGE>
Technitrol, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended September 29, 2000 and October 1, 1999
(Unaudited)
In thousands
<TABLE>
<CAPTION>
Sept. 29, Oct. 1,
2000 1999
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 69,500 $ 31,229
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 16,197 14,373
Tax benefits from employee stock compensation 1,629 287
Loss on sale of property, plant and equipment 967 1,076
Changes in assets and liabilities, net of effect of
acquisitions:
Trade receivables (30,707) (15,801)
Inventories (13,799) 4,943
Accounts payable and accrued expenses 27,561 (5,415)
Other, net 3,579 5,865
--------- ---------
Net cash provided by operating activities 74,927 36,557
--------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired (1,711) (994)
Capital expenditures (20,595) (13,235)
Proceeds from sale of property, plant and equipment 336 1,913
--------- ---------
Net cash used in investing activities (21,970) (12,316)
--------- ---------
Cash flows from financing activities:
Dividends paid (3,309) (3,037)
Proceeds of long-term borrowings 19,053 46,159
Principal payments of long-term debt (29,368) (53,057)
Proceeds from stock issued under employee
stock purchase plan 8,388 --
Proceeds from exercise of stock options 194 --
--------- ---------
Net cash used in financing activities (5,042) (9,935)
--------- ---------
Net effect of exchange rate changes on cash (114) (386)
--------- ---------
Net increase in cash and cash equivalents 47,801 13,920
Cash and cash equivalents at beginning of year 88,161 50,563
--------- ---------
Cash and cash equivalents at September 29, 2000 and
October 1, 1999 $ 135,962 $ 64,483
========= =========
</TABLE>
[FN]
See accompanying Notes to Unaudited Consolidated Financial Statements.
</FN>
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<PAGE>
Technitrol, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
September 29, 2000
(Unaudited)
In thousands, except per share data
<TABLE>
<CAPTION>
Other
---------------------
Common stock and Accumu-
paid-in lated other
capital compre- Compre-
---------- Retained Deferred hensive hensive
Shares Amount earnings compensation income income
------ ------ -------- ------------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000 16,266 $ 48,263 $ 171,278 $ (2,401) $ (1,505)
Stock options, awards and related
compensation 83 7,483 (4,009)
Tax benefit of stock compensation 1,629
Stock issued under employee stock
purchase plan 265 8,388
Currency translation adjustments (983) $ (983)
Net earnings 69,500 69,500
---------
Comprehensive income $ 68,517
=========
Dividends declared ($.2025 per share) (3,331)
------ --------- --------- --------- ---------
Balance at September 29, 2000 16,614 $ 65,763 $ 237,447 $ (6,410) $ (2,488)
====== ========= ========= ========= =========
</TABLE>
[FN]
See accompanying Notes to Unaudited Consolidated Financial Statements.
</FN>
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<PAGE>
Technitrol, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(1) Accounting Policies
-------------------
For a complete description of the accounting policies of Technitrol,
Inc. and its consolidated subsidiaries ("the Company"), refer to Note 1 of Notes
to Consolidated Financial Statements included in the Company's Form 10-K filed
for the year ended December 31, 1999.
The results for the quarters ended September 29, 2000 and October 1,
1999, have been prepared by Technitrol's management without audit by its
independent auditors. In the opinion of management, the financial statements
fairly present in all material respects the results of Technitrol's operations
and the financial position for the periods presented. To the best knowledge and
belief of Technitrol, all adjustments have been made to properly reflect income
and expenses attributable to the periods presented. All such adjustments are of
a normal recurring nature. Operating results for the nine months ended September
29, 2000 are not necessarily indicative of annual results.
Certain items in the prior year financial statements have been
reclassified to conform with the current year presentation.
(2) Acquisitions
------------
Tool and Die facility in Estonia from AMP: In January of 2000, the
-----------------------------------------
Company completed the acquisition of a tool and die design and manufacturing
operation near Tallinn, Estonia, from AMP, a division of Tyco Electronics
Corporation. The purchase price was not material to the Company's consolidated
financial position. The results of operating these assets in 2000 are included
within the Electrical Contact Products Segment ("ECPS") results, formerly the
Metallurgical Components Segment.
MEC Betras Italia S.r.l. ("MEC Betras"): On December 22, 1999, the
---------------------------------------
Company acquired the operating assets of MEC Betras. MEC Betras, located in
Italy, produced electrical contact rivets and stamped electrical contact parts.
The purchase price of MEC Betras' assets was not material to the Company's
consolidated financial position.
Tianjin Electrical Metal Works: In November 1999, the Company acquired
------------------------------
the assets of an electrical contacts business based in Tianjin, the People's
Republic of China. The purchase price was not material to the Company's
consolidated financial position.
6 OF 25
<PAGE>
Technitrol, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(3) Restructuring and Other Non-recurring Items
-------------------------------------------
During the first quarter of 2000, the Company initiated a restructuring
plan aimed at reducing the costs of manufacturing in the ECPS's European
operations which we refer to as "Strategy 2000". Employee termination and
related costs were 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)" and SEC Staff Accounting Bulletin No. 100, "Restructuring and
Impairment Charges." The Company will provide severance and related payments to
approximately 120 employees. Accordingly, reserves were established for these
costs during the quarter ended March 31, 2000. The affected employees include
both direct and indirect personnel, and are primarily located at the Company's
facility in Pforzheim, Germany. A charge of $5.5 million was included in the
line titled "Restructuring and other non-recurring items" in the consolidated
statements of earnings for the nine months ended September 29, 2000.
Approximately $4.6 million of this amount relates to employee termination costs
and $.9 million relates to the impairment of certain assets within the ECPS.
Partially offsetting these amounts was a gain of approximately $1.4 million
related to the sale of a non-strategic European product line and a $.8 million
gain related to a business interruption insurance settlement. Approximately $.4
million of severance payments were charged against the restructuring reserve
during the third quarter of 2000. A total of 46 people were terminated under the
plan in the nine months ended September 29, 2000. (See additional discussion
under Results of Operations in Item 2 of this Report.)
(4) Inventories
-----------
Inventories consisted of the following (in thousands):
September 29, December 31,
2000 1999
---- ----
Finished goods $22,891 $21,916
Work in process 15,565 13,624
Raw materials and supplies 38,059 29,561
------- -------
$76,515 $65,101
======= =======
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<PAGE>
Technitrol, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(5) Derivatives and Other Financial Instruments
-------------------------------------------
The Company utilizes derivative financial instruments, primarily
forward exchange contracts and currency options, to manage foreign currency
risks. While these hedging instruments are subject to fluctuations in value,
such fluctuations are generally offset by the value of the underlying exposures
being hedged.
At September 29, 2000, the Company had one currency option which was
immaterial to the Company's consolidated financial position. The term of the
contract was less than 30 days. The Company had no other financial derivative
instruments. In addition, management believes that there is no material risk of
loss from changes in market rates or prices which are inherent in other
financial instruments.
(6) Earnings Per Share
------------------
Basic earnings per share are calculated by dividing earnings by the
weighted average number of common shares outstanding (excluding restricted
shares) during the period. For calculating diluted earnings per share, common
share equivalents and restricted stock outstanding are added to the weighted
average number of common shares outstanding. Outstanding restricted stock that
includes performance criteria as a vesting requirement is not included for
calculating diluted earnings per share unless the criteria have been met and the
stock has vested. Common share equivalents result from outstanding options to
purchase common stock as calculated using the treasury stock method. Such common
share equivalent amounts were 6,900 and 36,400 for the three months ended
September 29, 2000 and October 1, 1999, respectively, and 7,100 and 35,100 for
the nine-month periods then ended. Earnings per share calculations are as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 29, Oct. 1, Sept. 29, Oct. 1,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $27,784 $12,218 $69,500 $31,229
Basic earnings per share:
Shares 16,305 16,056 16,198 16,043
Per share amount $ 1.70 $ .76 $ 4.29 $ 1.95
Diluted earnings per share:
Shares 16,485 16,252 16,377 16,236
Per share amount $ 1.69 $ .75 $ 4.24 $ 1.92
</TABLE>
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<PAGE>
Technitrol, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements, continued
(7) Business Segment Information
----------------------------
For the nine months ended September 29, 2000 and October 1, 1999, there
was an immaterial amount of intersegment revenues eliminated in consolidation.
There has not been a material change in segment assets from December 31, 1999 to
September 29, 2000. In addition, the basis for determining segment financial
information has not changed from 1999. Specific segment data are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 29, Oct. 1, Sept. 29, Oct. 1,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales:
Electronic Components $ 116,151 $ 80,582 $ 313,542 $ 221,047
Electrical Contact Products 54,523 56,450 173,011 169,072
--------- --------- --------- ---------
Total $ 170,674 $ 137,032 $ 486,553 $ 390,119
========= ========= ========= =========
Earnings before income taxes:
Electronic Components $ 31,556 $ 13,789 $ 78,546 $ 34,251
Electrical Contact Products 3,130 2,595 9,553 8,811
Electrical Contact Products Segment
restructuring and other
non-recurring items -- -- (3,305) --
--------- --------- --------- ---------
Operating profit 34,686 16,384 84,794 43,062
Other income (expense), net 296 (265) 1,036 (1,694)
--------- --------- --------- ---------
Earnings before income taxes $ 34,982 $ 16,119 $ 85,830 $ 41,368
========= ========= ========= =========
</TABLE>
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<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion and analysis of our financial condition and results of
operations, as well as other sections of this report, contain certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Actual results could differ materially. Please
refer to pages 19 through 22 of this report for a description of
"forward-looking statements" and factors that may affect future results.
Business Overview
Technitrol, Inc. is a global manufacturer of electronic components and
electrical contact products. We operate two business segments: the Electronic
Components Segment and the Electrical Contact Products Segment. We refer to
these segments as the ECS and the ECPS.
Electronic Components Segment
Our Electronic Components Segment provides a variety of magnetics-based
components, miniature chip inductors and modules. These components modify or
filter electronic signals. They are used primarily in local area network
("LAN"), Internet connectivity, telecommunication and power-conversion products.
We manufacture these products in the United States, France, Malaysia, Thailand,
the Philippines and the People's Republic of China. We sometimes refer to the
People's Republic of China as the PRC.
Our strategy is to expand our electronic components business through a
combination of internal growth and acquiring companies in the electronic
components business. Acquisitions during the last several years include:
o The magnetic components business of Northern Telecom, Ltd. -
We completed this acquisition on November 30, 1997. The
primary assets we purchased included manufacturing plants in
Malaysia and Thailand and a design engineering group in
Canada. These assets primarily serve the telecommunication and
power markets.
o FEE Technology, S.A. - We purchased FEE on July 3, 1998. FEE
designed and manufactured magnetic components for
telecommunications and power conversion equipment. With the
purchase of FEE, we acquired manufacturing facilities in
France, Thailand and Poland. We subsequently closed FEE's
Thailand and Poland facilities.
o GTI Corporation - We completed the acquisition of GTI and its
subsidiary, Valor Electronics, on November 16, 1998. Valor
designed and manufactured magnetics-based components for
signal processing and power transfer functions primarily for
local area network products and, to a much lesser extent,
telecommunication and power-conversion products. Their
manufacturing facilities were located in the People's Republic
of China and the Philippines. We closed Valor's Philippine
facility and have completed the consolidation of Valor's PRC
facility into our facilities in the PRC.
Our electronic component businesses operate as a unified business
throughout the world. This unified business operates under the Pulse name.
10 OF 25
<PAGE>
Electrical Contact Products Segment
Our Electrical Contact Products Segment manufactures electrical
contacts and assemblies, contact materials, thermostatic bimetals, clad metal
products and precision contact subassemblies. We also provide selective
electroplating and refining services.
We sell these electrical contact products to a wide range of industrial
and consumer product manufacturers. Our products are used in a variety of
applications which affect daily living including:
o residential, commercial and industrial circuit breakers;
o motor controls;
o switches and relays;
o wiring devices;
o temperature controls;
o appliances;
o automobiles;
o telecommunications products; and
o various other electrical products.
The ECPS has manufacturing facilities in the United States, Mexico,
Puerto Rico, Germany, Spain, Italy, Estonia, Hungary and the PRC.
In late 1996, we acquired the assets of Doduco GmbH in Germany and
Spain to support our strategy of increasing market share and the international
presence of our electrical contact products businesses. This business was then
combined with our existing electrical contact products operations in North
America. All of our electrical contact products businesses now operate globally
under the name AMI Doduco.
In July of 1998, we acquired certain assets of Metales y Contactos,
S.A. de C.V. Metales designed and manufactured precious and semi-precious metal
contacts used mainly in automobiles and other durable goods. The Metales
facility is located near Mexico City.
In November of 1999, we acquired the operating assets of the Tianjin
Electrical Metal Works electrical contacts business based in Tianjin, PRC.
In December of 1999, we acquired the operating assets of MEC Betras
Italia S.r.l. MEC Betras, located in Italy, produced electrical contact rivets
and stamped electrical contact parts.
In January of 2000, we finalized our acquisition of a tool and die
design and manufacturing operation near Tallinn, Estonia.
Our recent acquisitions provide the ECPS with additional lower-cost
operating locations and an enhanced market presence in key areas of the
business.
11 OF 25
<PAGE>
As part of our restructuring of the ECPS operations, we recorded
employee termination and related expenses in the first quarter of 2000. For a
further description of these charges, see the "Results of Operations" section of
this report.
Liquidity and Capital Resources
Working capital at September 29, 2000 was $205.2 million compared to
$141.9 million at December 31, 1999, an increase of $63.3 million. Cash on hand
increased approximately $47.8 million from December 31, 1999 while debt
outstanding decreased approximately $16.3 million. The operating results
generated by the ECS during the nine months ended September 29, 2000 were the
primary cause for these positive changes in our working capital, cash on hand
and outstanding debt since December 31, 1999.
We believe that the combination of cash on hand, cash generated by
operations and, if necessary, additional borrowings under our credit facilities
will be sufficient to satisfy our operating cash requirements for the
foreseeable future. In addition, we may use internally generated funds and
additional borrowings for acquisitions of suitable businesses or assets.
Cash Flows from Operating Activities
Cash provided by operating activities for the nine months ended
September 29, 2000 was $ 74.9 million. Net earnings, adjusted for non-cash
depreciation and amortization charges, contributed $85.7 million to cash flow
during the period. Increases in accounts payables and accrued expenses were more
than offset by increases in current assets. These changes were the result of our
business growth and significantly higher revenue, particularly in the ECS,
during the nine months ended September 29, 2000. The increase in accrued
expenses includes the result of employee termination and related accruals for
the ECPS. See our discussion of these items in the "Results from Operations"
section of this report.
Cash Flows from Investing Activities
Cash used by investing activities was $ 22.0 million during the nine
months ended September 29, 2000. Approximately $20.6 million of cash was used
for capital expenditures. The level of capital expenditures has increased during
2000 due to spending on capacity expansion projects. Other investing activities
consumed approximately $1.4 million. This represents primarily the cash used to
acquire the ECPS tool and die facility in Estonia and transaction expenses paid
in 2000 for 1999 acquisitions, partially offset by proceeds on sales of
property, plant and equipment.
We completed the purchase of inventories and fixed assets of a product
line from an independent company for approximately $4.0 million on October 12,
2000. The subject business will be integrated within the ECS segment.
We make capital expenditures to expand production capacity and to
improve our operating efficiency. We plan to continue making such expenditures.
Additionally, we may acquire other businesses or product lines to expand our
breadth and scope of operations.
12 OF 25
<PAGE>
With the exception of approximately $7.2 million of retained earnings
in the PRC which are restricted in accordance with PRC regulations,
substantially all retained earnings are free from legal or contractual
restrictions. We have not experienced any significant liquidity restrictions in
any country in which we operate and none are foreseen. However, foreign exchange
ceilings imposed by local governments and the sometimes lengthy approval
processes which some foreign governments require for international cash
transfers may delay our internal cash movements from time to time. The retained
earnings in other countries represent a material portion of our assets. We
expect to reinvest these earnings outside of the United States because we
anticipate that a significant portion of our opportunities for growth in the
coming years will be abroad. If such earnings were brought back to the United
States, significant tax liabilities could be incurred in the United States. This
could have a material unfavorable impact on our net income and cash position.
Cash Flows from Financing Activities
We used cash of approximately $ 5.0 million for financing activities in
the nine months ended September 29, 2000. We repaid approximately $ 10.3
million, net of additional borrowings, of debt during the nine months ended
September 29, 2000.
During the first nine months of 2000, we paid dividends of
approximately $3.3 million. We expect to continue paying quarterly dividends for
the foreseeable future. During this same period we received proceeds of $8.4
million from the sale of stock through our employee stock purchase plan.
At September 29, 2000, we had approximately $165.3 million of unused
lines of credit from banks.
Foreign Currency Effects
Euro currencies were approximately 14% weaker, on average, relative to
the U.S. dollar during the third quarter of 2000 than in the third quarter of
1999. As a result, we incurred foreign currency losses in our ECS European
operations, as Euro currency denominated assets and liabilities were translated
to U.S. dollars for financial reporting purposes. Foreign currency losses
recorded in the third quarter of 2000 were substantially higher than those
recorded in the third quarter of 1999. As a result of the downward valuation of
Euro currencies, we also experienced a negative translation adjustment to equity
because our investment in the ECPS's European operations is worth less in U.S.
dollars. This decrease in U.S. dollar value is reflected as a reduction in
equity.
We transact a significant amount of sales in currencies other than the
U.S. dollar. Therefore, changing exchange rates often impact our financial
results. This is particularly true of movements in the exchange rate between the
U.S. dollar and the Euro because ECPS's European sales are denominated primarily
in Euro currencies. In the future, it is possible that an increasing percentage
of our sales will be denominated in non-U.S. currencies. This would increase our
exposure to currency fluctuations. The impact of exchange rate differences on
ECPS's European sales may be offset by the impact on its expenses and bank
borrowings, most of which are also denominated in Euros.
13 OF 25
<PAGE>
In order to reduce our exposure resulting from currency fluctuations,
we may purchase currency exchange forward contracts and/or currency options.
These contracts guarantee a predetermined range of exchange rates at the time
the contract is purchased. This allows us to shift the majority of the risk of
currency fluctuations from the date of the contract to a third party for a fee.
At September 29, 2000, we had one currency option outstanding. The contract was
short-term in duration and immaterial to our financial position. In determining
the use of forward exchange contracts and currency options, we consider the
amount of sales, purchases and net assets or liabilities denominated in local
currencies, the type of currency, and the costs associated with the contracts.
New Accounting Pronouncements
In July 2000, the Emerging Issues Task Force reached a consensus on
issue No. 00-15 ("EITF 00-15"), "Classification in the Statement of Cash Flows
of the Income Tax Benefit Realized by a Company upon Employee Exercise of a
Nonqualified Stock Option". The EITF concluded that income tax benefits realized
upon an employee's exercise of a nonqualified stock option should be classified
as an operating cash flow. Accordingly, we have reported the tax benefits
resulting from the exercise of stock options on the Consolidated Statements of
Cash Flows.
In July 2000, the Emerging Issues Task Force issued No. 00-10 ("EITF
00-10"), "Accounting for Shipping and Handling Fees and Costs", which concluded
that all amounts billed to a customer in a sale transaction related to shipping
and handling, if any, represent revenue to the vendor and, therefore, should be
classified as revenue. EITF 00-10 is effective no later than the required
implementation date for SAB 101 (see below). Adoption of this standard is not
expected to have a material effect on our revenue, operating results or
liquidity.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which
outlines criteria that must be met to recognize revenue and provides guidance
for presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the SEC. SAB 101 is effective the
fourth fiscal quarter of fiscal years beginning after December 15, 1999 as
amended by SAB 101B. Adoption of this standard is not expected to have a
material effect on our revenue, operating results or liquidity.
In June of 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. This
standard was amended by Statement of Financial Accounting Standard No. 138,
"Accounting for Certain Derivative Instruments and certain Hedging Activities".
These standards are concurrently effective for quarters of fiscal years
beginning after June 15, 2000. Adoption of this standard is not expected to have
a material effect on our operating results or liquidity. The impact of this
standard on our balance sheet will depend on the amount of hedging activity
outstanding on the date of adoption.
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<PAGE>
Results of Operations
Our results of operations for the three and nine month periods ending
September 29, 2000 and October 1, 1999 are as follows. Amounts are in thousands:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 29, October 1, September 30, October 1,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales:
Electronic Components $ 116,151 $ 80,582 $ 313,542 $ 221,047
Electrical Contact Products 54,523 56,450 173,011 169,072
--------- --------- --------- ---------
Total $ 170,674 $ 137,032 $ 486,553 $ 390,119
========= ========= ========= =========
Earnings before income taxes:
Electronic Components $ 31,556 $ 13,789 $ 78,546 $ 34,251
Electrical Contact Products 3,130 2,595 9,553 8,811
Electrical Contact Products Segment
restructuring and other non-recurring
items -- -- (3,305) --
--------- --------- --------- ---------
Operating profit 34,686 16,384 84,794 43,062
Other income (expense), net 296 (265) 1,036 (1,694)
--------- --------- --------- ---------
Earnings before income taxes $ 34,982 $ 16,119 $ 85,830 $ 41,368
========= ========= ========= =========
</TABLE>
Revenues
Net sales for the third quarter of 2000 increased approximately $33.6
million, or 24.6%, from the comparable period in 1999. Our sales growth was
attributable primarily to our ECS operations.
ECS revenues increased $35.6 million, or 44.1%, from the third quarter
of 1999. Growth was achieved due to Pulse's customers demand for broadband
access technology, the latest generation networking equipment, and feature-rich
wireline and wireless connectivity. As orders exceeded shipments in the third
quarter, we expect the ECS sales growth to continue during the near term. Our
backlog for these product lines, though a less-reliable predictor of short-term
business volume than it once was, increased 17.1% since the beginning of the
third quarter.
Sales within the ECPS during the quarter ended September 29, 2000
decreased $1.9 million from the third quarter of 1999. Although sales in 2000
reflect improved European markets and contributions from AMI Doduco-Italy
(formerly MEC Betras Italia, acquired in late 1999), these positive factors were
more than offset by a Euro to U.S. dollar exchange rate that was approximately
14% weaker than in the third quarter of 1999. Had the euro to dollar exchange
rate been the same in the third quarter of 2000 as it was in the third quarter
of 1999, sales within the ECPS would have been approximately $6.0 million
greater than was actually reported for the quarter ended September 29, 2000. The
recovery in European markets that began to appear in the latter part of 1999
continued through the third quarter of 2000, while the North American markets
remained solid.
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Cost of Sales
Our consolidated gross margin for the quarter ended September 29, 2000
was 40.2% compared to 32.2% for the third quarter of 1999. Although the gross
margin for the ECPS increased slightly from the prior year, the consolidated
margin improvement is primarily due to the ECS. The ECS margin benefited from
higher volumes as well as a more favorable sales mix when compared to the third
quarter of 1999. The sales mix in the third quarter of 2000 included new
products for a variety of telecommunications applications such as digital
subscriber line access and for local area network telephony. The increase in the
ECPS gross margin is due to higher volumes as well as contributions from the MEC
Betras acquisition and the segment's Strategy 2000 work force streamlining and
process improvement efforts.
Operating Expenses
Total selling, general and administrative expenses for the third
quarter of 2000 were $33.9 million, or 19.8% of sales, compared to $27.7
million, or 20.2% of sales, in the comparable 1999 period. The increase in
selling, general and administrative expenses in dollars is due to costs
associated with higher sales volume; incentive awards and higher expenses
related to our restricted stock plan. Incentive awards were $.4 million higher
in the third quarter of 2000 versus the comparable 1999 period, primarily due to
strong ECS operating results. The underlying expense is variable and trends with
the Company's overall financial performance regarding incentive plan targets,
primarily achievement of economic profit and net operating profit objectives.
Stock based compensation plans including the restricted stock plan were $1.9
million higher in the third quarter of 2000 versus the comparable 1999 period.
The underlying expense is variable and dependent on the Company's common stock
price. Operating margins improved for the ECS as the segment met record demand
while keeping operating costs at or below budgeted levels. The ECPS operating
margin, when reviewed on a basis comparable to the third quarter of 1999, also
improved due to improved cost controls and the segment's Strategy 2000 work
force reduction and process improvement initiatives.
Research, development and engineering expenses are included in selling,
general and administrative expenses. We refer to research, development and
engineering expenses as RD&E. For the three and nine months ended September 29,
2000 and October 1, 1999, RD&E by segment was as follows:
Three Months Ended Nine Months Ended
September 29, October 1, September 29, October 1,
2000 1999 2000 1999
---- ---- ---- ----
RD&E:
Electronic Components $ 4,100 $ 3,402 $ 11,595 $ 10,476
% of Segment Sales 3.5% 4.2% 3.7% 4.7%
Electrical Contact Products $ 1,074 $ 1,410 $ 3,401 $ 4,394
% of Segment Sales 2.0% 2.5% 2.0% 2.6%
The ECPS's RD&E expenses decreased from 1999 to 2000 primarily due to the sale
of a non-strategic product line in Europe. Excluding the impact of the
non-strategic product line, ECPS's RD&E expenses in 2000 approximated those of
the prior year. Neither segment plans any significant reduction in RD&E efforts
in the near term.
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Restructuring and other non-recurring items of approximately $3.3
million, net, relate to the ECPS. As a result of a strategic review, our
European managers felt that the operations in Europe needed realignment to
maximize market opportunities and reduce costs. This is a part of an overall
strategic reassessment of ECPS's European business. This element of Strategy
2000 was aimed at reducing our ECPS employment levels by approximately 120
people, primarily in Germany. This reduction may be partially offset by targeted
hiring of individuals dedicated to certain product lines and initiatives. Other
elements of Strategy 2000 call for relocation of high-volume, repetitive
production to lower-cost locations, worldwide continuous process improvement
efforts, and the expansion of our more profitable and automated business based
in Germany. As a result of the program, we provided approximately $4.6 million
for employee severance and related payments. In addition, we recorded
approximately $0.9 million of charges related to the impairment of certain
assets within the ECPS. Offsetting these Strategy 2000 costs was a gain of
approximately $1.4 million related to the sale of a non-strategic European
product line and a $0.8 million gain related to an insurance settlement. Both of
these items also relate to the ECPS.
Although we developed the plan for Strategy 2000 during the quarter
ended March 31, 2000 and announced the plan to employees, no employee
termination payments were made under the plan as of that date. A total of 46
people were terminated under the plan as of September 29, 2000. It is
anticipated that the majority of the employee related severance matters related
to Strategy 2000 will be completed by the first quarter of 2001. For many of the
employees terminated, severance agreements include statutory notice-period pay
and a lump-sum severance payment at the end of the notice period. As many
employees are still within the notice period, a substantial portion of the
reserve will not be used until severance payments are made later this year and
early next year. The net savings of the plan began in the current year, although
we will not realize the full benefit of the program until the completion of the
part-time retirement aspect of the program. As part of Strategy 2000,
approximately 50 people elected to leave the Company under a government approved
part-time retirement program. The people in the part-time retirement program
will retire at varying times, the latest of which is in 2002. Cost savings from
the reduction in employment levels will affect both cost of goods sold and
general and administrative expenses.
Interest
Net interest income was $.9 million during the third quarter of 2000.
Net interest expense for the comparable period in 1999 was approximately $.3
million. This change is due to higher cash levels, higher interest rates on
invested cash and lower debt levels in the 2000 period.
The majority of our credit facilities have variable interest rates.
Accordingly, interest expense may increase if the rates associated with, or the
amounts borrowed under, our credit facilities move higher during subsequent
quarters. In addition, we may pursue additional or alternative credit to finance
further growth opportunities in one or both of our segments. We may use interest
rate swaps or other financial derivatives in order to manage the risk associated
with changes in market interest rates; however, we have not used any such
instruments thus far.
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Income taxes
Our effective income tax rate during the third quarter of 2000 was
20.6%, consistent with 20.2% (before first-quarter one-time items) over the
first nine months of 2000. The third quarter tax rate is lower than the 24.2%
reported in the third quarter of 1999 due to a higher proportion of taxable
income in low-tax jurisdictions throughout the nine months ended September 29,
2000. We expect no significant change in the tax rate in the fourth quarter.
Other Issues
Precious Metal
The ECPS uses silver, as well as other precious metals, in the
manufacturing of electrical contacts, rivets and other products. Historically,
we have leased or held these materials through consignment arrangements with our
suppliers. Leasing and consignment costs have been substantially below the costs
to borrow funds to purchase the metals. In addition, the risk of a decrease in
the market price of owned precious metal can be substantial. The terms of sale
within the ECPS allow us to charge customers for the current market value of
silver. Thus far we have been successful in managing the costs associated with
our precious metals. While limited amounts are purchased for use in production,
the vast majority of our precious metal inventory continues to be leased or held
on consignment. If our leasing/consignment fees increase significantly in a
short period of time, and we are unable to recover these increased costs through
higher sale prices, a negative impact on our results of operations and liquidity
may result. We believe this risk is shared by all of our competitors.
Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and the Euro. We refer to the 11 countries as the participating countries and
the participating countries' sovereign currencies as the legacy currencies.
The legacy currencies are scheduled to remain legal tender in the
participating countries as denominations of the Euro between January 1, 1999 and
July 1, 2002. During this transition period, public and private parties may pay
for goods and services using either the Euro or a legacy currency. Beginning
January 1, 2002, the participating countries will issue new Euro-denominated
bills and coins for use in cash transactions. By July 1, 2002, the participating
countries will withdraw all bills and coins denominated in the legacy
currencies, so that the legacy currencies no longer will be legal tender for any
transactions. The conversion to the Euro will then be complete, except for
additional participating countries.
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We have developed plans to ensure, to the extent possible, that the
Euro will not negatively impact our operating systems. On a company-wide basis,
those efforts have been coordinated by the corporate treasury department and
have included internal personnel as well as external consultants. The Company
does not expect costs of system modifications to be material, nor does it expect
the introduction and use of the euro to materially and adversely affect our
revenue, operating results or liquidity. We will continue to evaluate the impact
of the euro introduction.
Subsequent Event
On October 23, 2000, we announced a two-for-one stock split in the form
of a 100% stock dividend payable on November 27, 2000. At that time, one
additional share of stock will be issued for each share outstanding to
shareholders of record on November 6, 2000.
Factors That May Affect Our Future Results (Cautionary Statements for Purposes
of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act
of 1995)
Our disclosures and analysis in this report contain forward-looking
statements. Forward-looking statements reflect our current expectations of
future events. You can identify these statements by the fact that they do not
relate strictly to historical or current facts. They often (but not always) use
words such as "anticipate", "estimate", "expect", "project", "intend", "plan",
"believe", and similar terms. From time to time, we also provide oral or written
forward-looking statements in other materials we release to the public.
Any or all of our forward-looking statements in this report and in any
other public statements we make may turn out to be wrong. They may be affected
by inaccurate assumptions we might make or by risks and uncertainties which are
either unknown or not fully known or understood. Consequentially, no
forward-looking statement can be guaranteed. Actual future results may, and
probably will, vary materially.
We do not provide forecasts of future financial performance. We are
optimistic about our long-term prospects; however, the following issues and
uncertainties, among others, should be considered in evaluating our prospects
for the future.
Some of Our Products Are Subject to Rapid Technological Changes.
The ECS operates in an industry known for rapid change, consolidation,
uncertainty and constant new and emerging technologies. Generally, we expect
product life cycles to be very short. Changes in recent years due to the
Internet, on-line services and expansion of networking require the ECS to
maintain a strong engineering and development program. The program is necessary
to avoid product obsolescence and to meet or exceed customer expectations.
Accordingly, we expect to continue to spend money on engineering and development
with no assurances that our efforts in these areas will continue to be
successful.
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We Cannot Predict the Market Growth Rate for Our Products.
The ECS sells its products into markets that are characterized by
rapidly changing growth rates. These markets include LAN, telecommunication
devices and power-conversion products. It is often difficult for our customers
or us to assess worldwide demand for upgrades or replacement of networks, or the
pace at which telecommunication infrastructure will be deployed throughout the
world. The markets may counterbalance one another in terms of growth or they may
move in the same direction. All of these variables will impact ECS growth rates.
The growth rates of housing, construction, appliance, telecommunication
systems and auto sales, which are highly cyclical, will impact the revenue
growth of the ECPS and the ECS.
We May Receive Lower Prices for Our Products.
Both the ECPS and the ECS operate in businesses characterized by
continually declining average selling prices on existing products. Future prices
for our products may decrease from historical levels, depending on competition
and other factors, and we may not be able to bring our manufacturing costs down
proportionately or continue to introduce new products, each of which is
necessary to maintain profitability.
We May Not Be Able to Maintain Our Current Gross Margins and Operating Margins
as a Percentage of Sales.
Cost of sales as a percentage of sales is different for each segment
and can vary greatly based on sales mix and method of distribution. Mix factors
may increase cost of sales as a percentage of sales in the future. Acquisitions
that we make may also reduce our gross margin and operating margin percentages,
temporarily or permanently. We may not be able to reduce selling, general and
administrate expenses at the same rate as a reduction in gross margins.
We May Not Be Able to Obtain Sufficient Quantities of Raw Materials.
If we cannot obtain sufficient quantities of raw materials, including
precious metals used by the ECPS, or if the cost of those materials increases
significantly, and we cannot increase our selling prices, future operating
results could be much different from our expectations. Please refer to the
discussion of precious metal on page 18 of this report.
We May Not Successfully Identify, Integrate, or Manage Acquisitions.
We have completed several acquisitions over the past three years. The
degree of success of these acquisitions depends on our ability to:
o successfully integrate or consolidate acquired operations into
our existing segments;
o identify and take advantage of cost reduction opportunities; and
o further penetrate the market for the products acquired.
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Integration of acquisitions may take longer than expected and may never be
achieved to the extent originally anticipated. This could result in business
growth which may be less than anticipated or manufacturing costs which are
higher than anticipated. In addition, acquisitions may cause a disruption in our
ongoing business, distract our managers, unduly tax our other resources and make
it difficult or impossible to maintain our historical standards, procedures and
controls.
The timing, price, structure and success of future acquisitions are
uncertain. In addition, we may not be able to identify suitable acquisition
candidates at reasonable prices, thereby reducing the aggressive acquisition
component of our growth.
We Operate Internationally and in Developing Countries.
We have significant operations outside the United States. These
operations, like all international operations, are subject to a number of risks
including:
o currency fluctuations;
o capital and exchange control regulations;
o restrictive government actions; and
o expropriation and nationalization.
We believe that the risks in international operations are greatest in
developing countries. The ECS has significant manufacturing operations in
several developing countries, especially the People's Republic of China.
Although the PRC is one of the world's fastest growing economies, its potential
economic, political and labor developments provide uncertainties and risks.
While the PRC has been receptive to foreign investment, we can't be certain that
the current policies will continue indefinitely into the future. If any country
in which we have significant operations adopts economic, legal, or trading
policies harmful to private industry or foreign investment, such policies could
affect us significantly.
The unpredictability of economic forces and government policies in
foreign countries could cause changes to the favorable operating conditions we
have experienced in recent years. We continually monitor business conditions in
all of the regions where we operate.
Effectively Managing Our Growth May Be Difficult.
We have grown rapidly in the last five years, and we expect to continue
to grow internally and through additional acquisitions. This growth is likely to
place significant strain on our resources and systems. To manage our growth, we
must implement systems, recruit and develop additional human resources and
control our operations by continually training employees at every level.
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Other Factors
In addition to the factors discussed above, other factors which could
materially affect actual results include, but are not limited to:
o business conditions and the degree of optimism affecting the
economies throughout the world in general;
o competitive factors such as competitors seeking increased market
share based on price;
o manufacturing efficiencies and capacity;
o legal liability unknown at this time;
o risk of obsolescence due to shifts in market demand;
o information technology issues related to our computer systems or
the computer systems of our suppliers or customers;
o the timing of customer product introductions; and
o precious metals leasing costs cannot always be recovered.
We believe that we have the market opportunities, product offerings,
facilities, personnel and competitive and financial resources for continued
business success. However, future events, costs, margins, product mix and
profits are all subject to unpredictable factors including those discussed
above.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
There were no material changes in market risk exposures that affect the
quantitative and qualitative disclosures presented in our Form 10-K for the year
ended December 31, 1999.
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PART II. OTHER INFORMATION
Item 1 Legal Proceedings None
Item 2 Changes in Securities and Use of Proceeds None
Item 3 Defaults Upon Senior Securities None
Item 4 Submission of Matters to a Vote of Security Holders None
Item 5 Other Information None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibit Index is on page 24
(b) Reports On Form 8-K None
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Exhibit Index
Document
--------
3.(i) Articles of Incorporation Incorporated by reference to Exhibit
1 from Form 8-A/A dated April 10,
1998
(ii) By-laws Incorporated by reference to Exhibit
3 (ii) from Form 10-Q for the
quarter ended July 2, 1999
4. Instruments defining rights of Incorporated by reference to Form
security holders 8-A/A dated July 5, 2000
27. Financial Data Schedule Electronic Filing Only
--------------------------------------------------------------------------------
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Technitrol, Inc.
-------------------------------------
(Registrant)
November 8, 2000 /s/Albert Thorp, III
----------------------------- -------------------------------------
(Date) Albert Thorp, III
Vice President - Finance and
Chief Financial Officer
(Principal Financial Officer)
November 8, 2000 /s/Drew A. Moyer
----------------------------- -------------------------------------
(Date) Drew A. Moyer
Corporate Controller and Secretary
(Principal Accounting Officer)
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