Item 1 Business
General
Technitrol, Inc. is a global manufacturer of electronic and metallurgical components. We incorporated in Pennsylvania on April 10, 1947.
We operate two business segments: the Electronic Components Segment and the Metallurgical Components Segment. We refer to these segments as the ECS and the MCS. Each segment is managed by a President who reports to our Chief Executive Officer. Prior to June 4, 1997, we operated a third segment, the Test & Measurement Products Segment. We sold this segment to focus our resources on designing, manufacturing and marketing electronic and metallurgical components.
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, Internet connectivity, telecommunication and power-conversion products. We manufacture these products in the United States, Ireland, France, Malaysia, Thailand, the Philippines and the People's Republic of China. We sometimes refer to the People's Republic of China as the PRC.
Our strategy is to expand our electronic components business through a combination of internal growth and acquiring companies in the electronic components business. Acquisitions during the last several years include:
o Pulse Engineering, Inc. - In 1995, we acquired Pulse Engineering, Inc., with manufacturing locations in Ireland and China. The addition of Pulse significantly increased the size of our ECS business.
o The magnetic components business of Northern Telecom, Ltd. - We completed this acquisition on November 30, 1997. The primary assets we purchased included manufacturing plants in Malaysia and Thailand and a design engineering group in Canada. These assets primarily serve the 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.
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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 substantially 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.
Metallurgical Components Segment
Our Metallurgical Components Segment manufactures:
o electrical contacts and assemblies;
o contact materials;
o thermostatic bimetals;
o clad metal products; and
o precision contact subassemblies.
We also provide electroplating and refining services.
We sell these metallurgical components to a wide range of industrial and consumer product manufacturers. Our products are used in a variety of applications which affect daily living including:
o residential, commercial and industrial circuit breakers;
o motor controls;
o switches and relays;
o wiring devices;
o temperature controls;
o appliances;
o automobiles;
o telecommunications products; and
o various other electrical products.
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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 metallurgical businesses. This business was then combined with our existing metallurgical component operations in North America. All of our metallurgical component 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.
During the fourth quarter of 1999, we made two acquisitions and substantially completed a third. In November of 1999, we acquired the operating assets of the Tianjin Electrical Metal Works electrical contacts business based in Tianjin, PRC. On December 22, 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 completed an acquisition of a tool and die design and manufacturing operation near Tallinn, Estonia. These most recent acquisitions provide the MCS with additional lower-cost operating locations and an enhanced market presence in key areas of the business.
In 1999, the MCS manufactured in the United States, Germany, Spain, Puerto Rico and Mexico. We began manufacturing metallurgical products in Italy, the PRC and Estonia during the first quarter of 2000.
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Business Segment Financial Information. Amounts are in thousands:
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Our segments generally recognize revenue when the products are shipped to customers. We offer our customers credit terms which we believe are generally consistent with the terms offered in our industries. We reserve for or write off a customer account when we no longer feel the customer can or will pay us. We believe that the quality of our customers, which are generally large global companies, and our extensive customer base limit our exposure to significant concentrations of customer credit risk. For example, no customer accounted for more than 10% of sales in 1999, 1998 or 1997. Sales to our ten largest customers accounted for 32% of sales in 1999, 36% of sales in 1998 and 24% of sales in 1997. Depending on the amount of cash we have from time to time, we may maintain significant cash investments at financial institutions.
We do not use income taxes when measuring the segment results; however, we allocate income taxes to the segments to determine certain performance measures. These performance measures include return on employed capital and economic profit. The following pro forma disclosure of segment income tax expense is based on simplified assumptions and includes allocations of corporate tax items. These 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, $10,834, $12,275 and $10,022 in 1999, 1998 and 1997, respectively. For the MCS, they were, in thousands, $3,863, $6,759 and $7,656 in 1999, 1998 and 1997, respectively.
Geographic Information
Our sales are not concentrated in any particular geographic area. We sell our products to customers in North America and throughout the world. The following table summarizes our sales to customers in the United States and Germany, where sales are significant. Other countries in which our sales are not significant are grouped into regions. We attribute customer sales to the country addressed in the sales invoice. The product is usually shipped to the same country. Amounts are in thousands.
1999 1998 1997 ---- ---- ---- Sales to customers in: United States $226,376 $180,541 $177,701 Europe, other than Germany 108,339 98,892 97,122 Germany 86,174 85,860 76,026 Asia 70,589 55,914 33,375 North America, other than U.S. 36,507 24,972 9,945 Other 2,451 2,360 2,898 -------- -------- -------- Total $530,436 $448,539 $397,067 ======== ======== ========
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The following table includes net property, plant and equipment located in the United States, Germany and China where assets are significant. Other countries in which such assets are not significant are grouped into regions. Property, plant and equipment represents all of our relevant assets which have long useful lives. Amounts are in thousands.
1999 1998 1997 ---- ---- ---- Net property, plant and equipment located in: United States $22,554 $23,469 $18,476 China 19,170 19,507 11,320 Germany 14,639 16,466 12,608 Asia, other than China 12,563 15,210 11,818 Europe, other than Germany 10,659 11,156 5,276 Other 3,137 3,260 165 ------- ------- ------- Total $82,722 $89,068 $59,663 ======= ======= =======
International Operations
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 has a large and growing economy, its potential economic, political and labor developments necessarily entail uncertainties and risks. The risks posed to us are not unique and we believe are the same as those posed to any U.S. company doing business in the PRC. 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.
Sales and Marketing
Sales managers, district managers, direct salespeople and sales agents execute our sales and marketing activities.
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Competition
We operate in highly competitive industries. The industries are characterized by numerous firms competing in international markets.
Backlog
Our backlog of orders at December 31, 1999 was $92.5 million compared to $77.3 million at the end of 1998. We expect to ship the majority of the backlog over the next six months. Our delivery times vary between segments but are generally less than thirteen weeks. Customers can cancel orders upon payment of cancellation charges. As more customers adopt "demand-pull" and other creative inventory management policies, we believe backlog is a less accurate indicator of near-term business activity than it was previously.
Raw Materials
We are not dependent on any particular source of supply. However, there are not a lot of suppliers of certain:
o ferrite materials used in electronic components;
o powder metals used in electrical contacts; and
o specialty steel used in metal laminates.
We have not had any significant difficulties obtaining these raw materials and do not currently anticipate we will have any significant difficulties.
The MCS uses silver and other precious metals as raw material. Historically, these precious metals have been readily available. However, early in 1998, the demand for silver increased significantly, and the price of silver and associated financing costs also increased. This occurred again during the early part of 1999, although to a lesser extent. The terms of sale within the MCS allow us to charge customers for the current market value of silver. However, financing and other costs cannot always be recovered. Thus far we have been successful in managing the costs associated with our precious metals. However, if the terms and conditions under which we obtain silver or other precious metals change significantly in a short period of time, we may experience a negative impact on our future operating results.
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Research and Development
We do not engage in any basic research activities. Our engineers improve existing products and develop new products related to current or new product lines. The amount of expenses we incurred for research and development activities in each of the last three years is included in Note 5 of Notes to Consolidated Financial Statements. We own numerous patents, trademarks and tradenames, but we do not consider our earnings to be materially dependent upon any one patent, trademark or license.
Environment
Federal, state, and local environmental laws affect most of our manufacturing operations. These laws relate to the discharge of materials and the protection of the environment. We will continue to make expenditures to meet or exceed the environmental standards set by these laws. We charge to earnings or capitalize, as appropriate, the environmental expenditures as they are incurred.
We are studying and undertaking certain remedial action with respect to groundwater pollution and soil contamination at a former GTI facility. The facility is located in Leesburg, Indiana. We anticipate making additional environmental expenditures related to this facility in future years. The expenditures will be for continued environmental studies and analysis and, upon mutual agreement with appropriate state agencies, implementation of a remediation plan. Based on our current knowledge of the situation, we do not anticipate that the future expenses associated with the environmental remediation will have a material impact on our financial position.
We are also involved in several matters relating to superfund sites, none of which belong to us. Our 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. While we cannot predict the future costs of cleanup activities, capital expenditures, or operating costs for environmental compliance at these sites, we do not believe they (alone or together) will have a material effect on our capital expenditures, earnings or competitive position.
We have reserves which we believe are sufficient to cover the aggregate amount of our ultimate environmental liability. These reserves are not material to our current financial position.
Employees
At December 31, 1999, we had approximately 21,600 full time employees compared with 21,400 at the end of 1998. Some of our ECS operations in Asia are labor intensive.
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Energy
We did not have difficulty obtaining supplies of electricity, gas or oil in 1999, and we do not expect difficulty in 2000.
In developing countries, we may experience short interruptions of electrical service or other utilities from time to time. Our facilities in those countries generally maintain independent power supplies through back-up generators. As a result, power interruptions have not had and are not expected to have a material effect on our operations.
Products
Within each segment, the primary products sold are similar in design, material content, production process, application and customer base. We continually introduce new or improved products in response to customers' needs and changes within the markets served. For more information on our products, see pages 2, 3 and 4.
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 and in our 1999 annual report to shareholders contain forward-looking statements. Forward-looking statements give 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, in our 1999 annual 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.
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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.
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 MCS and the ECS.
We May Receive Lower Prices for Our Products.
Both the MCS 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 average selling prices and profitability.
We May Not Be Able to Maintain Our Current Gross 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 percentages, temporarily or permanently.
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 MCS, 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 raw materials on page 8 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;
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o identify and take advantage of cost reduction opportunities; and
o further penetrate the market for the products acquired.
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 are a global company subject to the risks of doing business outside of the United States, particularly in developing countries. Please refer to the discussion of international operations on pages 6 and 7.
The slowing of Asian economies during the latter part of the 1990s affected portions of our business as the installation and growth of communications and electrical infrastructure systems that utilize our components were delayed. During the fourth quarter of 1999, we saw improvements in this market. We remain optimistic about our prospects in the Asia Pacific region and we are committed to our presence in Asia. We believe our widespread manufacturing presence in Asia has been a key factor in our success. Nevertheless, we are aware of the inherent unpredictability of the economic situation in Asia. We attempt to carefully monitor all relevant developments throughout Asia.
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 (please see management's discussion and analysis in Item 7 of Part II of this report); and
o the timing of customer product introductions.
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 2
Item 2 Properties
We produce and market our products all over the world. At December 31, 1999, we operated 22 manufacturing plants in 12 countries. Our corporate offices are located in Trevose, Pennsylvania where we lease approximately 11,000 square feet of office space. The lease expires in 2006.
At December 31, 1999, the ECS had 9 manufacturing facilities, 6 of which are owned. Principal manufacturing facilities are located in the People's Republic of China, the Philippines, Malaysia, Thailand and Ireland. The PRC facilities are operated under negotiated contracts with the provincial government of China. In addition to the manufacturing space, each PRC facility includes space for staff quarters and dormitories. The ECS also owns and leases office and warehouse space in San Diego to serve as the segment's headquarters and North American distribution center. Including office space for administrative and sales functions, the ECS owns approximately 382,000 square feet of space and leases approximately 1,774,000 square feet. The lease terms vary by facility. See Note 7 of Notes to Consolidated Financial Statements for additional information related to our outstanding leases.
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The MCS operates 13 manufacturing plants. The plants are located in the United States, Europe, Puerto Rico, Mexico and China. The MCS owns the majority of its manufacturing facilities. The only major manufacturing plant leased is located in Export, Pennsylvania. This lease expires in 2001 but it is expected to be renewed. Total space used by the MCS is 1,303,000 square feet, including office space for administrative and sales functions.
The productive capacity and extent of utilization of our facilities are difficult to quantify. In any one facility, maximum capacity and utilization vary periodically depending on the segment's manufacturing strategies, the product being manufactured and the current market conditions and demand. We estimate that our average utilization of overall production capacity in 1999 was between 75% and 90%.
Item 3
Item 3 Legal Proceedings
We have been named in several lawsuits. We consider lawsuits to be part of what arises in the normal course of business. We do not expect the outcome of any of these lawsuits to have a material adverse effect on our consolidated financial condition.
Item 4
Item 4 Submission of Matters to a Vote of Security Holders - None
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Part II
Item 5
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is traded on the New York Stock Exchange. The following table reflects the highest and lowest sales prices in each quarter of the last two years. The dividends paid are also shown.
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- -------
1999 High $32.19 $32.63 $37.19 $46.25
1999 Low $19.88 $22.63 $32.38 $31.56
1999 Dividends Paid $.0600 $.0600 $.0675 $.0675
1998 High $39.50 $44.38 $43.38 $32.50
1998 Low $27.38 $37.00 $18.00 $16.88
1998 Dividends Paid $.0525 $.0600 $.0600 $.0600
On January 7, 2000, there were approximately 1,421 registered holders of our common stock which has a par value of $.125 per share and is the only class of stock that we have outstanding.
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Item 6
Item 6 Selected Financial Data (In Thousands, Except Per Share Data)
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Item 7
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
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. Please refer to pages 10 through 13 of this report for a description of "forward-looking statements" and factors that may affect future results.
We are making the statements below to inform our shareholders of our general financial condition and our results of operations. We are not trying to influence investors to buy or sell our securities.
Business Overview
Please refer to Part I, Item I for a description of our continuing businesses and strategic initiatives.
In June 1997, we sold our Test & Measurement Products Segment, which manufactured material testing systems, force measurement products and weighing devices. We sold these businesses because they did not fit within our core competencies and did not offer us opportunities to create significant shareholder value. The Test & Measurement Products Segment is reported as discontinued operations in the accompanying financial statements.
We believe that the investments, divestiture and strategies described in Part I, Item I and in the preceding paragraph have positioned us for future growth and the creation of additional shareholder value.
Liquidity and Capital Resources
Working capital at December 31, 1999 was $141.9 million, an increase of $39.5 million from the working capital of $102.3 million at December 31, 1998. Worldwide, cash on hand at December 31, 1999 was $88.2 million, approximately $37.6 million greater than at December 31, 1998. Cash provided by operating activities, supplemented by $4.6 million of net borrowings, was more than adequate to pay for capital expenditures, acquisitions, and dividends.
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. At December 31, 1999, we had approximately $146.0 million of unused lines of credit from banks.
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Cash Flows from Operating Activities
Cash flow from operations was $69.3 million for the year ended December 31, 1999, an increase of $19.5 million from 1998. Net earnings before depreciation and amortization, reductions in net deferred tax assets and inventory and an increase in accounts payable contributed to cash provided by operations. Offsetting these favorable cash flow factors were an increase in accounts receivable due to record sales levels contributed by the ECS during the fourth quarter of 1999 and a decrease in accured expenses due to payments for income taxes and for acquisition related transaction and integration expenses.
Cash Flows from Investing Activities
Cash used by investing activities was $32.9 million during 1999. We used approximately $15.3 million of cash to pay for acquisitions and $18.8 million to pay for capital expenditures.
Cash payments for capital expenditures, excluding acquisitions, represented approximately 3.5% of net sales during 1999 and exceeded overall depreciation by about $3.1 million. We make capital expenditures to expand production capacity and to improve our operating efficiency. We expect to continue making such expenditures.
With the exception of approximately $7.2 million of retained earnings in China which are restricted by 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
During 1999, we borrowed approximately $77.8 million and repaid approximately $73.2 million of debt. We entered into two DM10.0 million unsecured loan facilities in Germany in order to convert a portion of our outstanding credit from a variable-rate revolver to a fixed-rate term debt. One facility is due in July 2003 and bears interest at a rate of 4.85%. The second facility terminates in August 2009 and bears interest at 5.65%. In addition, we entered into an additional variable-rate Eurocurrency revolving credit facility. This facility has a maximum draw of $20.0 million and is due in June 2001. We used the proceeds of the additional debt instruments to finance acquisitions, working capital and capital expenditures.
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We have paid dividends for the last 95 consecutive quarters. Dividends paid in 1999 were $4.1 million compared to $3.8 million in 1998. We expect to continue making quarterly dividend payments for the foreseeable future.
Foreign Currency Effects
During 1999, the Euro devalued approximately 14% relative to the U.S. dollar. As a result, we incurred foreign currency losses at our ECS European operations, as Euro denominated net assets were translated to U.S. dollars for financial reporting purposes. In addition, we experienced a negative translation adjustment to equity as our investment in the MCS's European operations became worth less in U.S. dollars than it was prior to the devaluation of the Euro. This U.S. dollar decrease in investment value for 1999 resulted in a reduction in equity of approximately $1.8 million.
During 1998, we did not experience any significant foreign currency gains or losses but had a positive adjustment to equity as a result of strengthening of the Deutsche mark and the French franc during the second half of 1998.
During 1997, currencies of several of the Asian countries in which we manufacture and/or sell products devalued significantly relative to the U.S. dollar. The majority of our sales originating in those countries, as well as the majority of raw material purchased, are denominated in U.S. dollars. Expenses in those countries, particularly labor and overhead, are denominated and paid in local currencies which devalued against the U.S. dollar. As a result, the devaluation of these local currencies favorably affected our profitability by reducing the manufacturing costs incurred in those countries.
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 AMI Doduco'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 foreign currency fluctuations.
Please see the section titled "Foreign Currency Risk" under Item 7a
Item 7a Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our financial instruments exposed to changes in interest rates are long-term debt obligations. We invest our excess cash with high-credit-rated financial institutions. We limit our exposure to any one financial institution to the extent practical. Our board has adopted policies relating to these risks and the audit committee of the board continually monitors compliance with these policies.
The majority of our credit facilities have variable interest rates. Accordingly, interest expense may increase if the rates associated with, or the amount of, our borrowings move higher. In addition, we may pursue additional or alternative financing for growth opportunities in one or both 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 of these instruments to date.
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The table below presents principal amounts in equivalent U.S. dollars and related weighted average interest rates by year of maturity for our debt obligations. The carrying value of long-term debt approximates its fair value after taking into consideration current rates offered to us for similar debt instruments of comparable maturities. We do not hold or issue financial instruments or derivative financial instruments for trading purposes. Amounts are in thousands:
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Foreign Currency Risk
We conduct business in various foreign currencies, including those of emerging market countries in Asia and well-developed European countries. 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. In determining the use of forward exchange contracts and currency options, we consider the amount of sales and purchases made in local currencies, the type of currency, and the costs associated with the contracts. At December 31, 1999, the Company did not have any currency exchange forward contracts or currency options outstanding.
The table below provides information about our non-derivative financial instruments and presents the information in equivalent U.S. dollars. Amounts are in thousands:
Item 8
Item 8 Financial Statements and Supplementary Data
Information required by this item is incorporated by reference from the Independent Auditor's Report found on page 32 and from the consolidated financial statements and supplementary schedule on pages 33 through 58.
Item 9
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
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Part III
Cross Reference Index
Part IV
Item 14
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, 1999 and 1998 Consolidated Statements of Earnings - Years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Changes in Shareholders' Equity - Years ended December 31, 1999, 1998 and 1997 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)
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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/James M. Papada, III ----------------------- James M. Papada, III Chairman of the Board of Directors, Chief Executive Officer and Director
Date March 13, 2000
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 By /s/Graham Humes ----------------------- ------------------------------------ Stanley E. Basara Graham Humes Director Director
Date March 13, 2000 Date March 13, 2000
By By /s/Edward M. Mazze ----------------------- ------------------------------------ John E. Burrows, Jr. Edward M. Mazze Director Director
Date March 13, 2000 Date March 13, 2000
By /s/Rajiv L. Gupta By /s/Drew A. Moyer ----------------------- ------------------------------------ Rajiv L. Gupta Drew A. Moyer Director Corporate Controller and Secretary (Principal Accounting Officer) Date March 13, 2000 Date March 13, 2000 By ----------------------- J. Barton Harrison By /s/Albert Thorp, III Director ------------------------------------ Albert Thorp, III Date March 13, 2000 Vice President - Finance and Chief Financial Officer (Principal Financial Officer) By /s/Roy E. Hock ----------------------- Date March 13, 2000 Roy E. Hock Director
Date March 13, 2000
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Index to Financial Statements and Schedules
Financial Statements --------------------
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Earnings - Years ended December 31, 1999, 1998 and
Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998 and
Consolidated Statements of Changes in Shareholders' Equity - Years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Financial Statement Schedule ----------------------------
Schedule II - Valuation and Qualifying Accounts
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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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, 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 LLP
Philadelphia, Pennsylvania February 25, 2000
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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 ($39.5 million at December 31, 1999, and $40.0 million at December 31, 1998). This inventory consists primarily of precious metals which are used in the Company's metallurgical components manufacturing business. Included in interest expense for the year ended December 31, 1999 are consignment interest fees of $1.4 million. These interest costs were $1.4 million and $.4 million in 1998 and 1997, respectively.
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 of assets 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.
(continued)
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Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued -------------------------------------------
Excess of Cost over Net Assets - ------------------------------ Excess of cost over net assets acquired is amortized on a straight-line basis over 15 years. When events and circumstances so indicate, the recoverability of its carrying value is evaluated by determining whether its remaining balance can be recovered through future undiscounted cash flows from operations. Such events and circumstances include a sale of all or a significant part of the operations associated with the excess of cost over net assets acquired, or a significant decline in the operating performance of the net assets. If an evaluation indicates that the carrying value cannot be recovered through future operating undiscounted cash flows, an impairment charge will be recorded by discounting the future operating cash flows using the implied cost of capital for that business segment and comparing the resulting discounted cash flow to the carrying value.
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.
Financial Instruments and Derivative Financial Instruments - ---------------------------------------------------------- The carrying value of cash and cash equivalents, accounts receivable, short-term borrowings and accounts payable 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.
(continued)
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Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued -------------------------------------------
The Company is exposed to market risk from changes in interest rates, foreign currency exchange rates and precious metal prices. To mitigate the risk from these changes, the Company periodically enters into hedging transactions which have been authorized pursuant to the Company's policies and procedures. Gains and losses related to qualified hedges of firm commitments and anticipated transactions are deferred and are recognized in income or as adjustments of carrying amounts when the hedged transaction occurs. All other forward exchange and option contracts are marked-to-market and unrealized gains and losses are included in current-period net income. At December 31, 1999, the Company did not have any derivative financial instruments outstanding, other than to sell forward approximately $1.2 million of precious metal purchased as part of the acquisition of MEC Betras Italia S.r.l. on December 22, 1999.
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, 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.
(2) Acquisitions and Divestitures -----------------------------
Acquisitions
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. The Metallurgical Components Segment ("MCS") did not operate these assets until January of 2000; therefore, the acquisition had no impact on the Company's 1999 operating results. Historical proforma results of operations would not be materially different from actual results.
Tianjin Electrical Metal Works: In November 1999, the Company, through the ------------------------------- MCS, 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. The impact on the Company's operating results is also immaterial. Historical proforma results of operations would not be materially different from actual results.
(continued)
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Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(2) Acquisitions and Divestitures, continued -----------------------------
GTI Corporation ("GTI"): On November 16, 1998, the Company acquired all of ------------------------ the capital stock of GTI, whose principal operating unit was Valor Electronics, Inc. ("Valor"). Valor designed and manufactured magnetics-based components for signal processing and power transfer functions used primarily in local area networking and also in telecommunications and broadband products. At the time of acquisition, manufacturing operations were located in the People's Republic of China and the Philippines. GTI's corporate offices were located in San Diego, California.
The total purchase price included approximately $34.0 million paid to the former shareholders of GTI. In addition, transaction expenses and related acquisition costs were incurred. To complete the acquisition, the Company used approximately $14.0 million of cash on hand, and drew down approximately $20.0 million from previously unused bank lines of credit.
The acquisition was accounted for by the purchase method of accounting. An allocation of purchase price to the assets acquired and liabilities assumed has been made using fair values that include values based on independent appraisals and management estimates. The fair value of the assets acquired and liabilities assumed approximated $45.9 million and $15.8 million, respectively. The excess of costs over net assets acquired approximated $5.8 million. These amounts reflect adjustments made during 1999 to reflect the final allocation of the purchase price to the fair value of assets acquired and liabilities assumed.
The liabilities assumed included a reserve of approximately $3.7 million for restructuring the GTI businesses. The amount was established in accordance with Emerging Issues Task Force Issue 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination," and is intended to cover the estimated expenses related to integrating GTI's operations into existing Electronic Components Segment ("ECS") facilities. Expenses have been, and are expected to be, incurred primarily for terminating employees, leasehold terminations and other related exit costs. Actual expenses charged to the reserve through December 31, 1999 approximate $3.0 million.
(continued)
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Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(2) Acquisitions and Divestitures, continued ------------------------------
GTI experienced significant financial difficulty prior to its acquisition by the Company, and the Company has made significant changes in GTI's businesses, as noted above. As a result, the Company does not believe that the following unaudited pro forma financial information, which reflects continuing operations only and assumes GTI was acquired on January 1, 1997, 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, 1998 Dec. 31, 1997 ------------- ------------- Net sales $489,336 $479,658 Net earnings $17,627 $29,091 Diluted earnings per share $1.09 $1.80
FEE Technology, S.A. ("FEE"): On July 3, 1998, the Company purchased all of -------------------- the capital stock of FEE. FEE designed and manufactured magnetic components for telecommunications and power conversion equipment. FEE is now part of the ECS.
The total purchase price including assumed debt was approximately $17.0 million and was funded by cash on hand. In addition, transaction expenses and related acquisition costs were incurred. The approximate fair value of the net assets acquired was $8.3 million resulting in goodwill of approximately $8.7 million. The fair value of liabilities assumed included approximately $1.7 million for restructuring the FEE businesses, which was substantially completed by December 31, 1999. The $1.7 million was primarily for severance payments and other related exit costs resulting from closing factories. These amounts include adjustments made during 1999 to reflect the final allocation of the purchase price to the fair market value of assets acquired and liabilities assumed.
The acquisition was accounted for by the purchase method of accounting and, therefore, the financial results of FEE have been included with those of the Company beginning on July 3, 1998. Historical pro forma results of operations would not be materially different from actual results.
Certain Assets of Metales y Contactos, S.A. de C.V. ("Metales"): On July 3, ---------------------------------------------------------------- 1998, the Company, through the MCS, acquired certain assets of Metales. The purchase price of Metales' assets was not material to the Company's consolidated financial position. The results of the Metallurgical Components Segment include the results of operating the acquired assets from July 3, 1998.
(continued)
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Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(2) Acquisitions and Divestitures, continued ------------------------------
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. The acquisition of the Business was accounted for by the purchase method of accounting. The purchase price was approximately $22.5 million including transaction expenses. The fair value of the net assets acquired approximated $8.0 million. The purchase price was funded by cash on hand, including cash received from the sale of the Test & Measurement Products Segment, as explained below.
The following unaudited pro forma financial information, which reflects continuing operations only, assumes that the Business was acquired on January 1, 1997, and is provided for comparative purposes only. It does not purport to be indicative of the results that actually would have occurred if the acquisition had been consummated on the date indicated or which may be attained in the future (in thousands, except for earnings per share).
Year Ended Dec. 31, 1997 ------------- Net sales $430,242 Net earnings $30,275 Diluted earnings per share $1.88
Divestitures
Test & Measurement Products Segment: On June 4, 1997, the Company completed ------------------------------------ the sale of those entities which 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 and 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.
(continued)
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Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(2) Acquisitions and Divestitures, continued ------------------------------
For the year-ended December 31, 1997, the impact of the divestiture on earnings per share was as follows:
Year Ended Dec. 31, 1997 ------------- Earnings per share from continuing operations: Basic $1.81 Diluted 1.80 Discontinued operations, net of tax: Earnings per share from operations - basic and diluted .02 Earnings per share from gain on disposal - basic and diluted .71 Earnings per share: Basic 2.54 Diluted 2.53
(3) Financial Statement Details ---------------------------
The following provides details for certain financial statement captions at December 31, 1999 and 1998 (in thousands):
1999 1998 ---- ---- Inventories: Finished goods $ 21,916 $ 27,376 Work in progress 13,624 14,926 Raw materials and supplies 29,561 28,928 -------- -------- $ 65,101 $ 71,230 ======== ======== Property, plant and equipment, at cost: Land $ 4,226 $ 4,549 Buildings and improvements 30,951 30,431 Machinery and equipment 115,749 114,055 -------- -------- $150,926 $149,035 ======== ======== Accrued expenses: Income taxes payable $ 20,868 $ 32,301 Dividends payable 1,098 970 Accrued compensation 15,552 14,977 Other accrued expenses 33,566 29,825 -------- -------- $ 71,084 $ 78,073 ======== ========
(continued)
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Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(4) Long-term Debt --------------
At December 31, 1999 and 1998, long-term debt was as follows (in thousands):
(continued)
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Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(4) Long-term Debt, continued ---------------
At the Company's option, interest on the $125.0 million multi-currency revolving credit facility may be based on the prime rate or on LIBOR.
The facility expiring on June 30, 2000 is secured by a pledge of the stock of certain of the Company's domestic subsidiaries. All outstanding borrowings on that facility are denominated in U.S. dollars. The borrowings have been classified as non-current because the Company has the ability and the intent to refinance these obligations on a long-term basis.
The Company entered into the Eurocurrency revolving credit facility during the fourth quarter of 1999. The facility is unsecured and outstanding borrowings are denominated in the Euro.
The multi-currency facility terminating on December 31, 2001 is unsecured. All outstanding borrowings are denominated in Deutsche marks.
The Company has two fixed-rate term loans due on June 26, 2003. Each is for approximately $5.1 million as of December 31, 1999. The interest rates are 5.57% and 4.85%. The 4.85% term loan was entered into during 1999.
The Company also entered into a third fixed-rate term loan during 1999. This 5.65% term loan is due August 2, 2009.
The proceeds from the additional debt instruments entered into during 1999 were used to reduce the amounts outstanding under the previously existing revolving credit facilities and to finance acquisitions, working capital and capital expenditures.
Principal payments due within the next five years are as follows (in thousands):
2000 $11,167 2001 33,156 2002 164 2003 10,477 2004 147
The bank loan facilities contain certain covenants requiring maintenance of minimum net worth and other customary and normal provisions. The Company is in compliance with all such covenants.
(continued)
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Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(5) Research, Development and Engineering Expenses ----------------------------------------------
Research, development and engineering expenses ("RD&E") are included in selling, general and administrative expenses and were $19.6 million, $16.8 million and $16.4 million in 1999, 1998 and 1997, 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 $12.8 million, $12.5 million and $7.2 million in 1999, 1998 and 1997, respectively.
(6) Income Taxes ------------
Earnings before income taxes were as follows (in thousands):
1999 1998 1997 ---- ---- ---- Domestic $ 934 $ 5,984 $23,306 Non-U.S. 58,075 46,359 46,537 ------- ------- ------- Total $59,009 $52,343 $69,843 ======= ======= =======
Earnings attributable to continuing operations were (in thousands) $59,009, $52,343 and $46,764 in 1999, 1998 and 1997, respectively.
Income tax expense was as follows (in thousands):
Current: 1999 1998 1997 ---- ---- ---- Federal $ 736 $ 4,420 $14,080 State and local 858 688 2,214 Non-U.S. 9,784 10,511 13,451 ------- ------- ------- 11,378 15,619 29,745 Deferred expense (benefit) 3,319 3,415 (748) ------- ------- -------
$14,697 $19,034 $28,997 ======= ======= =======
(continued)
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Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(6) Income Taxes, continued -------------
Income tax expense amounts attributable to continuing operations were (in thousands) $14,697, $19,034 and $17,678 in 1999, 1998 and 1997, respectively. Income tax expense of $11,319 (in thousands) for 1997 is 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:
1999 1998 1997 ---- ---- ---- Statutory federal income tax rate 35% 35% 35% Increase (decrease) resulting from: Tax-exempt earnings of subsidiary in Puerto Rico (1) (1) (1) State and local income taxes, net of federal tax effect 1 1 2 Non-deductible expenses and other foreign income subject to U.S. income tax 3 10 5 Foreign (14) (10) (3) Other, net 1 1 4 --- --- --- Effective tax rate 25% 36% 42% === === ===
For continuing operations, the Company's effective tax rate was approximately 38% in 1997. 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)
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Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(6) Income Taxes, continued -------------
Deferred tax assets and liabilities included the following at December 31 (in thousands):
1999 1998 ---- ---- Assets: Inventories $ 1,064 $ 1,098 Plant and equipment 355 126 Vacation pay and other compensation 886 892 Pension expense 776 785 Stock awards 1,411 1,247 Accrued liabilities 4,387 5,186 Net operating losses 4,483 4,774 Capital losses carryover 6,582 6,582 Other 227 100 ------- ------- Total deferred tax assets 20,171 20,790 Valuation allowance (6,582) (6,582) ------- ------- Net deferred tax assets 13,589 14,208
Liabilities: Deferred taxes on foreign operations 2,600 -- Other 123 23 ------- ------- Total deferred tax liabilities 2,723 23 ------- ------- Net deferred tax assets 10,866 14,185 Less current deferred tax assets 2,251 4,889 ------- ------- Long-term deferred income taxes $ 8,615 $ 9,296 ======= =======
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 net deferred tax assets.
The Company has not provided for U.S. federal income and foreign withholding taxes on approximately $235.3 million of non-U.S. subsidiaries' undistributed earnings (as calculated for income tax purposes) as of December 31, 1999. Such earnings include pre-acquisition earnings of foreign entities acquired through stock purchases, and are intended to be reinvested outside of the U.S. indefinitely. It is not practical to estimate the amount of unrecognized deferred taxes on these undistributed earnings. Where excess cash has accumulated in the Company's non-U.S. subsidiaries and it is advantageous for tax or foreign exchange reasons, subsidiary earnings may be remitted.
(continued)
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Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(7) 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, 1999, 1998 and 1997 were $5.4 million, $4.5 million and $3.6 million, respectively. The aggregate minimum rental commitments under non-cancelable leases in effect at December 31, 1999 were as follows (in thousands):
Year ending December 31 ----------- 2000 $ 6,102 2001 4,964 2002 3,784 2003 3,357 2004 2,820 Thereafter 4,405 ------- $25,432 =======
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, as a result of the acquisition of GTI, the Company is involved in studying and undertaking certain remedial actions with respect to groundwater pollution and soil contamination conditions at a facility in Leesburg, Indiana. The Company anticipates making additional environmental expenditures in future years to continue its environmental studies and analysis. Upon mutual agreement with a certain state agency, the Company will implement a remediation plan. Based on current knowledge, the Company does not believe that any future expenses associated with environmental remediation will have a material impact on the financial position of the Company.
The Company is also subject to various lawsuits, claims and proceedings which arise in the ordinary course of its business. The Company does not believe that the outcome of any of these lawsuits will have a material adverse effect on its financial results.
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.
(continued)
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Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(8) 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, 1999 include approximately $7.2 million which has been restricted in accordance with the laws of the People's Republic of China (PRC). This amount, which is based on the earnings of the Company's subsidiaries in the PRC, may not be available for distribution to the U.S. parent company or its shareholders but is not required to be held in cash.
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.
Effective September 1, 1999 and subject to shareholder approval, the Company adopted a qualified, non-compensatory employee stock purchase plan to provide substantially all U.S. employees an opportunity to purchase common stock of the Company. The purchase price is equal to 85% of the fair value of the common stock on either the first day of the offering period or the last day of the purchase period, whichever is lower. The offering periods and purchase periods are defined by the plan, but are generally 24 and six months in duration, respectively. In connection with this stock purchase plan, 500,000 shares of common stock are reserved for issuance under the plan. In 1999, employees purchased approximately 30,000 shares.
(continued)
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Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(8) Shareholders' Equity, continued ---------------------
As permitted by the provisions of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (FAS 123), the Company applies Accounting Principles Board Opinion 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock-based employee compensation plans. Accordingly, no compensation cost has been recognized for the Company's employee stock purchase plan. If compensation cost for the Company's employee stock purchase plan had been determined based on the fair value as required by FAS 123, the Company's pro forma net income and earnings per basic and diluted share for 1999 would have been $43.9 million, $2.74 and $2.70, respectively.
(9) 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 year. For calculating diluted earnings per share, common share equivalents and restricted stock outstanding are added to the weighted average number of common shares outstanding. Common share equivalents result from outstanding options to purchase common stock as calculated using the treasury stock method. Such amounts were approximately 36,000 in 1999 and 1998 and 44,000 in 1997. Earnings per share calculations are as follows (in thousands, except per share amounts):
1999 1998 1997 ---- ---- ---- Net income $44,312 $33,309 $40,846 Basic earnings per share: Shares 16,046 15,981 16,093 Per share amount $2.76 $2.08 $2.54
Diluted earnings per share: Shares 16,246 16,203 16,137 Per share amount $2.73 $2.06 $2.53
(continued)
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Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(10) 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. During 1999, a non-U.S. defined benefit pension plan was terminated.
Pension expense (benefit) was as follows (in thousands):
1999 1998 1997 ---- ---- ---- Principal defined benefit plans $(982) $(176) $420 Multi-employer and other employee benefit plans 295 206 40 ----- ----- ---- $(687) $ 30 $460 ===== ===== ====
The expense for the principal defined benefit pension plans include the following components (in thousands):
1999 1998 1997 ---- ---- ---- Service cost - benefits earned during the period $1,180 $1,093 $1,172 Interest cost on projected benefit obligation 1,399 1,376 1,332 Expected actual return on plan assets (2,256) (2,290) (1,927) Curtailment gain (664) -- -- Net amortization (641) (355) (157) ------ ------ ------ Net periodic pension cost $ (982) $ (176) $ 420 ====== ====== ======
(continued)
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Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(10) Employee Benefit Plans, continued -----------------------
The financial status of the principal defined benefit plans at December 31, 1999 and 1998, was as follows (in thousands):
1999 1998 ---- ---- Change in benefit obligation:
Benefit obligation at beginning of year $20,910 $20,486
Service cost 1,180 1,093 Interest cost 1,399 1,376 Actuarial gain (880) (984) Plan termination (900) -- Benefits paid (720) (1,061) ------- ------- Benefit obligation at end of year 20,989 20,910
Change in plan assets:
Fair value of plan assets at beginning of year 25,951 26,379
Actual return on plan assets 3,189 620 Employer contributions -- 13 Plan termination (1,872) -- Benefits paid (720) (1,061) ------- ------- Fair value of plan assets at end of year 26,548 25,951 ------- -------
Funded status 5,559 5,041 Unrecognized: Net gains (9,496) (8,124) Prior service cost 654 728 Net transition obligation 17 21 ------- ------- Accrued pension costs at December 31 $(3,266) $(2,334) ======= =======
(continued)
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Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(10) Employee Benefit Plans, continued -----------------------
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 1999 and 1998 were as follows:
Discount rate 7.3% Annual compensation increases 4.8% Expected long-term rates of return on plan assets 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 contributed 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. Beginning September 1, 1999, the Company increased its contribution amount to a matching amount equal to $1.00 for each $1.00 of the participants 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 $681,000, $586,000 and $524,000 in 1999, 1998 and 1997, respectively.
The Company does not provide any significant post-retirement benefits other than the pension plans and 401(k) plans described above.
(11) Stock-Based Compensation ------------------------
The Company has an incentive compensation plan for 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 1999, net of cancellations (902,055) --------- Balance at December 31, 1998 297,945 Awarded during 1999, net of cancellations (60,526) --------- Balance available at December 31, 1999 237,419 =========
(continued)
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Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(11) Stock-Based Compensation, continued -------------------------
During the years ended December 31, 1999, 1998 and 1997 the Company issued to employees, net of cancellations, incentive compensation shares having an approximate fair value at date of issue of $1,683,000, $1,210,000 and $1,037,000, 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 $2,327,000 in 1999, $1,186,000 in 1998 and $912,000 in 1997.
The Company also has a stock award plan for non-employee directors. The Board of Directors Stock Plan was approved in 1998 to assist the Company in attracting and retaining highly qualified persons to serve on the Company's Board of Directors. Under the terms of the plan, 30,000 shares of the Company's common stock are available for grant. On an annual basis, shares amounting to a dollar value predetermined by the plan are issued to non-employee directors. In 1999 and 1998, 5,424 and 2,896 shares, respectively, (including those deferred at the directors' election) were issued under the plan.
In connection with the 1995 acquisition of Pulse Engineering, 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. At December 31, 1999, approximately 43,000 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 Standards No. 123, "Accounting for Stock-Based Compensation."
(continued)
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Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(12) Supplementary Information -------------------------
The following amounts were charged directly to costs and expenses (in thousands, for continuing operations):
1999 1998 1997 ---- ---- ---- Depreciation $15,678 $13,933 $11,874 Amortization of intangible assets 3,733 2,347 1,379 Advertising 780 799 1,510 Repairs and maintenance 6,480 6,472 5,868 Bad debt expense 116 632 328
Cash payments made (in thousands, for all operations):
Income taxes $17,604 $11,813 $13,668 Interest 3,528 3,344 2,353
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) ========
(13) Segment Information -------------------
The "Business Segment Financial Information" and "Geographic Information" sections on pages 5 through 7 of this Form 10-K are integral parts of the Company's consolidated financial statements.
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Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(14) Quarterly Financial Data (Unaudited) -----------------------------------
Quarterly results of operations (unaudited) for 1999 and 1998 are summarized as follows (in thousands, except per share data):
Quarter Ended ------------- Apr. 2 July 2 Oct. 1 Dec. 31 ------ ------ ------ ------- 1999: Net sales $125,230 $127,857 $137,032 $140,317 Gross profit 38,139 40,028 44,052 49,664 Net earnings 8,736 10,275 12,218 13,083 Net earnings per share: Basic .55 .64 .76 .81 Diluted .54 .63 .75 .80
Mar. 31 June 30 Sept. 30 Dec. 31 ------- ------- -------- ------- 1998: Net sales $110,748 $104,888 $113,349 $119,554 Gross profit 36,142 33,159 34,946 37,996 Net earnings 9,378 8,413 7,442 8,076 Net earnings per share: Basic .58 .53 .47 .51 Diluted .58 .52 .46 .50
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