UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 27, 2002
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______________ to
_______________
Commission File No. 1-5375
TECHNITROL, INC.
(Exact name of registrant as specified in Charter)
PENNSYLVANIA 23-1292472
(State of Incorporation) (IRS Employer Identification Number)
1210 Northbrook Drive, Suite 385, Trevose, Pennsylvania 19053
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 215-355-2900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each Exchange on which registered
------------------- -----------------------------------------
Common Stock par value $.125 per
share New York Stock Exchange
Common Stock Purchase Rights New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act).
YES |X| NO |_|
The aggregate market value of voting stock held by non-affiliates as of June 28,
2002 is $921,738,000 computed by reference to the closing price on the New York
Stock Exchange on such date.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of February 19, 2003.
Number of shares outstanding
Title of each class February 19, 2003
------------------- -----------------
Common stock par value $.125 per share 40,129,595
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement to be used in connection
with the registrant's 2003 Annual Meeting of Shareholders, are incorporated by
reference into Part III of this Form 10-K where indicated.
Page 1 of 62
Part I
Item 1 Business
General
Technitrol, Inc. is a global producer of precision-engineered passive
magnetics-based electronic components and electrical contact products and
materials. We sometimes refer to Technitrol as "we" or "our". We believe we are
a leading global producer of these products and materials in the primary markets
we serve based on our estimates of the size of our primary markets in annual
revenues and our share of those markets relative to our competitors. Passive
magnetics-based electronic components are used in virtually all types of
electronic products to manage and regulate electronic signals and power.
Electrical contact products and materials are used in any device in which the
continuation or interruption of electrical currents is necessary. In each case,
our products are critical to the functioning of the end product.
Our world-class design and manufacturing capabilities, together with the
breadth of our product offerings, provides us with a competitive advantage that
enables us to anticipate and deliver highly-customized solutions for our
customers' product needs. In addition, our global presence enables us to
participate in many relevant product and geographic markets and provides us with
proximity to our global customer base. This allows us to better understand and
more easily satisfy our customers' unique design and product requirements.
We operate our business in two distinct segments: the electronic
components segment, which operates under the name Pulse, and the electrical
contact products segment, which operates under the name AMI Doduco. We refer to
these segments as ECS or Pulse, and ECPS or AMI Doduco, respectively.
We incorporated in Pennsylvania on April 10, 1947 and we are headquartered
in Trevose, PA. Our mailing address is 1210 Northbrook Drive, Suite 385,
Trevose, PA 19053-8406, and our telephone number is 215-355-2900. Our website is
www.technitrol.com.
Pulse
Pulse designs and manufactures a wide variety of highly-customized passive
magnetics-based electronic components. These components manage and regulate
electronic signals and power for use in a variety of devices by filtering out
radio frequency interference and adjusting and ensuring proper current and
voltage. These products are often referred to as chokes, inductors, filters and
transformers. Pulse sells its products to primarily multinational original
equipment manufacturers, contract manufacturers and distributors.
Pulse's products are used in a broad array of industries, including:
o automotive;
o consumer electronics;
o enterprise networking;
o military/aerospace;
o power conversion; and
o telecommunications.
Representative end products that use Pulse's components include:
o automotive controls;
o broadband access equipment including cable modems and digital
subscriber line, or DSL, devices for telephone central office
and home use;
o Ethernet switches;
o military/aerospace navigation and weapon guidance systems;
o power supplies;
o routers;
o televisions;
o video game consoles; and
o voice over Internet equipment.
Page 2 of 62
Pulse's products are generally characterized by short life cycles and
rapid technological change. This allows us to utilize our design and engineering
expertise to meet our customers' evolving needs. We believe that the industries
served by Pulse have been, and will continue to be, characterized by ongoing
product innovation that will drive the growth in the passive magnetics-based
electronic components industry.
Pulse generated $204.6 million, or 50.3% of our revenues for the year
ended December 27, 2002 and $253.3 million, or 53.4% of our revenues for the
year ended December 28, 2001. Excluding restructuring and other unusual charges,
Pulse generated $4.5 million, or 62.4% of our operating profit for the year
ended December 27, 2002 and $9.4 million, or 59.8% of our operating profit for
the year ended December 28, 2001. Note 14 to the Consolidated Financial
Statements contains additional segment information.
AMI Doduco
We believe AMI Doduco is the only global manufacturer which produces a
full array of precious metal electrical contact products that range from contact
materials to completed contact subassemblies. Contact products complete or
interrupt electrical circuits in virtually every electrical device. AMI Doduco
provides its customers with a broad array of highly engineered products and
tools designed to meet unique customer needs. AMI Doduco sells products to
multinational original equipment manufacturers.
AMI Doduco's products are used in a broad array of industries, including:
o appliance;
o automotive;
o building construction circuitry;
o commercial and industrial machinery;
o electric power; and
o telephone equipment.
Representative end products that use AMI Doduco's products include:
o electrical circuit breakers;
o motor and temperature controls;
o power substations;
o sensors;
o switches and relays;
o telephone equipment; and
o wiring devices.
AMI Doduco's products are generally characterized by longer life cycles
and slower technological change, providing longer life cycle revenue streams
than Pulse's products. We believe that technological developments in some of the
industries served by AMI Doduco, particularly in the electric power, appliance
and automotive industries, along with opportunities arising from customer
outsourcing and consolidation of the electrical contact industry, may present
attractive growth opportunities for AMI Doduco.
AMI Doduco generated $201.8 million, or 49.7% of our revenues for the year
ended December 27, 2002 and $220.9 million, or 46.6% of our revenues for the
year December 28, 2001. Excluding restructuring and other unusual charges, AMI
Doduco generated $2.7 million, or 37.6% of our operating profit for the year
ended December 27, 2002 and $6.3 million, or 40.2% of our operating profit for
the year ended December 28, 2001. Note 14 to the Consolidated Financial
Statements contains additional segment information.
Our overall strategy is to further enhance our market positions in the
passive magnetics-based electronic component and electrical contact products
industries. In order to accomplish this, we intend to focus on attractive growth
markets; utilize our engineering and design capabilities; achieve the lowest
cost, highest quality manufacturing; continue to undertake strategic
acquisitions and attractive outsourcing opportunities; and focus on economic
profit and financial flexibility.
Page 3 of 62
Products
Pulse designs and manufactures a wide array of passive magnetics-based
electronic components. These products are highly-customized to address our
customers' needs. The following table contains a list of some of Pulse's key
products:
----------------------------------------------------------------------------------------------------------------------
Primary Products Function Application
----------------------------------------------------------------------------------------------------------------------
Discrete Filter or Choke Removes interference, or noise Network switches, routers, hubs and personal
from circuitry computers
Phone, fax and alarm systems used with
digital subscriber lines, or DSL
----------------------------------------------------------------------------------------------------------------------
Filtered Connector, which combines Removes interference, or Local area networks, or LANs, and wide area
a filter with a connector noise, from circuitry and networks, or WANs equipment for personal
connects electronic applications computers and video game consoles
----------------------------------------------------------------------------------------------------------------------
Inductor/chip inductor Regulates electrical current AC/DC & DC/DC power supplies
under conditions of varying load Mobile phones and portable devices
----------------------------------------------------------------------------------------------------------------------
Power Transformer Modifies circuit voltage AC/DC & DC/DC power supplies
----------------------------------------------------------------------------------------------------------------------
Signal Transformer Limits distortion of signal as Analog circuitry
it passes from one medium to Military/aerospace navigation and weapon
another guidance systems
----------------------------------------------------------------------------------------------------------------------
Flyback Transformer Generates high voltages to Televisions
illuminate cathode ray picture
tubes
----------------------------------------------------------------------------------------------------------------------
AMI Doduco designs and manufactures a wide array of contact materials,
parts and completed contact subassemblies. The following table contains a list
of some of AMI Doduco's key products:
----------------------------------------------------------------------------------------------------------------------
Primary Products Function Application
----------------------------------------------------------------------------------------------------------------------
Contact prematerial such as wire and Raw materials Made into our customers' electrical
metal tapes contact parts
----------------------------------------------------------------------------------------------------------------------
Electrical contact parts, either Complete or interrupt an electrical Electrical switches, relays, circuit
discrete or affixed to precision circuit breakers and motor controls
stamped parts
----------------------------------------------------------------------------------------------------------------------
Component subassemblies Integrate contact with precision Sensors and control devices
stampings and plastic housings
----------------------------------------------------------------------------------------------------------------------
Within each segment, our primary products 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.
Sales, Marketing and Distribution
Pulse and AMI Doduco sell products predominantly through separate
worldwide direct sales forces. Given the highly technical nature of our
customers' needs, our direct salespeople typically team up with members of our
engineering staff to discuss a sale with a customer's purchasing and engineering
personnel. During the sales process, there is close interaction between our
engineers and those in our customers' organizations. This interaction extends
throughout a product's life cycle, engendering strong customer relationships. As
of December 27, 2002, Pulse had approximately 50 salespeople and 12 sales
offices worldwide and AMI Doduco had approximately 25 salespeople and 9 sales
offices worldwide.
We provide technical and sales support for our direct and indirect sales
force. We believe that our coordinated sales effort provides a high level of
market penetration and efficient coverage of our customers on a cost-effective
basis.
Page 4 of 62
Customers and End Markets
We sell our products and services to original equipment manufacturers
("OEMs"), which design, build and market end-user products. Pulse also sells its
products to contract equipment manufacturers ("CEMs"), which contract with OEMs
to manufacture the OEM's products, as well as to independent distributors, which
sell components and materials to both OEMs and CEMs. In recent years, the trend
in the electronics industry has been for many OEMs to use CEMs primarily or
exclusively to build their products. Nonetheless, OEMs generally control the
decision as to which component designs best meet their needs. Accordingly, we
consider OEMs to be customers for our products even if they purchase our
products through CEMs or independent distributors. In order to maximize our
sales opportunities, Pulse's engineering and sales teams also maintain close
relationships with CEMs and distributors.
No customer of either Pulse or AMI Doduco accounted for more than 10% of
our consolidated net sales for the year ended December 27, 2002 or the year
ended December 28, 2001. Sales to our ten largest customers accounted for 29.7%
of net sales for the year ended December 27, 2002 and 30.7% of net sales for the
year ended December 28, 2001.
An increasing percentage of our sales in recent years has been outside of
the United States. We now have manufacturing operations in 9 countries. For the
year ended December 27, 2002, 68.7% of our net sales were outside of the United
States. During the year ended December 28, 2001, 64.9% of our net sales were to
customers outside of the United States. Sales made by Pulse to its customers
outside the United States accounted for 70.1% of its net sales for the year
ended December 27, 2002 and 63.8% of its net sales for the year ended December
28, 2001. Sales made by AMI Doduco to its customers outside the United States
accounted for 67.4% of its net sales for the year ended December 27, 2002 and
69.4% of its net sales for the year ended December 28, 2001.
Development and Engineering
Our development and engineering efforts are focused on the design and
development of innovative products in collaboration with our customers. We work
closely with OEMs to identify their design and engineering requirements. We
maintain strategically located design centers throughout the world where
proximity to customers enables us to better understand and more readily satisfy
their design and engineering needs. Pulse's design process is a disciplined,
orderly process that uses a product data management system to track the level of
design activity enabling us to manage and improve how our engineers design
products. Pulse typically owns the customized designs that it uses to make its
products.
Pulse's development and engineering expenditures were $13.9 million for
the year ended December 27, 2002, $16.0 million for the year ended December 28,
2001 and $15.7 million for the year ended December 29, 2000. AMI Doduco's
development and engineering expenditures were $3.9 million for the year ended
December 27, 2002, $4.2 million for the year ended December 28, 2001 and $4.4
million for the year ended December 29, 2000. We intend to continue to invest in
personnel and new technologies to improve product performance.
Competition
We believe we are a market leader in the primary markets we serve based on
our estimates of the size of our primary markets in annual revenues and our
share of those markets relative to our competitors. We do not believe that any
one company competes with all of the product lines of either Pulse or AMI Doduco
on a global basis. However, both Pulse and AMI Doduco frequently encounter
strong competition within individual product lines, both domestically and
internationally. In addition, several OEMs internally manufacture many of the
products offered by Pulse or AMI Doduco. We believe that this represents an
opportunity to capture additional market share as OEMs decide to outsource
component operations. Therefore, we constantly work to identify these
opportunities and to convince these OEMs that our economies of scale, purchasing
power and manufacturing core competencies enable us to produce these products
better and more efficiently.
Competitive factors in the markets for our products include:
o price;
o product quality and reliability;
o global design and manufacturing capabilities;
o breadth of product line; and
o customer service.
Page 5 of 62
We believe we compete favorably on the basis of each of these factors.
Product quality and reliability, as well as design and manufacturing
capabilities, are enhanced through our commitment to continually invest in and
improve our manufacturing and designing resources and our close relationships
with our customers' engineers. The breadth of our product offering provides
customers with the ability to satisfy their entire magnetic component and
contact needs through one supplier. Our global presence enables us to deepen our
relationship with our customers and to better understand and more easily satisfy
the needs of local markets. In addition, our ability to purchase raw materials
in large quantities reduces our manufacturing costs, enabling us to price our
products competitively.
Employees
As of December 27, 2002, we had approximately 19,000 full-time employees
as compared to 14,800 as of December 28, 2001. Of the 19,000 full-time
employees, approximately 740 were located in the United States and approximately
60 employees in the United States were covered by collective-bargaining
arrangements. In addition, some foreign employees are members of trade and
government-affiliated unions. We have not experienced any major work stoppages
and consider our relations with our employees to be good. The U.S. employee
reductions for the year ended December 27, 2002 came from primarily involuntary
work force reductions.
Raw Materials
Raw materials necessary for the manufacture of our products include:
o precious metals such as silver;
o base metals such as copper and brass; and
o ferrite cores.
We do not currently have difficulty obtaining any of our raw materials and
do not currently anticipate that we will face any significant difficulties in
the near future. However, many of the raw materials we use are considered
commodities and are subject to price volatility. Although we are not dependent
on any one particular source of supply, several of our raw materials are only
sold by a limited number of suppliers, which may have an adverse effect on the
price of these materials. Should prices rise or a shortage occur in any
necessary raw material, our manufacturing costs will likely increase, which may
result in lower margins or decreased sales if we were unable to pass along the
price increase to our customers.
AMI Doduco uses precious metals, primarily silver, in manufacturing a vast
majority of its electrical contacts, contact materials and contact
subassemblies. Historically, we have leased or held these materials through
consignment arrangements with our suppliers. Leasing and consignment costs have
generally been substantially below the costs to borrow funds to purchase the
metals and these arrangements eliminate the fluctuations in the market price of
owned precious metal. AMI Doduco's terms of sale allow us to charge customers
for the fabricated market value of silver on the day after we deliver the silver
bearing product to the customer. See additional discussion of precious metals on
page 20.
Backlog
Our backlog of orders at December 27, 2002 was $51.4 million compared to
$48.2 million at December 28, 2001. We expect to ship the majority of the
backlog over the next six months. Customers can cancel orders at any time,
sometimes requiring a payment of cancellation charges. We do not believe that
backlog is an accurate indicator of near-term business activity as customers may
make multiple orders of the same component from multiple sources when lead times
are long and may cancel orders when business is weak and inventories are
excessive. Moreover, in the last two years, many customers have negotiated
vendor managed inventory and other similar consignment type arrangements with
us. Orders from these arrangements typically are not reflected in backlog.
Similarly, many of AMI Doduco's products are repeat products which are
continuously ordered by customers by phone for delivery within several days and
such orders generally are not included in backlog.
Intellectual Property
We own a number of patents and have acquired the use of patents of others
under license agreements, which impose restrictions on our ability to utilize
the intellectual property. We seek to limit disclosure of our intellectual
property by generally requiring employees and consultants with access to our
proprietary information to execute confidentiality agreements with us and by
restricting access to our proprietary information.
Page 6 of 62
Existing legal protections afford only limited protection for our
products. For example, others may independently develop similar or competing
products or attempt to copy or use aspects of our products that we regard as
proprietary. Furthermore, intellectual property law may not fully protect
products or technology that we consider to be our own, and claims of
intellectual property infringement may be asserted against us or against our
customers in connection with their use of our products.
While our intellectual property is important to us in the aggregate, we do
not believe any individual patent or license is material to our business or
operations.
Environmental
Our manufacturing operations are subject to a variety of local, state,
federal, and international environmental laws and regulations governing air
emissions, wastewater discharges, the storage, use, handling, disposal and
remediation of hazardous substances and wastes and employee health and safety.
It is our policy to meet or exceed the environmental standards set by these
laws.
We are involved in several legal actions relating to non-owned waste
disposal sites. Our involvement in these matters has generally arisen from the
legal disposal of small amounts of waste material many years ago. In addition,
we are aware of contamination at two locations. In Sinsheim, Germany, there is
shallow groundwater and soil contamination that is naturally decreasing over
time. The German environmental authorities have not required corrective action
to date. A property in Leesburg, Indiana, which was acquired with our
acquisition of GTI in 1998, is the subject of a 1994 Corrective Action Order to
GTI by the Indiana Department of Environmental Management. The order requires us
to investigate and take corrective actions. Monitoring data is being collected
to confirm and implement the corrective measures. We anticipate making
additional environmental expenditures in future years to continue our
environmental studies, analysis and remediation activities.
While we cannot predict the future costs of environmental studies, cleanup
activities, capital expenditures, or operating costs for environmental
compliance at our present or former facilities or any third party disposal
sites, we do not believe such costs, individually or in the aggregate, will have
a material impact on our operations or our consolidated financial position,
liquidity or operating results.
Available Information
We make available free of charge on our website, www.technitrol.com, all
materials that we file electronically with the Securities and Exchange
Commission, including our annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports, as soon as
reasonably practicable after we electronically file or furnish such materials to
the SEC.
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 or future financial performance. You can identify these statements
by the fact that they do not relate strictly to historical or current facts.
They often use words such as "anticipate", "estimate", "expect", "project",
"intend", "plan", "believe", and similar terms. These forward-looking statements
are based on our current plans and expectations.
Any or all of our forward-looking statements in this report may prove to
be incorrect. 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. Accordingly, actual outcomes and results may differ materially from
what is expressed or forecasted in this report.
We sometimes provide forecasts of future financial performance. The risks
and uncertainties described under "Risk Factors" as well as other risks
identified from time to time in other Securities and Exchange Commission
reports, registration statements and public announcements, among others, should
be considered in evaluating our prospects for the future. We undertake no
obligation to release updates or revisions to any forward-looking statement,
whether as a result of new information, future events or otherwise.
Page 7 of 62
Risk Factors
Cyclical changes in the markets we serve, including the recent contraction,
could result in a significant decrease in demand for our products and reduce our
profitability.
Our components are used in various products for the electronic and
electrical equipment markets. These markets are highly cyclical. The demand for
our components reflects the demand for products in the electronic and electrical
equipment markets generally. Beginning in late 2000 and continuing into 2002,
these markets, particularly the electronics market, have experienced a severe
worldwide contraction. This contraction has resulted in a decrease in demand for
our products, as our customers have:
o canceled many existing orders;
o introduced fewer new products; and
o worked to decrease their inventory levels.
The decrease in demand for our products has had a significant adverse
effect on our operating results and profitability. We cannot predict how long a
contraction will last nor the strength of any recovery. Accordingly, we may
continue to experience volatility in both our revenues and profits.
Reduced prices for our products may adversely affect our profit margins if we
are unable to reduce our costs of production.
The average selling prices for our products tend to decrease over their
life cycle. In addition, the recent economic contraction has significantly
increased the pressure on our customers to seek lower prices from their
suppliers. As a result, our customers are likely to continue to demand lower
prices from us. To maintain our margins and remain profitable, we must continue
to meet our customers' design needs while reducing costs through efficient raw
material procurement and process and product improvements. Our profit margins
will suffer if we are unable to reduce our costs of production as sales prices
decline.
An inability to adequately respond to changes in technology may decrease our
sales.
Pulse operates in an industry characterized by rapid change caused by the
frequent emergence of new technologies. Generally, we expect life cycles for our
products in the electronic components industry to be relatively short. This
requires us to anticipate and respond rapidly to changes in industry standards
and customer needs and to develop and introduce new and enhanced products on a
timely and cost effective basis. Our engineering and development teams place a
priority on working closely with our customers to design innovative products and
improve our manufacturing processes. Our inability to react to changes in
technology quickly and efficiently may decrease our sales and profitability.
If our inventories become obsolete, our future performance and operating results
will be adversely affected.
The life cycles of our products depend heavily upon the life cycles of the
end products into which our products are designed. Many of Pulse's products have
very short life cycles which are measured in quarters. Products with short life
cycles require us to closely manage our production and inventory levels.
Inventory may become obsolete because of adverse changes in end market demand.
During market slowdowns, this may result in significant charges for inventory
write-offs, as was the case during 2001. Our future operating results may be
adversely affected by material levels of obsolete or excess inventories.
An inability to capitalize on our recent or future acquisitions may adversely
affect our business.
In recent years we have completed several acquisitions. We continually
seek acquisitions to grow our business. We may fail to derive significant
benefits from our acquisitions. In addition, if we fail to achieve sufficient
financial performance from an acquisition, goodwill and other intangibles could
become impaired, resulting in our recognition of a loss. In 2002, we recorded a
goodwill impairment charge of $15.7 million related to AMI Doduco and a trade
name impairment charge of $32.1 million related to Pulse. The degree of success
of any of our acquisitions depends on our ability to:
Page 8 of 62
o successfully integrate or consolidate acquired operations into our
existing businesses;
o identify and take advantage of cost reduction opportunities; and
o further penetrate the markets for the product capabilities acquired.
Integration of acquisitions may take longer than we expect and may never
be achieved to the extent originally anticipated. This could result in slower
than anticipated business growth or higher than anticipated costs. In addition,
acquisitions may:
o cause a disruption in our ongoing business;
o distract our managers;
o unduly burden our other resources; and
o result in an inability to maintain our historical standards,
procedures and controls.
Integration of acquisitions into the acquiring segment may limit the ability of
investors to track the performance of individual acquisitions and to analyze
trends in our operating results.
Our historical practice has been to quickly integrate acquisitions into
the existing business of the acquiring segment and to report financial
performance on the segment level. As a result of this practice, we do not
separately track the stand-alone performance of acquisitions after the date of
the transaction. Consequently, investors cannot quantify the financial
performance and success of any individual acquisition or the financial
performance and success of a particular segment excluding the impact of
acquisitions. In addition, our practice of quickly integrating acquisitions into
the financial performance of each segment may limit the ability of investors to
analyze any trends in our operating results over time.
An inability to identify additional acquisition opportunities may slow our
future growth.
We intend to continue to identify and consummate additional acquisitions
to further diversify our business and to penetrate important markets. We may not
be able to identify suitable acquisition candidates at reasonable prices. Even
if we identify promising acquisition candidates, the timing, price, structure
and success of future acquisitions are uncertain. An inability to consummate
attractive acquisitions may reduce our growth rate and our ability to penetrate
new markets.
If our customers terminate their existing agreements, or do not enter into new
agreements or submit additional purchase orders for our products, our business
will suffer.
Most of our sales are made on a purchase order basis as needed by our
customers. In addition, to the extent we have agreements in place with our
customers, most of these agreements are either short term in nature or provide
our customers with the ability to terminate the arrangement with little or no
prior notice. Our contracts typically do not provide us with any material
recourse in the event of non-renewal or early termination. We will lose business
and our revenues will decrease if a significant number of customers:
o do not submit additional purchase orders;
o do not enter into new agreements with us; or
o elect to terminate their relationship with us.
If we do not effectively manage our business in the face of fluctuations in the
size of our organization, our business may be disrupted.
We have grown rapidly over the last ten years, both organically and as a
result of acquisitions. However, in the past two years we have significantly
reduced our workforce and facilities in response to a dramatic decrease in
demand for our products due to prevailing global market conditions. These rapid
fluctuations place strains on our resources and systems. If we do not
effectively manage our resources and systems, our business may suffer.
Uncertainty in demand for our products may result in increased costs of
production and an inability to service our customers.
We have very little visibility into our customers' purchasing patterns and
are highly dependent on our customers' forecasts. These forecasts are
non-binding and often highly unreliable. Given the fluctuation in growth
Page 9 of 62
rates and cyclical demand for our products, as well as our reliance on often
imprecise customer forecasts, it is difficult to accurately manage our
production schedule, equipment and personnel needs and our raw material and
working capital requirements. Our failure to effectively manage these issues may
result in:
o production delays;
o increased costs of production;
o an inability to make timely deliveries; and
o a decrease in profits.
A decrease in availability or increase in cost of our key raw materials could
adversely affect our profit margins.
We use several types of raw materials in the manufacturing of our
products, including:
o precious metals such as silver;
o base metals such as copper and brass; and
o ferrite cores.
Some of these materials are produced by a limited number of suppliers.
From time to time, we may be unable to obtain these raw materials in sufficient
quantities or in a timely manner to meet the demand for our products. The lack
of availability or a delay in obtaining any of the raw materials used in our
products could adversely affect our manufacturing costs and profit margins. In
addition, if the price of our raw materials increases significantly over a short
period of time, customers may be unwilling to bear the increased price for our
products and we may be forced to sell our products containing these materials at
prices that reduce our profit margins.
Some of our raw materials, such as precious metals, are considered
commodities and are subject to price volatility. We attempt to limit our
exposure to fluctuations in the cost of precious materials, including silver, by
holding the majority of our precious metal inventory through leasing or
consignment arrangements with our suppliers. We then typically purchase the
precious metal from our supplier at the current market price on the day after
delivery to our customer and pass this cost on to our customer. In addition,
leasing and consignment costs have historically been substantially below the
costs to borrow funds to purchase the precious metals. We currently have four
consignment or leasing agreements related to precious metals, all of which
generally have one year terms with varying maturity dates, but can be terminated
by either party with 30 days' prior notice. Our results of operations and
liquidity will be negatively impacted if:
o we are unable to enter into new leasing or consignment arrangements
with similarly favorable terms after our existing agreements
terminate, or
o our leasing or consignment fees increase significantly in a short
period of time and we are unable to recover these increased costs
through higher sale prices.
Fees charged by the consignor are driven by interest rates and the market
price of the consigned material. The market price of the consigned material is
determined by the supply of and the demand for the material. Consignment fees
will increase if interest rates or the price of the consigned material increase.
Competition may result in lower prices for our products and reduced sales.
Both Pulse and AMI Doduco frequently encounter strong competition within
individual product lines from various competitors throughout the world. We
compete principally on the basis of:
o product quality and reliability;
o global design and manufacturing capabilities;
o breadth of product line;
o customer service; and
o price.
Our inability to successfully compete on any or all of the above factors
may result in reduced sales.
Page 10 of 62
Our backlog is not an accurate measure of future revenues and is subject to
customer cancellation.
While our backlog consists of firm accepted orders with an express release
date generally scheduled within six months of the order, many of the orders that
comprise our backlog may be canceled by customers without penalty. It is widely
known that customers in the electronics industry have on occasion double and
triple-ordered components from multiple sources to ensure timely delivery when
quoted lead time is particularly long. In addition, customers often cancel
orders when business is weak and inventories are excessive, a process that we
have experienced in the recent contraction. Although backlog should not be
relied on as an indicator of our future revenues, our results of operations
could be adversely impacted if customers cancel a material portion of orders in
our backlog.
Fluctuations in foreign currency exchange rates may adversely affect our
operating results.
We manufacture and sell our products in various regions of the world and
export and import these products to and from a large number of countries.
Fluctuations in exchange rates could negatively impact our cost of production
and sales that, in turn, could decrease our operating results and cash flow.
Although we engage in limited hedging transactions, including foreign currency
contracts, to reduce our transaction and economic exposure to foreign currency
fluctuations, these measures may not eliminate or substantially reduce our risk
in the future.
Our international operations subject us to the risks of unfavorable political,
regulatory, labor and tax conditions in other countries.
We manufacture and assemble some of our products in foreign locations,
including France, Germany, Hungary, Italy, Mexico, the Peoples' Republic of
China, or PRC, Spain and Turkey. In addition, approximately 68.7% of our
revenues for the year ended December 27, 2002 were derived from sales to
customers outside the United States. Our future operations and earnings may be
adversely affected by the risks related to, or any other problems arising from,
operating in international markets.
Risks inherent in doing business internationally may include:
o economic and political instability;
o expropriation and nationalization;
o trade restrictions;
o capital and exchange control programs;
o transportation delays;
o foreign currency fluctuations; and
o unexpected changes in the laws and policies of the United States or
of the countries in which we manufacture and sell our products.
In particular, Pulse has substantially all of its manufacturing operations
in the PRC. Our presence in the PRC has enabled Pulse to maintain lower
manufacturing costs and to flexibly adjust our work force to demand levels for
our products. Although the PRC has a large and growing economy, the potential
economic, political, legal and labor developments entail uncertainties and
risks. While the PRC has been receptive to foreign investment, we cannot be
certain that its current policies will continue indefinitely into the future. In
the event of any changes that adversely affect our ability to conduct our
operations within the PRC, our business will suffer. In early 2003, we acquired
the consumer business of Eldor Corporation. While this business is headquartered
in Italy, all of its manufacturing operations are in Turkey. These operations in
Turkey are subject to unique risks, including those associated with continuing
Middle East geo-political conflicts.
We have benefited over recent years from favorable tax treatment as a
result of our international operations. We operate in foreign countries where we
realize favorable income tax treatment relative to the U.S. statutory rate. We
have also been granted special tax incentives commonly known as tax holidays in
other countries such as the PRC. This favorable situation could change if these
countries were to increase rates or revoke the special tax incentives, or if we
discontinue our manufacturing operations in any of these countries and do not
replace the operations with operations in other locations with favorable tax
incentives. Accordingly, in the event of changes in laws and regulations
affecting our international operations, we may not be able to continue to take
advantage of similar benefits in the future.
Page 11 of 62
Shifting our operations between regions may entail considerable expense.
In the past we have shifted our operations from one region to another in
order to maximize manufacturing and operational efficiency. We may close one or
more additional factories in the future. This could entail significant one-time
earnings charges to account for severance, equipment write-offs or write-downs
and moving expenses. In addition, as we implement transfers of our operations we
may experience disruptions, including strikes or other types of labor unrest
resulting from layoffs or termination of employees.
Liquidity requirements could necessitate movements of existing cash balances
which may be subject to restrictions or cause unfavorable tax and earnings
consequences.
A significant portion of our cash is held offshore by our international
subsidiaries and is predominantly denominated in U.S. dollars. If we encounter a
significant domestic need for liquidity that we cannot fulfill through
borrowings, equity offerings, or other internal or external sources, we may
experience unfavorable tax and earnings consequences as this cash is transferred
to the United States. These adverse consequences would occur if the transfer of
cash into the United States is taxed and no offsetting foreign tax credit is
available to offset the U.S. tax liability, resulting in lower earnings. In
addition, we may be prohibited from transferring cash from the PRC. With the
exception of approximately $10.0 million of retained earnings as of December 27,
2002 in the PRC that are restricted in accordance with the PRC Foreign
Investment Enterprises Law, substantially all retained earnings are free from
legal or contractual restrictions. The PRC Foreign Investment Enterprise Law
restricts 10% of our net earnings in the PRC, up to a maximum amount equal to
50% of the total capital we have invested in the PRC. We have not experienced
any significant liquidity restrictions in any country in which we operate and
none are presently 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.
Losing the services of our executive officers or our other highly qualified and
experienced employees could adversely affect our business.
Our success depends upon the continued contributions of our executive
officers and management, many of whom have many years of experience and would be
extremely difficult to replace. We must also attract and maintain experienced
and highly skilled engineering, sales and marketing and managerial personnel.
Competition for qualified personnel is intense in our industries, and we may not
be successful in hiring and retaining these people. If we lose the services of
our executive officers or cannot attract and retain other qualified personnel,
our business could be adversely affected.
Environmental liability and compliance obligations may affect our operations and
results.
Our manufacturing operations are subject to a variety of environmental
laws and regulations governing:
o air emissions;
o wastewater discharges;
o the storage, use, handling, disposal and remediation of hazardous
substances, wastes and chemicals; and
o employee health and safety.
If violations of environmental laws should occur, we could be held liable
for damages, penalties, fines and remedial actions. Our operations and results
could be adversely affected by any material obligations arising from existing
laws, as well as any required material modifications arising from new
regulations that may be enacted in the future. We may also be held liable for
past disposal of hazardous substances generated by our business or businesses we
acquire. In addition, it is possible that we may be held liable for
contamination discovered at our present or former facilities.
We are aware of contamination at two locations. In Sinsheim, Germany,
there is a shallow groundwater and soil contamination that is naturally
decreasing over time. The German environmental authorities have not required
corrective action to date. In addition, property in Leesburg, Indiana, which was
acquired with our acquisition of GTI in 1998, is the subject of a 1994
Corrective Action Order to GTI by the Indiana Department of Environmental
Management. The order requires us to investigate and take corrective actions.
Monitoring data is being collected to confirm and implement the corrective
measures. We anticipate making additional environmental expenditures in future
years to continue our environmental studies, analysis and remediation
activities. Based on current knowledge, we do not believe that any future
expenses or liabilities associated with environmental remediation will have a
Page 12 of 62
material impact on our operations or our consolidated financial position,
liquidity or operating results, however, we may be subject to additional costs
and liabilities if the scope of the contamination or the cost of remediation
exceeds our current expectations.
Item 2 Properties
We are headquartered in Trevose, Pennsylvania where we lease 11,000 square
feet of office space. Through Pulse and AMI Doduco, we operated 17 manufacturing
plants in 9 countries as of December 27, 2002. We continually seek to size our
operations correctly in order to maximize cost efficiencies. Accordingly, in the
future, we may take further actions to increase or decrease our manufacturing
capacity. To maximize production efficiencies, we seek whenever practical to
establish manufacturing facilities in countries where we can take advantage of
lower labor costs and, if available, various government incentives and tax
benefits. We also seek to maintain facilities in those regions where we market
our products in order to maintain a local presence in proximity to our
customers.
The following is a list of the locations of our principal manufacturing
facilities at December 27, 2002:
Pulse Percentage
Approx. Owned/ Used For
Location (1) Square Ft.(2) Leased Manufacturing
-------- --------- ------ -------------
Dongguan, People's Republic
of China, or PRC 357,000 Leased 100%
Zhuhai, PRC 226,000 Leased 100%
Orgelet, France 38,000 Owned(3) 30%
Mexico City, Mexico 32,000 Leased 90%
Greensboro, Maryland 20,000 Owned 95%
Zhongshan, PRC 15,000 Leased 100%
-------
Total 688,000
(1) In addition to these manufacturing locations, Pulse has 112,000 square
feet of space which is used for engineering, sales and administrative
support functions, including Pulse's headquarters in San Diego,
California. In addition, Pulse leases approximately 1,542,000 square feet
of space for dormitories, canteen and other employee-related facilities in
the PRC.
(2) Consists of aggregate square footage in each locality where manufacturing
facilities are located. More than one manufacturing facility may be
located within each locality.
(3) There are mortgages on this property related to mortgage notes due in
2007, of which approximately $.6 million was outstanding as of December
27, 2002.
AMI Doduco Percentage
Approx. Owned/ Used For
Location (1) Square Ft. Leased Manufacturing
-------- --------- ------ -------------
Pforzheim, Germany 490,000 Owned 65%
Sinsheim, Germany 222,000 Owned 55%
Reidsville, North Carolina 260,000 Owned 60%
Export, Pennsylvania 115,000 Leased 78%
Tianjin, PRC 59,000 Leased 85%
Bussey, France 25,000 Leased 100%
Luquillo, Puerto Rico 32,000 Owned 80%
Madrid, Spain 32,000 Owned 93%
Mexico City, Mexico 25,000 Leased 84%
Lentate S/Seveso, Italy 23,000 Leased 90%
Lancaster, Pennsylvania 15,000 Leased 85%
Dorog, Hungary 11,000 Leased 80%
---------
Total 1,309,000
(1) Engineering, sales and administrative support functions for AMI Doduco are
generally contained in these locations.
Page 13 of 62
We have developed our manufacturing processes in ways intended to maximize
our economic profitability. Accordingly, the manufacturing processes at Pulse
facilities maintain a cost structure that is labor intensive and highly
variable, which enables us to increase and decrease production rapidly and to
contain costs during slower periods. On the other hand, AMI Doduco's products
tend to have longer business cycles, longer time to market and are more capital
intensive. As a result, we have automated many more functions at AMI Doduco
facilities and vertically integrated our products in an attempt to utilize all
of our manufacturing capabilities to create higher value added products.
Traditionally, our engineers design products to meet our customers'
product needs and then we mass-produce the products once a contract is awarded
by, or orders are received from, our customer. We also service customers that
design their own components and outsource production of these components to us.
We then build the components to the customer's design.
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 2002 was
between 65% to 75% for Pulse and 60% to 75% for AMI Doduco.
Item 3 Legal Proceedings
We are a party to various legal proceedings and administrative actions. We
consider lawsuits to be part of the normal course of business. Although it is
difficult to predict the outcome of any legal proceeding, we do not believe
these proceedings and actions will, individually or in the aggregate, have a
material adverse effect on our consolidated financial condition or results of
operations.
Item 4 Submission of Matters to a Vote of Security Holders
None
Page 14 of 62
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is traded on the New York Stock Exchange under the ticker
symbol "TNL". The following table reflects the highest and lowest sales prices
in each quarter of the last two years. The dividends paid are also shown. All
amounts reflect stock splits through December 27, 2002.
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
2002 High $ 31.40 $ 27.24 $ 23.30 $ 18.25
2002 Low $ 20.12 $ 21.26 $ 14.55 $ 12.66
2002 Dividends Paid $ 0.3375 -- -- --
2001 High $ 57.00 $ 33.89 $ 26.80 $ 28.42
2001 Low $ 21.75 $ 19.60 $ 20.53 $ 21.80
2001 Dividends Paid $ .03375 $ .03375 $ .03375 $ .03375
On February 19, 2003, there were approximately 1,588 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. See additional discussion on restricted
earnings in Item 7, Liquidity and Capital Resources, and in Note 8 of Notes to
Consolidated Financial Statements.
On April 11, 2002 we completed a follow-on offering of 6,348,000 shares of
our common stock. The proceeds of the offering, net of expenses, were
approximately $134.7 million. These proceeds resulted in a common stock increase
of $.8 million and an additional paid-in capital increase of $133.9 million.
After paying a dividend of $0.03375 per share on January 25, 2002 to
shareholders of record on January 4, 2002, we discontinued regular quarterly
cash dividends on our common stock. We currently intend to retain future
earnings to finance the growth of our business.
Page 15 of 62
Item 6 Selected Financial Data (In Thousands, Except Per Share Data)
2002(d) 2001(e) 2000 1999 1998
--------- -------- -------- -------- --------
Net sales $ 406,354 $474,199 $664,378 $530,436 $448,539
Net earnings (loss) $ (43,537) $ 2,784 $ 99,308 $ 44,312 $ 33,309
Earnings(loss) per share:
Basic (a) $ (1.17) $ .08 $ 3.05 $ 1.38 $ 1.04
Diluted (a) $ (1.17) $ .08 $ 3.02 $ 1.36 $ 1.03
Total assets $ 547,388 $525,020 $520,771 $381,239 $344,134
Total long-term debt $ 16,348 $ 89,129 $ 48,588 $ 60,496 $ 60,898
Shareholders' equity $ 422,059 $329,231 $324,430 $215,635 $174,809
Net worth per share (a) $ 10.52 $ 9.77 $ 9.76 $ 6.63 $ 5.40
Working capital (b)(f) $ 235,579 $189,257 $230,397 $141,851 $102,336
Current ratio 3.2 to 1 2.9 to 1 2.7 to 1 2.5 to 1 2.0 to 1
Number of shares outstanding:
(a) Weighted average,
including common stock
equivalents 37,581 33,566 32,859 32,492 32,406
Year end (a) 40,130 33,683 33,237 32,532 32,340
Dividends declared per share
(a)(c) -- $ .1350 $ .1350 $ .13125 $ .11625
Price range per share:
High (a) 31.40 $ 57.00 $ 76.13 $ 23.13 $ 22.19
Low (a) 12.66 $ 19.60 $ 19.38 $ 9.94 $ 8.44
(a) Share amounts and per share amounts reflect a two-for-one stock split on
November 27, 2000.
(b) Includes cash and cash equivalents and current installments of long-term
debt.
(c) After January 25, 2002, we discontinued paying regular quarterly cash
dividends on our common stock.
(d) During 2002, we recorded a cumulative effective of accounting change of
$15.7 million net of income tax benefit, and a $32.1 million intangible
asset impairment, less a $12.8 million tax benefit. We have not adjusted
2002 results for these items.
(e) During 2002, our ownership interest in a cost basis method investment
increased from approximately 19% to 28%. The initial investment was made
in 2001. We have adjusted 2001 to reflect the impact of a change in
accounting for this investment from the cost basis method to the equity
accounting method, as if this investment were accounted for as an equity
method investment since the initial investment.
(f) On January 9, 2003 we purchased Eldor High Tech Wire Wound Components
S.r.L. for $84.5 million in cash. We have not adjusted our 2002 working
capital for this item.
Page 16 of 62
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 and involve a number of risks and uncertainties.
Actual results may differ materially from those anticipated in these
forward-looking statements for many reasons, including the risks faced by us
described in "Risk Factors" section of this report on page 7 through 13.
Critical Accounting Policies
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires us to make judgments, assumptions and estimates that affect the amounts
reported in the Consolidated Financial Statements and accompanying notes. Note 1
to the Consolidated Financial Statements on page 37 describes the significant
accounting policies and methods used in the preparation of the Consolidated
Financial Statements. Estimates are used for, but not limited to, the accounting
for inventory provisions, impairment of goodwill and other intangibles,
restructuring expense and acquisition related restructuring costs, income taxes,
and contingency accruals. Actual results could differ from these estimates. The
following critical accounting policies are impacted significantly by judgments,
assumptions and estimates used in the preparation of the Consolidated Financial
Statements.
Inventory Provisions. Inventory purchases and commitments are based upon
future demand forecasts estimated by taking into account actual purchases of our
products over the recent past and customer forecasts. If there is a sudden and
significant decrease in demand for our products or there is a higher risk of
inventory obsolescence because of rapidly changing technology and or customer
requirements, we may be required to write down our inventory and our gross
margin could be negatively affected. If we were to sell or use a significant
portion of inventory already written down, our gross margin could be positively
affected.
Impairment of Goodwill and Other Intangibles. We will assess goodwill
impairment on an annual basis and between annual tests in certain circumstances.
In addition, in response to changes in industry and market conditions, we may
strategically realign our resources and consider restructuring, disposing of, or
otherwise exiting businesses, which could result in an impairment of goodwill.
Restructuring Expense and Acquisition Related Restructuring Costs. Our
recent restructuring activities, which related to our existing and recently
acquired businesses, were designed to reduce both our fixed and variable costs,
particularly in response to the dramatically reduced demand for our products in
the electronics components industry. These costs included the closing of
facilities and the termination of employees. Acquisition-related costs are
included in the allocation of the cost of the acquired business and are added to
goodwill. Other restructuring costs are expensed during the period in which we
determine that we will incur those costs, and all of the requirements for
accrual are met in accordance with the applicable guidance. Restructuring costs
are recorded based upon our best estimates at the time such as estimated
residual values. Our actual expenditures for the restructuring activities may
differ from the initially recorded costs. If this occurs, we would adjust our
initial estimates in future periods. In the case of acquisition-related
restructuring costs, and depending on whether the assets impacted came from the
acquired entity and the timing of the restructuring charge, such adjustment
would generally require a change in value of the goodwill appearing on our
balance sheet, which may not affect our earnings. In the case of other
restructuring costs, we could be required either to record additional expenses
in future periods if our initial estimates were too low, or reverse part of the
charges that we recorded initially if our initial estimates were too high.
Income Taxes. We have not provided for U.S. federal income and foreign
withholding taxes on non-U.S. subsidiaries' undistributed earnings as calculated
for income tax purposes, because, in accordance with the provisions of
Accounting Principles Board Opinion No. 23, Accounting for Income Taxes -
Special Areas ("APB 23") we intend to reinvest these earnings outside the U.S.
indefinitely. If we encounter a significant domestic need for liquidity that we
cannot fulfill through borrowings, equity offerings, or other internal or
external sources, we may experience unfavorable tax consequences as cash
invested outside the U.S. is transferred to the U.S. This adverse consequence
would occur if the transfer of cash into the U.S. were subject to income tax
without sufficient foreign tax credits available to offset the U.S. tax
liability.
Contingency Accruals. During the normal course of business, a variety of
issues may arise, which may result in litigation, environmental compliance and
other contingent obligations. In developing our contingency
Page 17 of 62
accruals we consider both the likelihood of a loss or incurrence of a liability
as well as our ability to reasonably estimate the amount of exposure. We record
contingency accruals when a liability is probable and the amount can be
reasonably estimated. We periodically evaluate available information to assess
whether contingency accruals should be adjusted. We could be required to record
additional expenses in future periods if our initial estimates were too low, or
reverse part of the charges that we recorded initially if our estimates were too
high.
Overview
We are a global producer of precision-engineered passive magnetics-based
electronic components and electrical contact products and materials. We believe
we are a leading global producer of these products and materials in the primary
markets we serve based on our estimates of the size of our primary markets in
annual revenues and our share of those markets relative to our competitors.
We operate our business in two distinct segments:
o the electronic components segment, which operates under the name
Pulse, and
o the electrical contact products segment, which operates under the
name AMI Doduco.
General. We experienced consistent growth in net sales from fiscal 1991
through fiscal 2000. We define net sales as gross sales less returns and
allowances. We sometimes refer to net sales as revenue. During this time period,
the growth in our consolidated net sales has been due in large part to the
growth of Pulse. However, since late 2000, the electronics markets served by
Pulse have experienced a severe global contraction. While we currently do not
have a great deal of visibility with respect to future demand for our products,
particularly at Pulse, we believe that in 2002, many of the markets we serve
began to stabilize, but at very low levels. We believe that a broad-based market
rebound will be erratic and gradual probably lasting several years. In markets
where unit demand has recovered, downward pressure on selling prices have kept
total revenue from growing in a manner consistent with unit growth.
Demand slowed at AMI Doduco as we entered 2002, mirroring the prevailing
economic conditions in North America and Europe. However, during 2002 AMI Doduco
has experienced increases in design and quoting activities for component
subassemblies in Europe. This includes component subassemblies for automotive
applications such as multi-function switches, motor control sensors and ignition
security systems, and for non-automotive uses such as appliance and industrial
controls and medical equipment. AMI Doduco continued cost reduction actions in
2002 including workforce adjustments in line with demand around the world. AMI
Doduco also completed the North American plant consolidation in 2002, as well as
the consolidation of all European contact pre-material production into our
Pforzheim, Germany facility and other product and plant consolidation actions in
Europe in 2002.
In 2002, we recorded a goodwill impairment charge of $15.7 million, net of
income tax benefit, related to AMI Doduco as a cumulative effect of accounting
change. We also recorded a trade name impairment charge of $32.1 million, less a
$12.8 million income tax benefit, related to Pulse.
Historically, the gross margin at Pulse has been significantly higher than
at AMI Doduco. As a result, the mix of net sales generated by Pulse and AMI
Doduco during a period affects our consolidated gross margin. Over the past 18
months, our gross margin has been positively impacted by the savings from our
various restructuring activities and ongoing cost and expense controls. Our
gross margin is also significantly affected by capacity utilization,
particularly at AMI Doduco. Pulse's markets are characterized by a relatively
short-term product life cycle compared to AMI Doduco. As a result, significant
product turnover occurs each year. Therefore, Pulse's changes in average selling
prices do not necessarily provide a meaningful and quantifiable measure of
Pulse's operations. AMI Doduco has a relatively long-term and mature product
line, without significant turnover, compared to Pulse, with minimal variation in
the prices of product sold. Therefore, changes in prices do not have a material
impact on AMI Doduco revenue. Accordingly, substantially all of the sales growth
and contraction at AMI Doduco is attributable to changes in unit volume.
Acquisitions. Historically, acquisitions have been an important part of
our growth strategy. In many cases, our move into new and high-growth extensions
of our existing product lines or markets has been facilitated by an acquisition.
Our acquisitions continually change the mix of our net sales. Pulse made
numerous acquisitions in recent years which have increased our penetration into
our primary markets and expanded our presence in new markets. Recent examples of
these acquisitions include Excelsus, and the consumer electronics business of
Eldor Corporation. Excelsus was acquired in August 2001 for approximately $85.9
million, net of cash acquired. Excelsus was based in Carlsbad, California and
was a leading producer of customer-premises digital subscriber line filters and
other
Page 18 of 62
broadband accessories. Pulse acquired Eldor's consumer electronics business in
January 2003. Accordingly, the financial results of this business are not
reflected in the financial statements included in this report on Form 10-K. They
will be included with our results beginning with the first quarter of 2003.
Eldor's consumer business is a leading supplier of flyback transformers to the
European television industry.
Similarly, AMI Doduco has made a number of recent acquisitions. In January
2001, AMI Doduco acquired the electrical contact and materials business of
Engelhard-CLAL, a manufacturer of electrical contacts, wire and strip contact
materials and related products. Generally, AMI Doduco's acquisitions have been
driven by our strategy of expanding our product and geographical market presence
for electrical contact products.
Due to our integration of acquisitions and the interchangeable sources of
net sales between existing and acquired operations, historically, we have not
separately tracked the net sales of an acquisition after the date of the
transaction.
Recent Cost Reduction Programs. During 1999 and 2000, the electronic
components industries served by Pulse were characterized by unprecedented
growth. Beginning in late 2000 and continuing all during 2001, however, the
opposite trend was experienced as these industries experienced a severe
worldwide contraction and many of our customers canceled orders and decreased
their level of business activity as a result of lower demand for their end
products. Our manufacturing business model at Pulse has a very high variable
cost component due to the labor-intensity of many processes. This allows us to
quickly change our capacity based on market demand. Just as we expanded capacity
during 1999 and 2000, we reduced capacity during 2001 and 2002. While the
electrical contact industry served by AMI Doduco is generally less dependent on
volatile technology markets, it too was negatively impacted by general economic
trends as reflected in slower overall construction spending, and reduced capital
spending. AMI Doduco has a higher fixed cost component of manufacturing activity
than Pulse, as it is more capital intensive. Therefore, AMI Doduco is unable to
contract its capacity as quickly as Pulse in response to market demand, although
significant actions have been taken to align AMI Doduco's capacity with current
market demand. In response to the decline in demand for our products, we
implemented a succession of cost reduction initiatives and programs, summarized
as follows:
In 2002, we announced the closure of our production facility in the
Philippines. The production at this facility was transferred to other Pulse
facilities in Asia. We recorded charges of $3.8 million for this plant closing,
comprised of $1.4 million for severance and related payments and $2.4 million
for asset writedowns. The majority of this accrual was utilized by the end of
2002. We also adopted other restructuring plans during 2002. In this regard, we
recorded provisions of $6.0 million for personnel reductions. Approximately 800
personnel were terminated in 2002 and substantially all of the employee
severance and related payments in connection with these actions were completed
as of December 27, 2002. An additional provision of $7.0 million was recorded in
2002 related to asset writedowns. These assets were primarily Asian-based
production equipment that became idle in 2002. The remaining cost basis of the
assets has been reclassified from fixed assets to assets held for sale in the
balance sheet as of December 27, 2002.
During 2001, we announced the closure of our production facilities in
Thailand and Malaysia. The production at these two facilities was transferred to
other Pulse facilities in Asia. We recorded charges of $3.6 million for these
plant closings, comprised of $2.5 million for severance and related payments and
$1.1 million for other exit costs. The majority of this accrual was utilized by
the end of 2002. We also adopted other restructuring plans during 2001. In this
regard, provisions of $6.4 million were recorded during 2001. Approximately
3,500 manufacturing personnel primarily in Asia, and approximately 200 support
personnel in North America and Europe were terminated. Approximately 75% of all
of the employee severance and related payments in connection with these actions
were completed as of December 28, 2001. Approximately $2.3 million of the
provision remained as of December 28, 2001 for severance payments and related
expenses which were paid in 2002. An additional $0.7 million remained accrued at
December 28, 2001 for other exit costs at primarily Thailand and Malaysia.
Termination costs for employees at our Thailand and Malaysian facilities have
been included in the separate provisions for exiting those facilities. In
addition to these terminations, headcount was reduced by approximately 12,300
additional personnel, net of new hires, during fiscal 2001 through voluntary
employee attrition and involuntary workforce reductions primarily at
manufacturing facilities in the PRC where severance payments are not necessary.
In addition, a charge of $3.5 million was recorded during the third quarter of
2001 to write-down the value of certain Pulse fixed assets to their disposal
value.
Page 19 of 62
In 2000, AMI Doduco recorded a $5.5 million provision for restructuring
initiatives due to a reduction in employment levels by approximately 120 people,
primarily in Germany. We provided $3.7 million for employee severance and
related payments, $0.9 million related to the impairment of certain assets and
$0.9 million for other exit costs. Offsetting these costs was a gain of $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.
As a result of our continuing focus on both economic and operating profit,
we will continue to aggressively size both Pulse and AMI Doduco so that costs
are minimized while we wait for the recovery in demand and pursue additional
growth opportunities. The amounts of additional charges will depend on specific
actions taken. The actions taken over the past two years such as plant closures,
asset impairments and reduction in personnel worldwide have resulted in the
elimination of a variety of costs. The majority of these costs represent the
annual salaries and benefits of terminated employees, both those directly
related to manufacturing and those providing selling, general and administrative
services. The eliminated costs also include depreciation savings from disposed
equipment and the relocation of capacity to factories in lower cost countries,
primarily the PRC. If incoming orders increase substantially, additional hiring
may be necessary to expand capacity. However, we do not anticipate requiring
additional capacity in the foreseeable future.
We recorded pre-tax inventory provisions in cost of sales of $2.2 million
and $20.3 million for the years ended December 27, 2002 and December 28, 2001,
respectively. The amounts were determined by comparing quantities on-hand to
actual historical usage and forecasted demand. The inventory that was written
off in 2001 was primarily raw materials and specific finished goods for several
customers.
International Operations. An increasing percentage of our sales in recent
years has been outside of the United States. As of December 27, 2002, we have
operations in 9 countries and we have significant net sales in currencies other
than the U.S. dollar. For the year ended December 27, 2002, 68.7% of our net
sales were outside of the U.S. For the year ended December 28, 2001, 64.9% of
our net sales were to customers outside of the U.S. Changing exchange rates
often impact our financial results and the analysis of our period-over-period
results. This is particularly true of movements in the exchange rate between the
U.S. dollar and the euro. AMI Doduco's European sales are denominated primarily
in euro. A portion of Pulse's European sales are also denominated in euros.
However, the proportion at Pulse is less than it is at AMI Doduco. As a result
of this and other factors and prior to the acquisition of Eldor, Pulse used the
U.S. dollar as its functional currency in Europe while AMI Doduco uses the euro.
For the acquired Eldor operations, Pulse uses the euro as its functional
currency. The use of different functional currencies creates different financial
effects. The euro was 5.5% stronger, on average, relative to the U.S. dollar,
for the year ended December 27, 2002 versus the comparable prior-year period. As
a result, AMI Doduco's euro-denominated sales resulted in higher dollar sales
upon translation for our U.S. consolidated financial statements. We also
experienced a positive translation adjustment to equity in the 2002 period
because our investment in AMI Doduco's European operations was worth more in
U.S. dollars. At Pulse, we incurred foreign currency gains as euro denominated
assets and liabilities were remeasured to U.S. dollars for financial reporting
purposes during 2002. If an increasing percentage of our sales are denominated
in non-U.S. currencies, it could increase our exposure to currency fluctuations.
The impact of exchange rate differences on AMI Doduco's European sales will be
partially offset by the impact on our expenses and bank borrowings in Europe,
all of which are also denominated in euros. Despite Pulse's significant presence
in Asia, the vast majority of our revenues from customers in Asia are
denominated in U.S. dollars. As a result, Pulse has less exposure than AMI
Doduco to sales fluctuations caused by currency fluctuations.
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.
As of December 27, 2002, we had one foreign currency forward contract
outstanding to sell forward approximately 46.5 million of euro in order to hedge
intercompany loans. 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.
Precious Metals. AMI Doduco uses silver, as well as other precious metals,
in manufacturing some of its electrical contacts, contact materials and contact
subassemblies. Historically, we have leased or held these materials through
consignment arrangements with our suppliers. Leasing and consignment costs have
been typically below the costs to borrow funds to purchase the metals and these
arrangements eliminate the fluctuations in the market price of owned precious
metal. AMI Doduco's terms of sale generally allow us to charge customers for the
market value of silver on the day after we deliver the silver bearing product to
the customer. Thus far we have been successful in managing the costs associated
with our precious metals. While limited amounts are purchased for use in
production,
Page 20 of 62
the 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. Leasing/consignment fee increases are caused by increases in
interest rates or increases in the price of the consigned material. See
additional discussion in note 1 of the Notes to Consolidated Financial
Statements.
Income Taxes. Our effective income tax rate is affected by the proportion
of our income earned in high-tax jurisdictions such as Germany and the income
earned in low-tax jurisdictions, particularly in Asia. This mix of income can
vary significantly from one period to another. We have benefited over recent
years from favorable offshore tax treatments. However, we may not be able to
take advantage of similar benefits in the future. Developing countries and, in
particular, the People's Republic of China, may change their tax policies at any
time.
We have not provided for U.S. federal income and foreign withholding taxes
on approximately $307.6 million of our non-U.S. subsidiaries' undistributed
earnings (as calculated for income tax purposes) as of December 27, 2002, as per
Accounting Principles Board Opinion No. 23, Accounting for Income Taxes -
Special Areas. 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. Unrecognized deferred taxes on these
undistributed earnings are estimated to be approximately $93.7 million. Where
excess cash has accumulated in our non-U.S. subsidiaries and it is advantageous
for tax reasons, subsidiary earnings may be remitted.
Results of Operations
Year ended December 27, 2002 compared to the year ended December 28, 2001
Net Sales. Net sales for the year ended December 27, 2002 decreased $67.9
million, or 14.3%, to $406.4 million from $474.2 million for the year ended
December 28, 2001. Our sales decline from the comparable period last year was
attributable primarily to declining average selling prices, especially in
Pulse's power conversion and telecom markets, and the precipitous global
downturn in markets served by Pulse that began late in 2000, as a large portion
of the strong sales in the first quarter of 2001 were for products ordered in
2000. Factors contributing to the downturn included declining capital
expenditures by end-users and subsequent excess inventory levels. This downturn
was experienced primarily in Pulse's networking and telecommunications markets
on a worldwide basis, particularly in North America and Europe. Offsetting the
sales declines in 2002 are the full year results of acquisitions completed in
2001.
Pulse's net sales decreased $48.7 million, or 19.2%, to $204.6 million for
the year ended December 27, 2002 from $253.3 million for the year ended December
28, 2001. Although Pulse's sales were fairly consistent in the last nine months
of 2002 and 2001, Pulse's sales were significantly lower in the first quarter of
2002 compared to the first quarter of 2001. The majority of Pulse sales during
the quarter ended March 30, 2001 were for products ordered in 2000, before the
dramatic market slowdown began. During the first quarter of 2001, new order
rates declined and significant customer order cancellations occurred. Average
selling prices also declined throughout 2002 compared to 2001, especially in
Pulse's power conversion and telecom markets. Net sales in 2002 also include
full year results of Grupo ECM and Excelsus sales, whereas 2001 included only
sales derived from Grupo ECM and Excelsus since the date of their acquisition in
March and August 2001, respectively.
AMI Doduco's net sales decreased $19.1 million, or 8.7%, to $201.8 million
for the year ended December 27, 2002 from $220.9 million for the year ended
December 28, 2001. Although AMI Doduco's sales were fairly consistent in the
last nine months of 2002 and 2001 respectively, AMI Doduco's sales were
significantly lower in the first quarter of 2002 compared to the first quarter
of 2001. Sales in the 2002 period reflect very weak European markets, offset
somewhat by a stronger average euro to U.S. dollar exchange rate on a
year-over-year basis. Demand in North American markets was also lower throughout
2002 versus 2001, although the decline was not as severe as in Europe. The lower
worldwide manufacturing activity in 2002 resulted in lower net sales primarily
from customers in the commercial and industrial machinery, non-residential
construction, and appliance industries in 2002.
Cost of Sales. Our cost of sales decreased $49.8 million, or 13.9%, to
$309.9 million for the year ended December 27, 2002 from $359.7 million for the
year ended December 28, 2001. This decrease was due to a decrease in net sales
in 2002 and a reduction in inventory write-offs of $18.1 million, from $20.3
million in 2001 versus $2.2 million in 2002. Our consolidated gross margin for
the year ended December 27, 2002 was 23.8% compared to 24.2% for the year ended
December 28, 2001. Since the Pulse gross profit as a percentage of sales is
typically higher than that of AMI Doduco, our consolidated gross margin in 2002
was negatively affected by:
Page 21 of 62
o a mix of net sales weighted more heavily by AMI Doduco on a relative
basis,
o a trend towards higher priced products with even higher costs for
certain Pulse products, such as filtered connectors replacing
discrete components, and
o average per unit selling price declines for other Pulse products.
There were also manufacturing inefficiencies at both Pulse and AMI Doduco due to
under-utilization of capacity as a result of the market downturn. These factors
more than offset the positive impact of our restructuring initiatives.
Selling, General and Administrative Expenses. Total selling, general and
administrative expenses for the year ended December 27, 2002 decreased $9.6
million, or 9.7%, to $89.3 million, or 22.0% of net sales, from $98.8 million,
or 20.8% net of sales for the year ended December 28, 2001. The decrease in
selling, general and administrative expenses in 2002 was due primarily to
actions that we took to reduce costs and tighten spending controls. In addition,
selling expenses, which are largely variable with net sales, decreased $2.0
million from 2001 to 2002. Administrative expenses decreased by $5.8 million,
due largely to lower headcount in the U.S. and lower incentive awards, offset
somewhat by higher expenses related to our restricted stock plan in 2002.
Research, development and engineering expense decreased by $2.4 million, due
largely to consolidation of research facilities.
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 years ended December 27, 2002 and December
28, 2001, RD&E by segment was as follows (dollars in thousands):
2002 2001
------- -------
Pulse $13,892 $16,026
Percentage of segment sales 6.8% 6.3%
AMI Doduco $ 3,903 $ 4,155
Percentage of segment sales 1.9% 1.9%
Although 2002 had been characterized by cost reduction activities and
lower sales levels, particularly at Pulse, we largely avoided spending cuts in
the RD&E area, as we believe that future demand in the electronic components
markets will be driven by next-generation products. Design and development
activities with our OEM customers continued at an aggressive pace during 2002.
The reduced expense in RD&E in 2002 was primarily attributable to facility
consolidation.
Interest. Net interest expense was $0.1 million for the year ended
December 27, 2002 compared to $1.4 million of net interest income for the year
ended December 28, 2001. This decrease was due to significantly lower yields on
invested cash, somewhat offset by lower borrowing costs attributable to lower
average outstanding debt in 2002. We incurred debt of approximately $74.0
million in connection with the acquisition of Excelsus in August 2001. Some of
this debt remained outstanding until April 2002, when the balance was retired
with proceeds from our follow-on offering. Invested cash balances increased by
$62.8 million from year end 2001, due primarily to 2002 follow-on offering
proceeds of $134.7 million less debt repayments of $75.3 million, coupled with
an intense focus on cash and working capital management throughout 2002.
Our current credit facility, which was entered into on June 20, 2001, has
variable interest rates. Accordingly, interest expense may increase if the rates
associated with, or the amounts borrowed under, our credit facility move higher
during subsequent quarters. 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 to date. At
December 27, 2002, there were no borrowings under our facility.
Income Taxes. The effective income tax rate in the form of a benefit for
the year ended December 27, 2002 was 30.8% compared to 51.0% for the year ended
December 28, 2001. The lower tax rate in 2002 was the result of a higher
weighting of Pulse taxable income versus AMI Doduco, as Pulse generally operates
in lower tax jurisdictions than AMI Doduco. There was also a higher level of
non-deductible restructuring charges incurred in 2001 versus 2002. Specifically,
plant shut-down costs and severance expenses were incurred in certain low-tax
jurisdictions or countries where we have current losses or discontinuing
operations. In such countries, we expect to have no future income to offset such
charges, resulting in little or no income tax benefit.
Page 22 of 62
Cumulative Effect of Accounting Change. During 2002, we recorded a
cumulative effective of accounting change of $15.7 million, net of income tax
benefit, upon adoption of SFAS 142. This charge was attributable to impairment
of AMI Doduco goodwill.
Unusual and Infrequent Items. During 2002, we recorded a charge of $32.1
million, less a related $12.8 million income tax benefit, attributable to a
write down of the Excelsus trade name acquired by Pulse. The trade name
impairment charge was triggered by the combined effect of reorganizing Pulse
into product line based organization and updated forecast for DSL microfilters.
A total of $1.9 million was also recognized as unusual and infrequent income in
2002, attributable to the favorable outcome of certain legal matters. Note 12 to
the Consolidated Financial Statements contains additional information regarding
restructuring charges recorded in 2002.
Year ended December 28, 2001 compared to the year ended December 29, 2000
Net Sales. Net sales for the year ended December 28, 2001 decreased $190.2
million, or 28.6%, to $474.2 million from $664.4 million for the year ended
December 29, 2000. Our sales decline from the comparable period last year was
attributable primarily to the precipitous global downturn in markets served by
Pulse that began late in 2000. Factors contributing to the downturn included
declining capital expenditures by end-users and subsequent excess inventory
levels. This downturn was experienced in Pulse's networking, telecommunications
and power conversion markets on a worldwide basis, particularly in North America
and Europe.
Pulse's net sales decreased $185.5 million, or 42.3%, to $253.3 million
for the year ended December 28, 2001 from $438.8 million for the year ended
December 29, 2000. Pulse's sales were significantly lower in 2001 than in 2000
as new order rates declined and significant customer order cancellations
occurred. Net sales in 2001 include sales derived from our acquisitions of Grupo
ECM and Excelsus since the date of their acquisition in March and August 2001,
respectively.
AMI Doduco's net sales decreased $4.7 million, or 2.1%, to $220.9 million
for the year ended December 28, 2001 from $225.6 million for the year ended
December 29, 2000. Sales in the 2001 period reflect strong European markets and
contributions from the Engelhard-CLAL operations, acquired in early January
2001. However, these positive factors were offset by a slowdown in North
American manufacturing activity during the year ended December 28, 2001, and to
a lesser extent, a decline in the average euro-to-U.S. dollar exchange rate. The
lower manufacturing activity resulted in lower net sales primarily from
customers in the commercial and industrial machinery, telecommunications and
appliance industries.
Cost of Sales. Our cost of sales decreased $50.2 million, or 12.2%, to
$359.7 million for the year ended December 28, 2001 from $409.9 million for the
year ended December 29, 2000. This decrease was due to a decrease in net sales.
Our consolidated gross margin for the year ended December 28, 2001 was 24.1%
compared to 38.3% for the year ended December 29, 2000. Since the Pulse gross
profit as a percentage of sales is typically higher than that of AMI Doduco, our
consolidated gross margin in 2001 was negatively affected by:
o a mix of net sales weighted more heavily by AMI Doduco on a relative
basis,
o manufacturing inefficiencies at both Pulse and AMI Doduco due to
under-utilization of capacity as a result of the market downturn,
and
o provisions for slow moving inventory at Pulse due to business
slowdown.
These factors more than offset the positive impact of our restructuring
initiatives.
Selling, General and Administrative Expenses. Total selling, general and
administrative expenses for the year ended December 28, 2001 decreased $32.3
million, or 24.6%, to $98.8 million, or 20.8% of net sales, from $131.1 million,
or 19.7% net of sales for the year ended December 29, 2000. The decrease in
selling, general and administrative expenses in 2001 was due primarily to
actions that we took to reduce costs and tighten spending controls. In addition,
selling expenses, which are largely variable with net sales, decreased $3.1
million from 2000 to 2001. Administrative expenses decreased by $30.2 million,
due largely to reduced headcount and lower incentive awards and lower expenses
related to our restricted stock plan in 2001. These decreases were partially
offset by higher research, development and engineering expenses, which increased
by $1.0 million from 2001. The underlying expense for incentive awards is
primarily variable and dependent upon our overall financial performance
regarding incentive plan targets, primarily the achievement of economic profit
and net operating profit objectives. These targets, which were set in December
of 2000, were not achieved, and consequently, except for a small payment by AMI
Doduco in the first quarter of 2001, no cash incentives were paid to executives.
These incentive awards were $0.5 million in 2001 compared to $9.4 million in
2000. Expenses associated with stock-based compensation plans
Page 23 of 62
including the restricted stock plan were also significantly lower in 2001 versus
the year ended December 29, 2000, due to a lower average share price of our
common stock throughout 2001 compared to 2000. These expenses were approximately
$1.2 million in 2001 compared to $7.0 million in 2000.
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 years ended December 28, 2001 and December
29, 2000, RD&E by segment was as follows (dollars in thousands):
2001 2000
------- -------
Pulse $16,026 $15,748
Percentage of segment sales 6.3% 3.6%
AMI Doduco $ 4,155 $ 4,430
Percentage of segment sales 1.9% 2.0%
Although 2001 was characterized by cost reduction activities and much
lower sales levels, particularly at Pulse, we largely avoided spending cuts in
the RD&E area as we believe that the recovery in the electronic components
markets will be driven by next-generation products. Design and development
activities with our OEM customers continued at an aggressive pace during 2001.
Interest. Net interest income was $1.4 million for the year ended December
28, 2001 compared to $2.9 million for the year ended December 29, 2000. Invested
cash balances remained essentially consistent with the year ended December 29,
2000, due to the intense focus on cash management throughout 2001. This resulted
in preservation of average cash balances throughout 2001. Outstanding debt
increased during the year ended December 28, 2001 due primarily to $74.0 million
that was incurred in connection with the acquisition of Excelsus in August 2001,
resulting in increased interest expense.
Income Taxes. The effective income tax rate for the year ended December
28, 2001 was 51.0% compared to 19.2% for the year ended December 29, 2000. The
higher tax rate in 2001 resulted from the non-deductibility of certain
restructuring charges incurred in 2001. Specifically, plant shut-down costs and
severance expenses were incurred in low-tax jurisdictions or countries where we
have current losses or discontinued operations. In such countries, we expect to
have no future income to offset such charges, resulting in little or no income
tax benefit. In addition, a higher proportion of income was earned in high-tax
jurisdictions.
Liquidity and Capital Resources
Working capital including cash and cash equivalents as of December 27,
2002 was $238.6 million compared to $189.3 million as of December 28, 2001. This
increase was primarily due to proceeds from our follow-on offering, net of debt
repayments, offset by higher current installments of long-term debt. Cash and
cash equivalents, which is included in working capital, increased from $142.3
million as of December 28, 2001 to $205.1 million as of December 27, 2002.
Net cash flows from operating activities was $20.8 million for the year
ended December 27, 2002 and $62.7 million in 2001, a decrease of $41.9 million.
The lower cash flow from operations in 2002 was primarily driven by decreasing
net earnings. However, the lower earnings were partially offset by decreased
working capital requirements and aggressive cash management actions that we took
in response to the slowdown. A significant decrease in Pulse's net sales during
the year ended December 28, 2001 compared to 2000, caused a significant decrease
in accounts receivable in 2001.
Capital expenditures were $5.8 million during the year ended December 27,
2002 and $13.2 million in 2001. The level of capital expenditures decreased from
the year ended December 28, 2001, due to tight spending controls and lower Pulse
capacity needs resulting from lower sales. We significantly reduced our capital
spending in 2001 as compared to fiscal 2000. Our spending in 2003 will depend on
market demand and capacity requirements. We make capital expenditures to expand
production capacity and to improve our operating efficiency. We plan to continue
making such expenditures in the future.
Cash used for acquisitions was $6.7 million for the year ended December
27, 2002 and $115.5 million for 2001. The 2002 spending was for an additional
equity investment in Full Rise Electronics, Co., Ltd.. We exercised our option
to expand our investment in FRE on July 27, 2002, with an additional investment
of approximately $6.7
Page 24 of 62
million which increased our total investment to $20.9 million. The spending in
2001 included the acquisition of Excelsus for approximately $85.9 million in
August 2001. On January 9, 2003 we acquired Eldor High Tech Wire Wound
Components S.r.L. for 81.6 million euros, or $84.5 million in U.S. dollar
equivalent, plus related acquisition costs and expenses. The source of funding
for the purchase was cash on hand. As the purchase price was denominated in
euro, we exchanged in a spot market transaction, $87.1 million for 84.1 million
euro on December 30, 2002. The additional funding of 2.5 million euro, in excess
of the purchase price, was expected to be used to fund working capital
requirements, as Eldor was purchased net of existing cash. We may acquire other
businesses or product lines to expand our breadth and scope of operations.
We paid dividends of $1.1 million for the year ended December 27, 2002 and
$4.5 million for the year ended December 28, 2001. We received proceeds of $1.3
million during the year ended December 27, 2002 and $6.5 million for the year
ended December 28, 2001 from the sale of stock through our employee stock
purchase plan. After paying a dividend on January 25, 2002 to shareholders of
record on January 4, 2002, we discontinued our regular quarterly cash dividends
on our common stock. We currently intend to retain future earnings to finance
the growth of our business.
As of December 27, 2002, we have no outstanding borrowings under our
existing three-year revolving credit agreement. We entered into this credit
agreement on June 20, 2001 providing for $225.0 million of credit capacity.
Following the conclusion of our follow-on equity offering in April 2002, we
voluntarily reduced the size of this credit facility to a maximum of $175.0
million in order to reduce commitment fees and to size the facility to estimated
future needs given cash on hand. We also amended the minimum net worth threshold
from $275.0 million to $259.3 million as a result of goodwill impairment charge
recorded in the three months ended March 29, 2002. The amended facility consists
of:
o an aggregate U.S. dollar-based revolving line of credit in the
principal amount of up to $175.0 million including individual
sub-limits of:
- a British pounds sterling-based or euro-based revolving line
of credit in the principal amount of up to the U.S. dollar
equivalent of $75.0 million; and
- a multicurrency facility providing for the issuance of letters
of credit in an aggregate amount not to exceed the U.S. dollar
equivalent of $10.0 million.
The amounts outstanding under the credit facility in total may not exceed $175.0
million. Outstanding borrowings are limited to a maximum of three times our
earnings before interest, taxes, depreciation and amortization, (EBITDA) on a
rolling twelve-month basis.
The credit facility also contains covenants requiring maintenance of
minimum net worth, maximum debt to EBITDA ratio, minimum interest expense
coverage, capital expenditure limitations, and other customary and normal
provisions. We are in compliance with all such covenants.
We pay a facility fee, irrespective of whether there are outstanding
borrowings or not, which ranges from 0.275% to 0.450% of the total commitment,
depending on our EBITDA. The interest rate for each currency's borrowing will be
a combination of the base rate for that currency plus a credit margin spread.
The base rate is different for each currency. It is LIBOR or prime rate for U.S.
dollars, Euro-LIBOR for euros, and a rate approximating sterling LIBOR for
British pounds. The credit margin spread is the same for each currency and is
0.850% to 1.425% depending on our debt to EBITDA ratio. Each of our domestic
subsidiaries with net worth equal to or greater than $5 million has agreed to
guarantee all obligations incurred under the credit facility.
We also have obligations outstanding under two term loan agreements. The
first is with Baden-Wurttembergische Bank for borrowing under two loans, each in
the amount of approximately 5.1 million euro, both due in June 2003. The second
is with Sparkasse Pforzheim, for the borrowing of approximately 5.1 million
euro, and is due in August 2009.
We had three standby letters of credit outstanding at December 27, 2002 in
the aggregate amount of $2.5 million securing transactions entered into in the
ordinary course of business.
Page 25 of 62
As of December 27, 2002, future payments related to contractual
obligations are as follows (in thousands):
Amounts due by period
4 to 5
Total Less than 1 year 2 to 3 years years Thereafter
----- ---------------- ------------ ------ ----------
Long-term debt $16,348 $10,667 $ 242 $ 172 $5,267
Operating leases 22,329 7,535 7,971 2,680 4,143
------- ------- ------ ------ ------
$38,677 $18,202 $8,213 $2,852 $9,410
We also have commercial commitments as of December 27, 2002 of $43.5
million due under precious metal consignment-type leases and $2.5 million of
standby letters of credit securing transactions entered into in the ordinary
course of business. We believe that our existing cash balances and funds
expected to be generated from future operations will be sufficient to satisfy
these contractual obligations and commercial commitments.
We believe that the combination of cash on hand, cash generated by
operations and, if necessary, additional borrowings under our credit agreement
will be sufficient to satisfy our operating cash requirements in the short-term
and long-term. In addition, we may use internally generated funds or borrowings,
or additional equity offerings for acquisitions of suitable businesses or
assets.
With the exception of approximately $10.0 million of retained earnings as
of December 27, 2002 in the PRC that are restricted in accordance with Section
58 of the PRC Foreign Investment Enterprises Law, substantially all retained
earnings are free from legal or contractual restrictions. The amount restricted
in accordance with the PRC Foreign Investment Enterprise Law is for employee
welfare programs and is applicable to all foreign investment enterprises doing
business in the PRC. The restriction applies to 10% of our net earnings in the
PRC, limited to 50% of the total capital invested in the PRC. 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 these earnings were brought back to the United States, significant
tax liabilities could be incurred in the United States as several countries in
which we operate have rates significantly lower than the U.S. statutory rate.
Additionally, we have not accrued U.S. income taxes on foreign earnings
indefinitely invested abroad. We have also been granted special tax incentives
in other countries such as the PRC. This favorable situation could change if
these countries were to increase rates or revoke the special tax incentives, or
if we were to discontinue manufacturing operations in these countries. This
could have a material unfavorable impact on our net income and cash position.
New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 Consolidation of Variable Interest Entities ("FIN
46"). FIN 46 clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. We are required to
adopt the provisions of FIN 46 for variable interest entities created after
January 31, 2003. Adoption of this interpretation is not expected to have a
material effect on our revenue, operating results, financial position, or
liquidity.
In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-Based Compensation, Transition and Disclosure, an amendment to Statement
No. 123 ("SFAS 148"). SFAS 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of Statement No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), by
requiring prominent disclosures in both annual and interim financial statements,
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions of SFAS 148 are
effective for fiscal years ending after December 15, 2002. We intend to adopt
the provisions of SFAS 123, as amended by SFAS 148, as of the beginning of our
fiscal year in 2003. We will use the prospective method of adoption, which
recognizes expense for all employee awards granted, modified or settled after
the beginning of the fiscal year in which the recognition provisions are first
applied. Adoption of this standard is not expected to have a material effect on
our revenue, operating results or liquidity, and we expect net expense after
related tax benefits to lower diluted earnings per share by approximately $0.01
per share in fiscal 2003.
Page 26 of 62
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees and Indebtedness of Others ("FIN 45"). FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
FIN 45 also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. We are required to adopt the provisions of
FIN 45 on a prospective basis to guarantees issued or modified after December
31, 2002, although the related disclosure requirements are effective
immediately. We have not issued any guarantees for performance of third parties.
Accordingly, adoption of this interpretation is not expected to have a material
effect on our revenue, operating results, financial position or liquidity.
In June 2002, the FASB issued Statement No. 146 Accounting for Costs
Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146 superceded
the Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain
Termination Benefits and Other Costs to Exit an Activity, ("EITF 94-3") The
principal difference between SFAS 146 and EITF 94-3 is that SFAS 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF 94-3, a liability for an
exit cost was recognized at the date of an entity's commitment to an exit plan.
As such, under SFAS 146, an entity's commitment to a plan by itself, does not
create a present obligation meeting the definition of a liability. SFAS 146 also
established fair value as the objective for initial measurement of the
liability. We are required to adopt the provisions of SFAS for all exit or
disposal activities initiated after December 15, 2002. The impact of this
standard on our operating results will depend on the level and nature of
restructuring activities that we initiate in 2003 and beyond.
In August 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations ("SFAS 143") which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS 143 applies to legal
obligations associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development and (or) normal use of
the assets. SFAS 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the liability
is added to the carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If the
obligation is settled for other than the carrying amount of the liability, a
gain or loss on settlement will be recognized. We are required to adopt the
provisions of SFAS 143 during the three months ending March 28, 2003. Adoption
of this standard is not expected to have a material effect on our net sales,
operating results, financial position, or liquidity.
Item 7a Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our financial instruments, including cash and cash equivalents and
long-term debt, are exposed to changes in interest rates in both the U.S. and
abroad. We invest our excess cash in short-term, investment grade interest
bearing securities. We generally 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.
Our existing credit facility has variable interest rates. Accordingly,
interest expense may increase if we borrow and if the rates associated with 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.
Page 27 of 62
The table below presents principal amounts in U.S. dollars (or equivalent
U.S. dollars with respect to non-U.S. denominated debt) and related weighted
average interest rates by year of maturity for our foreign debt obligations. The
column captioned "Approximate Fair Value" sets forth the carrying value of our
long-term debt as of December 27, 2002, which approximates our fair value at
such date 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
(dollars in thousands):
Approx.
There- Fair
2003 2004 2005 2006 2007 after Total Value
---- ---- ---- ---- ---- ----- ----- -----
Liabilities
Long-term debt
Fixed rate:
Euro (1) $10,667 $140 $102 $112 $60 $5,267 $16,348 $16,348
Wt. ave. interest rate 5.26% 9.02% 9.02% 9.02% 9.02% 5.65%
(1) U.S. dollar equivalent
Foreign Currency Risk
As of December 27, 2002, substantially all of our cash was denominated in
U.S. dollars. However, we conduct business in various foreign currencies,
including those of emerging market countries in Asia and well-developed European
countries. We utilize derivative financial instruments, primarily forward
exchange contracts in connection with fair value hedges, to manage foreign
currency risks. In accordance with SFAS 133, gains and losses related to fair
value hedges are recognized in income along with adjustments of carrying amounts
of the hedged items. Therefore, all of our forward exchange contracts are
marked-to-market, and unrealized gains and losses are included in current period
net income. These contracts guarantee a predetermined rate of exchange 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. We believe there are two potential risks of holding these instruments. The
first is that the foreign currency being hedged could move in a direction which
could create a better economic outcome than if hedging had not taken place. The
second risk is that the counterparty to a currency hedge defaults on our
obligations. We reduce the risk of counterparty default by entering into
relatively short-term hedges with well capitalized and highly rated banks. In
determining the use of forward exchange contracts, we consider the amount of
sales and purchases made in local currencies, the type of currency and the costs
associated with the contracts. As of December 27, 2002, we had one foreign
currency forward contract outstanding to sell forward 46.5 million of euro in
order to hedge intercompany loans. The term of this contract was 30 days.
Page 28 of 62
The table below provides information about our other non-derivative,
non-U.S. dollar denominated financial instruments and presents the information
in equivalent U.S. dollars. Amounts set forth under "Liabilities" represent
principal amounts and related weighted average interest rates by year of
maturity for our foreign currency debt obligations. The column captioned
"Approximate Fair Value" sets forth the carrying value of our foreign currency
long-term debt as of December 27, 2002, which approximates our fair value at
such date after taking into consideration current rates offered to us for
similar debt instruments of comparable maturities (dollars in thousands):
Approx.
There- Fair
2003 2004 2005 2006 2007 after Total Value
------- ------- ------- ------- ------- ------- ------- -------
Assets
Cash and equivalents
Variable rate:
Euro (1) $1,381 $ 1,381 $ 1,381
Other currencies (1) $2,539 $ 2,539 $ 2,539
Liabilities
Long-term debt
Fixed rate:
Euro (1) $10,667 $ 140 $ 102 $ 112 $ 60 $ 5,267 $16,348 $16,348
Wt. ave. interest rate 5.26% 9.02% 9.02% 9.02% 9.02% 5.65%
(1) U.S. dollar equivalent
Item 8 Financial Statements and Supplementary Data
Information required by this item is incorporated by reference from the
Independent Auditors' Report found on page 33 and from the consolidated
financial statements and supplementary schedule on pages 34 through 57.
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None
Page 29 of 62
Part III
Item 10 Directors and Executive Officers of the Registrant
The disclosure required by this item is incorporated by reference to the
sections entitled, "Directors and Executive Officers" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in our definitive proxy statement to
be used in connection with our 2003 Annual Meeting of Shareholders.
Item 11 Executive Compensation
The disclosure required by this item is incorporated by reference to the
sections entitled, "Executive Compensation," "Retirement Plan," "Executive
Employment Arrangements," "Compensation of Non-Employee Directors," "Board Stock
Ownership," "Report of Executive Compensation Committee on Compensation
Policies," "Compensation Committee Interlocks and Insider Participation," and
"Comparison of Five-Year Cumulative Total Return" in our definitive proxy
statement to be used in connection with our 2003 Annual Meeting of Shareholders.
Item 12 Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The disclosure required by this item is (i) included under Part II, Item
5, and (ii) incorporated by reference to the sections entitled, "Persons Owning
More Than Five Percent of Our Stock" and "Stock Owned by Directors and Officers"
in our definitive proxy statement to be used in connection with our 2003 Annual
Meeting of Shareholders.
Information as of December 27, 2002 concerning plans under which our
equity securities are authorized for issuance are as follows:
Number of shares to
be issued upon
exercise of options Weighted average Number of
or grant of exercise securities
restricted shares or price of remaining
other incentive outstanding available for
Plan Category shares options future issuance
----------------------------- ------------------------------------------------------------
Equity compensation plans
Approved by security holders 5,960,000 $20.79 3,383,918
Equity compensation plans not
Approved by security holders 0 0 0
Total 5,960,000 $20.79 3,383,918
On May 15, 1981, our shareholders approved an incentive compensation plan
(ICP) intended to enable us to obtain and retain the services of employees by
providing them with incentives that may be created by the Executive Compensation
Committee under the ICP. Subsequent amendments to the plan were approved by our
shareholders including an amendment on May 23, 2001 which increased the total
number of shares of our common stock which may be granted under the plan to
4,900,000 shares. Except for 392,300 options outstanding, the difference between
5,960,000 authorized shares and the number remaining available for future
issuance of 3,383,918 represents shares of restricted stock which have been
issued since the inception of the ICP in 1981. These shares reflect all stock
splits, and the restricted stock is currently reflected in our outstanding
shares. Our 2001 Stock Option Plan and the Restricted Stock Plan II were adopted
under the ICP. In addition to the ICP, plans approved by us include a 60,000
share Board of Director Stock Plan and an Employee Stock Purchase Plan. The
maximum number of shares which may be issued under our Employee Stock Purchase
Plan is 1,000,000 shares, provided, however, that such amount will be
automatically increased annually beginning on August 1, 2002 in an amount equal
to the least of (a) 200,000 shares, (b) two percent (2%) of the outstanding
common stock as of the last day of the prior fiscal year or (c) such an amount
as may be determined by our Board of Directors (but failing such determination
the lessor of (a) or (b)). In 2002, our Board of Directors determined that no
increase for 2002 should be made. Of the 3,383,918 shares remaining available
for future issuance, 439,757 shares are attributable to our Restricted Stock
Plan, 927,000 shares are attributable to our Employee Stock Purchase Plan, and
25,335 shares are attributable to our Board of Director Stock Plan. Note 11 to
the Consolidated Financial Statements contains additional information regarding
our stock based compensation plans.
Page 30 of 62
Item 13 Certain Relationships and Related Transactions
None
Item 14 Controls and Procedures
Within 90 days prior to the filing date of this report (Evaluation Date),
we evaluated the effectiveness of the design and operation of our "disclosure
controls and procedures" for purposes of filing reports under the Securities
Exchange Act of 1934 (Exchange Act) and our "internal controls and procedures"
for financial reporting purposes. This evaluation was done under the supervision
and with the participation of our management, including our Principal Executive
Officer ("PEO") and Principal Financial Officer ("PFO"). Rules adopted by the
U.S. Securities and Exchange Commission (SEC) require that in this section of
the annual report we present the conclusions of the PEO and the PFO about the
effectiveness of our disclosure controls and internal controls based on and as
of the Evaluation Date.
Disclosure controls and procedures are designed with the objective of
ensuring that information required to be disclosed in our reports filed under
the Exchange Act, such as this annual report on Form 10-K, is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Disclosure controls and procedures are also designed with
the objective of ensuring that such information is accumulated and communicated
to our management, including the PEO and the PFO, as appropriate to allow timely
decisions regarding required disclosure. Internal controls and procedures are
designed with the objective of providing reasonable assurance that our
transactions are properly authorized; our assets are safeguarded against
unauthorized or improper use; and our transactions are properly recorded and
reported, all to permit the preparation of our financial statements in
conformity with generally accepted accounting principles.
Our management, including the PEO and PFO, does not expect that our
disclosure controls and procedures or our internal controls and procedures will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of a simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
We plan to evaluate our disclosure and internal controls and procedures on
a quarterly basis in accordance with the Exchange Act so that the conclusions
concerning controls effectiveness can be reported in our quarterly reports on
Form 10-Q and our annual reports on Form 10-K. Our internal controls and
procedures are also evaluated on an ongoing basis by personnel in our finance
organization and by our independent auditors in connection with their audit and
review activities. The overall goals of these various evaluation activities are
to monitor our disclosure and internal controls and procedures and to make
modifications as necessary; our intent in this regard is that these controls and
procedures will be maintained as dynamic systems that change (including with
improvements and corrections) as conditions warrant. For example, our evaluation
of the impact on our controls and procedures of our recent acquisition of the
Eldor consumer business is still in process, as the acquisition was completed
subsequent to our year end.
Among other matters, we sought in our evaluation to determine whether
there were any "significant deficiencies" or "material weaknesses" in our
internal controls and procedures, or whether we had identified any acts of fraud
involving personnel who have a significant role in our internal controls and
procedures. This information was important both for the controls evaluation
generally and because the PEO and PFO certification requirement under items 5
and 6 of Section 302 of the Sarbanes-Oxley Act of 2002 mandates that they
disclose that information to our audit committee and to our independent auditors
and to report on related matters in this section of the annual report on Form
10-K. In the professional auditing literature, "significant deficiencies" are
referred to as "reportable conditions"; those control issues that could have a
significant adverse effect on the ability to record, process, summarize and
report financial data in the financial statements. A "material weakness" is
defined in the
Page 31 of 62
auditing literature as a particularly serious reportable condition where the
internal control does not reduce to a relatively low level the risk that
misstatements caused by error or fraud may occur in amounts that would be
material in relation to the financial statements and not be detected within a
timely period by employees in the normal course of performing their assigned
functions. We also sought to deal with other controls matters in the controls
evaluation and where appropriate to consider what revision, improvement and/or
correction to make in accord with our ongoing procedures.
Based upon the controls evaluation, our PEO and PFO have concluded that,
subject to the inherent limitations noted above, as of the Evaluation Date our
disclosure controls and procedures are effective to ensure that material
information relating to the company and our consolidated subsidiaries is made
known to management, including the PEO and PFO, particularly during the period
when our periodic reports are being prepared, and that our internal controls and
procedures are effective to provide reasonable assurance that our financial
statements are fairly presented in conformity with generally accepted accounting
principles. In accordance with SEC requirements, the PEO and PFO note that,
since the Evaluation Date to the date of this annual report on form 10-K, there
have been no significant changes in internal controls and procedures or in other
factors that could significantly effect internal controls and procedures,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Item 15 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 27, 2002 and December 28, 2001
Consolidated Statements of Operations - Years ended December 27, 2002,
December 28, 2001 and December 29, 2000
Consolidated Statements of Cash Flows - Years ended December 27, 2002,
December 28, 2001 and December 29, 2000
Consolidated Statements of Changes in Shareholders' Equity - Years ended
December 27, 2002, December 28, 2001 and December 29, 2000
Notes to Consolidated Financial Statements
Financial Statement Schedules
Schedule II, Valuation and Qualifying Accounts
(b) Reports on Form 8-K
We filed a report on Form 8-K dated January 10, 2003. This report pertains
to our acquisition of Eldor High Tech Wire Wound Components S.r.L.,
pursuant to a share purchase agreement entered into on January 9, 2003.
(c) Exhibits
Information required by this item is contained in the "Exhibit Index"
found on page 58 through 59 of this report.
Page 32 of 62
Independent Auditors' Report
The Board of Directors and Shareholders
Technitrol, Inc.:
We have audited the accompanying consolidated balance sheets of Technitrol, Inc.
and subsidiaries as of December 27, 2002 and December 28, 2001, and the related
consolidated statements of operations, cash flows and changes in shareholder's
equity for each of the three years in the three-year period ended December 27,
2002. These consolidated financial statements and the financial statement
schedule are the responsibility of 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 auditing standards generally accepted
in the United States of America. 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 27, 2002 and December 28, 2001, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 27, 2002, in conformity with accounting principles
generally accepted in the United States of America. 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.
As discussed in Note 17 to the Consolidated Financial Statements, in 2002, the
Company changed its method of accounting for goodwill and other intangible
assets in accordance with Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets.
/s/ KPMG LLP
Philadelphia, Pennsylvania
January 17, 2003
Page 33 of 62
Technitrol, Inc. and Subsidiaries
Consolidated Balance Sheets
December 27, 2002 and December 28, 2001
In thousands, except per share data
Assets 2002 2001
--------- ---------
Current assets:
Cash and cash equivalents $ 205,075 $ 142,267
Trade receivables, net 65,185 63,294
Inventories 60,588 62,404
Prepaid expenses and other current assets 13,878 18,785
--------- ---------
Total current assets 344,726 286,750
Property, plant and equipment 163,147 170,665
Less accumulated depreciation 98,286 87,613
--------- ---------
Net property, plant and equipment 64,861 83,052
Deferred income taxes 11,743 9,499
Goodwill and other intangibles, net 100,768 128,512
Other assets 25,608 17,525
--------- ---------
$ 547,706 $ 525,338
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt $ 10,667 $ 122
Accounts payable 28,791 24,780
Accrued expenses 69,689 72,591
--------- ---------
Total current liabilities 109,147 97,493
Long-term liabilities:
Long-term debt, excluding current installments 5,681 89,007
Other long-term liabilities 10,501 9,289
Commitments and contingencies
Shareholders' equity:
Common stock: 175,000,000 shares authorized; 40,129,595 and
33,683,420 outstanding in 2002 and 2001, respectively; $.125
par value per share and additional paid-in capital 207,033 70,184
Retained earnings 220,836 264,373
Other (5,492) (5,008)
--------- ---------
Total shareholders' equity 422,377 329,549
--------- ---------
$ 547,706 $ 525,338
========= =========
See accompanying Notes to Consolidated Financial Statements.
Page 34 of 62
Technitrol, Inc. and Subsidiaries
Consolidated Statements of Operations
Years ended December 27, 2002, December 28, 2001 and December 29, 2000
In thousands, except per share data
2002 2001 2000
--------- --------- ---------
Net sales $ 406,354 $ 474,199 $ 664,378
Cost of sales 309,848 359,681 409,856
--------- --------- ---------
Gross profit 96,506 114,518 254,522
Selling, general and administrative
expenses 89,286 98,837 131,113
Restructuring and unusual and
infrequent items 46,982 13,594 3,305
--------- --------- ---------
Operating profit (loss) (39,762) 2,087 120,104
Other (expense) income:
Interest income 2,903 6,401 6,341
Interest expense (3,005) (4,998) (3,482)
Other, net (580) 1,879 (49)
Equity method investment earnings 300 318 --
--------- --------- ---------
Earnings (loss) before taxes and
cumulative effect of accounting
change (40,144) 5,687 122,914
Income taxes (benefit) (12,345) 2,903 23,606
--------- --------- ---------
Net earnings (loss) before cumulative
effect of accounting change (27,799) 2,784 99,308
Cumulative effect of accounting
change, net of income taxes (15,738) -- --
--------- --------- ---------
Net earnings (loss) $ (43,537) $ 2,784 $ 99,308
Basic earnings (loss) per share before
cumulative effect of accounting
change (.75) .08 3.05
Cumulative effect of accounting
change, net of income taxes (.42) -- --
--------- --------- ---------
Basic earnings per share $ (1.17) $ .08 $ 3.05
========= ========= =========
Diluted earnings (loss) per share
before cumulative effect of
accounting change (.75) .08 3.02
Cumulative effect of accounting change, net of
income taxes (.42) -- --
--------- --------- ---------
Diluted earnings (loss) per share $ (1.17) $ .08 $ 3.02
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
Page 35 of 62
Technitrol, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended December 27, 2002, December 28, 2001 and December 29, 2000
In thousands
2002 2001 2000
--------- --------- ---------
Cash flows from operating activities:
Net earnings (loss) $ (43,537) $ 2,784 $ 99,308
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and amortization 19,770 26,553 22,378
Tax benefit from employee stock compensation 406 231 1,893
Amortization of stock incentive plan expense 1,403 1,219 6,990
Loss on disposal or sale of assets 7,027 3,863 1,301
Cumulative effect of accounting change, net of taxes 15,738 -- --
Trade name write-off, net of taxes 19,260 -- --
Deferred taxes (1,726) (318) (4,239)
Restructuring and unusual and infrequent items, net of cash payments
(excluding loss on disposal of assets and trade name write-off, net
of taxes) 1,326 599 2,495
Equity method investment earnings (300) (318) --
Inventory provisions 2,212 20,295 8,129
Changes in assets and liabilities, net of effect of acquisitions and
divestitures:
Trade receivables 1,540 48,197 (31,527)
Inventories 2,978 8,437 (30,161)
Prepaid expenses and other current assets (1,007) (720) 1,462
Accounts payable 2,987 (14,348) 10,630
Accrued expenses (5,325) (33,657) 21,321
Other, net (1,962) (1,571) 3,808
--------- --------- ---------
Net cash provided by operating activities 20,790 62,686 113,788
--------- --------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired (6,708) (115,533) (5,365)
Capital expenditures, exclusive of acquisitions (5,755) (13,149) (29,976)
Proceeds from sale of property, plant and equipment 1,695 4,531 571
--------- --------- ---------
Net cash used in investing activities (10,768) (124,151) (34,770)
--------- --------- ---------
Cash flows from financing activities:
Principal payments on long-term debt (75,318) (97,261) (36,243)
Long-term borrowings -- 140,239 27,269
Payment of debt assumed in acquisition -- (3,944) --
Dividends paid (1,137) (4,528) (4,430)
Exercise of stock options -- 17 220
Sale of stock through employee stock purchase plan 1,351 6,548 8,388
Net proceeds from follow-on offering 134,700 -- --
--------- --------- ---------
Net cash provided by (used in) financing activities 59,596 41,071 (4,796)
--------- --------- ---------
Net effect of exchange rate changes on cash (6,810) 30 248
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 62,808 (20,364) 74,470
Cash and cash equivalents at beginning of year 142,267 162,631 88,161
--------- --------- ---------
Cash and cash equivalents at end of year $ 205,075 $ 142,267 $ 162,631
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
Page 36 of 62
Technitrol, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 27, 2002, December 28, 2001 and December 29, 2000
In thousands, except per share data
Other
----------------------
Accumu-
lated
Common stock and other
paid-in capital Deferred compre- Compre-
--------------- Retained compen- hensive hensive
Shares Amount earnings sation income income
------ --------- --------- -------- -------- --------
Balance at December 31, 1999 16,266 $ 48,263 $ 171,278 $(2,401) $ (1,505)
Stock options, awards and related compensation 88 5,365 -- (1,470) --
Tax benefit of stock compensation -- 1,893 -- -- --
Stock issued under employee stock purchase plan 265 8,388 -- -- --
Currency translation adjustments -- -- -- -- (235) $ (235)
Net earnings -- -- 99,308 -- -- 99,308
--------
Comprehensive income -- -- -- -- -- $ 99,073
========
Dividends declared $(.135 per share) -- -- (4,454) -- --
Two-for-one stock split effective in November 2000 16,618 -- -- -- --
------ --------- --------- ------- --------
Balance at December 29, 2000 33,237 $ 63,909 $ 266,132 $(3,871) $ (1,740)
Stock options, awards and related compensation 48 (504) -- 1,441 --
Tax benefit of stock compensation -- 231 -- -- --
Stock issued under employee stock purchase plan 398 6,548 -- -- --
Currency translation adjustments -- -- -- -- (838) $ (838)
Net earnings (loss) -- -- 2,784 -- -- 2,466
--------
Comprehensive income -- -- -- -- -- $ 1,628
========
Dividends declared $(.135 per share) -- -- (4,543) -- --
------ --------- --------- ------- --------
Balance at December 28, 2001 33,683 $ 70,184 $ 264,373 $(2,430) $ (2,578)
Stock options, awards and related compensation 26 392 -- 1,253 --
Tax benefit of stock compensation -- 406 -- -- --
Stock issued under employee stock purchase plan 73 1,351 -- -- --
Follow-on offering 6,348 134,700 -- -- --
Currency translation adjustments -- -- -- -- (1,737) $ (1,737)
Net earnings (loss) -- -- (43,537) -- -- (43,537)
--------
Comprehensive income (loss) -- -- -- -- -- $(45,274)
------ --------- --------- ------- -------- ========
Balance at December 27, 2002 40,130 $ 207,033 $ 220,836 $(1,177) $ (4,315)
====== ========= ========= ======= ========
See accompanying Notes to Consolidated Financial Statements.
Page 37 of 62
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. and all of our subsidiaries. We sometimes refer to Technitrol as "we" or
"our". 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 method. Inventory that is fully reserved in the
ordinary course of business is not written back up after a write-down. Inventory
provisions are utilized when the actual inventory is physically disposed. The
provisions are determined by comparing quantities on-hand to historical usage
and forecasted demand. Inventory provisions at December 27, 2002 and December
28, 2001 were $15.6 million and $23.5 million, 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. 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 our balance sheet, and any resulting gains or losses are included
in earnings.
Goodwill and Other Intangibles
SFAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead they are tested for impairment
at least annually in accordance with the provisions of SFAS 142. SFAS 142 also
requires that other intangible assets with definite useful lives be amortized
over their respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS 144. We amortize other
intangibles, except those with indefinite lives, on a straight-line basis over 5
years. We have approximately $86.7 million of goodwill and $14.1 million of
other intangibles on our balance sheet as of December 27, 2002. We had
approximately $80.3 million of goodwill and $48.2 million of other intangibles,
including $40.0 million of trade names, on our balance sheet as of December 28,
2001. See Note 2 and Note 17 for additional information regarding implementation
of SFAS 142.
Revenue Recognition
Revenue is recognized upon shipment of product and passage of title
without right of return, after all performance factors have been met. We are not
subject to any significant customer acceptance provisions. All product returns
are deducted from net sales and are accrued for based on historical experience
and Financial Accounting Standard No. 48, "Revenue Recognition When Right of
Return Exists." Warranties are limited to rework or replacement of products.
Accounts receivable provisions at December 27, 2002 and December 28, 2001 were
$3.3 million and $2.6 million, respectively.
Stock-based Compensation
We account for stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25). Note 11 presents proforma results of operations as if FASB's Statement No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), had been used to
account for stock-based compensation plans.
Page 38 of 62
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
Foreign Currency Translation
Certain of our foreign subsidiaries use the U.S. dollar as a functional
currency and others use a local currency. For subsidiaries using the U.S. dollar
as the functional currency, non-U.S. dollar monetary assets and liabilities are
remeasured at year-end exchange rates while non-monetary items are remeasured at
historical rates. Income and expense accounts are remeasured at the average
rates in effect during the year, except for depreciation that is remeasured at
historical rates. Gains or losses from changes in exchange rates are recognized
in earnings in the year of occurrence. For subsidiaries 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 our 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 our long-term debt approximates our fair value after taking into
consideration current rates offered 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. We do not hold or issue financial instruments or derivative financial
instruments for trading purposes.
We are exposed to market risk from changes in interest rates, foreign
currency exchange rates and precious metal prices. To mitigate the risk from
these changes, we periodically enter into hedging transactions which have been
authorized pursuant to our policies and procedures. In accordance with SFAS 133,
gains and losses related to fair value hedges are recognized in income along
with adjustments of carrying amounts of the hedged item. Therefore, all of our
forward exchange contracts are marked-to-market, and unrealized gains and losses
are included in current-period net income. At December 27, 2002 we have one
foreign currency forward contract outstanding to sell forward 46.5 million of
euro in order to hedge intercompany loans. At December 28, 2001, we had five
foreign exchange contracts in place to sell forward approximately 44.2 million
of euro in connection with hedging intercompany loans. At December 29, 2000, we
had a foreign exchange contract in place to sell forward $3.2 million of U.S.
dollars for French francs, in connection with the purchase of the electrical
contacts business of Engelhard-CLAL on January 4, 2001.
Precious Metal Consignment-type Leases
We have custody of inventories under consignment-type leases from
suppliers of $43.5 million at December 27, 2002 and $39.6 million at December
28, 2001. We have four consignment-type leases in place for sourcing all
precious metals. The leases are operating leases and the related inventory and
liability are not recorded on our balance sheet. The leases are generally
one-year in duration and can be extended with annual renewals. Either party can
terminate the lease agreements with 30 days written notice. The primary covenant
in each of the agreements is a prohibition against us creating security
interests in the consigned metals. Included in interest expense for the year
ended December 27, 2002 are consignment fees of $1.4 million. These interest
costs were $1.1 million in the years ended December 28, 2001 and December 29,
2000, respectively.
Estimates
Our preparation of financial statements is in conformity with what
generally accepted accounting principles require and we make estimates and
assumptions that 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 significantly from those
estimates.
Reclassifications
Certain amounts in the prior-year financial statements have been
reclassified to confirm with the current-year presentation. Also refer to Note
16 "Equity Method Investment".
Page 39 of 62
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(2) Acquisitions
Excelsus Technologies, Inc.: In August 2001, we acquired all of the
capital stock of Excelsus Technologies, Inc. based in Carlsbad, California.
Excelsus produced customer-premises digital subscriber line filters and other
broadband accessories. The acquisition was accounted for by the purchase method
of accounting. The preliminary purchase price was approximately $85.9 million,
net of $4.8 million of cash acquired and a preliminary purchase price adjustment
of $2.6 million. The fair value of net assets acquired approximated $18.2
million. Based on the fair value of the assets acquired, the allocation of the
purchase price included $40.0 million for trade names, $8.0 million for
technology and $27.0 million for goodwill. The technology intangible is subject
to amortization and is estimated to have a 5-year life. Included in the assets
acquired was a $6.3 million tax receivable, generated by the acceleration and
settlement of Excelsus stock options at the time of closing. We filed income tax
returns for the period ending on the closing date, and received the full amount
of the tax receivable during the fourth quarter of 2001. In order to fund the
purchase price, we used approximately $19.0 million of cash on-hand and borrowed
approximately $74.0 million under our existing credit facility with a syndicate
of commercial banks.
During the quarter ended June 28, 2002 we recorded an impairment charge of
$32.1 million of the value assigned to the Excelsus trade names, before any tax
benefit. The charge was included in line "restructuring and unusual and
infrequent items" on the consolidated statement of operations. This charge was
triggered by the combined effect of reorganizing Pulse into a product-line based
organization and updated financial forecasts for DSL microfilters. In addition,
a purchase price allocation adjustment to record a deferred tax liability of
$16.0 million associated with the trade name was recorded and goodwill in an
equal amount was recognized. Approximately $12.8 million of the additional
deferred tax liability was recognized as a tax benefit in the consolidated
statement of earnings for the three months ended June 28, 2002, concurrent with
the trade name impairment.
Full Rise Electronics Co. Ltd. ("FRE"): FRE is based in the Republic of
China (Taiwan) and manufactures connector products including single and
multiple-port jacks and supplies these products to us under a cooperation
agreement. In April 2001, we made a minority investment in the common stock of
FRE, which was accounted for by the cost-basis method of accounting. On July 27,
2002 we made an additional investment in FRE of $6.7 million which increased our
total investment to $20.9 million. As a result of the increased ownership
percentage to approximately 29%, we began to account for the investment under
the equity method beginning in the three months ended September 27, 2002. We
also have an option to purchase additional shares of common stock in FRE in the
future. Also refer to Note 16, Equity Method Investment.
Grupo ECM: In March 2001, we acquired Electro Componentes Mexicana, S.A.
de C.V. and affiliates based in Mexico City. These operations are referred to as
Grupo ECM. Grupo ECM manufactured and marketed inductive components primarily
for automotive applications. This business was integrated into Pulse. The
purchase price was not material to our consolidated financial position.
Engelhard-CLAL: In January 2001, we acquired the electrical contacts
business of Engelhard-CLAL. These operations are located in France and the
United Kingdom. Engelhard-CLAL manufactured electrical contacts, wire and strip
contact materials and related products primarily for the European electrical
equipment market. This business was integrated into AMI Doduco. The purchase
price was not material to our consolidated financial position.
Page 40 of 62
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(3) Financial Statement Details
The following provides details for certain financial statement captions at
December 27, 2002 and December 28, 2001 (in thousands):
2002 2001
-------- --------
Inventories:
Finished goods $ 21,446 $ 22,159
Work in progress 12,390 11,723
Raw materials and supplies 26,752 28,522
-------- --------
60,588 $ 62,404
======== ========
Property, plant and equipment, at cost:
Land $ 3,300 $ 3,287
Buildings and improvements 27,277 30,287
Machinery and equipment 132,570 137,091
-------- --------
163,147 $170,665
======== ========
Accrued expenses:
Income taxes payable $ 24,264 $ 26,210
Dividends payable -- 1,137
Accrued compensation 12,535 10,158
Other accrued expenses 32,890 35,086
-------- --------
$ 69,689 $ 72,591
======== ========
(4) Long-term Debt
At December 27, 2002 and December 28, 2001, long-term debt was as follows (in
thousands):
Bank Loans 2002 2001
---------- ------- -------
Variable-rate, (base rate plus 0.85% to 1.425% depending on debt to EBITDA
ratio; base rate is LIBOR or prime rate for U.S. dollars, Euro-LIBOR for
euros and a rate approximating Sterling LIBOR for British pounds)
multi-currency revolving credit facility with $175.0 million maximum
draw, due June 20, 2004 (2.91% weighted average rate at December 28, 2001) $ -- $75,000
Fixed-rate (5.57% and 4.85%), unsecured debt in Germany (denominated
in euros) due June 26, 2003 10,534 9,038
Fixed-rate (5.65%), unsecured debt in Germany (denominated in euros)
due August 2, 2009 5,267 4,519
------- -------
Total bank loans 15,801 88,557
Mortgage Notes, secured by mortgages on land, buildings, and certain equipment:
8.20% - 10.32% mortgage notes, due in monthly installments until 2007 547 572
------- -------
Total long-term debt 16,348 89,129
Less current installments 10,667 122
------- -------
Long-term debt excluding current installments $ 5,681 $89,007
======= =======
Page 41 of 62
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(4) Long-term Debt, continued
All previous credit facilities and lines of credit, excluding fixed term
loans, were replaced as of June 20, 2001 under a new three-year revolving credit
agreement providing for $225.0 million of credit capacity. Following the
conclusion of our follow-on equity offering in April 2002, we voluntarily
reduced the size of the credit facility to a maximum of $175.0 million in order
to reduce commitment fees and to size the facility to estimated future needs
given cash on hand. We also amended the minimum net worth threshold from $275.0
million to $259.3 million as a result of the goodwill impairment charge recorded
in 2002. The amended facility consists of:
o An aggregate U.S. dollar-based revolving line of credit in the
principal amount of up to $175.0 million including individual
sub-limits of:
- a British pounds sterling-based or euro-based revolving line
of credit in the principal amount of up to the U.S. dollar
equivalent of $75.0 million; and
- a multicurrency facility providing for the issuance of letters
of credit in an aggregate amount not to exceed the U.S. dollar
equivalent of $10.0 million.
The amounts outstanding under the credit facility in total may not exceed
$175.0 million. Outstanding borrowings are limited to a maximum of three times
our EBITDA on a rolling twelve-month basis.
We pay a facility fee irrespective of whether there are outstanding
borrowings or not, which ranges from 0.275% to 0.450% of the total commitment,
depending on our EBITDA. The interest rate for each currency's borrowing will be
a combination of the base rate for that currency plus a credit margin spread.
The base rate is different for each currency. It is LIBOR or prime rate for U.S.
dollars, Euro-LIBOR for euros, and a rate approximating sterling LIBOR for
British pounds. The credit margin spread is the same for each currency and is
0.850% to 1.425% depending on debt to EBITDA ratio. Each of our domestic
subsidiaries with net worth equal to or greater than $5.0 million has agreed to
guarantee all obligations incurred under the credit facility.
Our German subsidiary, AMI Doduco GmbH, has obligations outstanding under
two term loan agreements. The first is with Baden-Wurttembergische Bank for the
borrowing of two loans, each in the amount of approximately 5.1 million euro,
both due in June 2003. The second is with Sparkasse Pforzheim, for the borrowing
of approximately 5.1 million euro, and is due in August 2009. We, including
several of our subsidiaries, have guaranteed the obligations arising under these
term loan agreements.
Principal payments due within the next five years, based on terms of our
debt arrangements, are as follows (in thousands):
2003 $10,667
2004 140
2005 102
2006 112
2007 60
Thereafter 5,267
-------
$16,348
=======
The credit agreement contains certain covenants requiring maintenance of
minimum net worth, maximum debt to EBITDA ratio, minimum interest expense
coverage, capital expenditure limits and other customary and normal provisions.
We are in compliance with all such covenants.
Page 42 of 62
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(5) Research, Development and Engineering Expenses
Research, development and engineering expenses are included in selling,
general and administrative expenses and were $17.8 million, $20.2 million and
$20.2 million in 2002, 2001 and 2000, 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 $12.1
million, $14.1 million and $14.4 million in 2002, 2001 and 2000, respectively.
(6) Income Taxes
Earnings (loss) before cumulative effect of accounting change and income
taxes were as follows (in thousands):
2002 2001 2000
-------- -------- ---------
Domestic $(40,044) $ (5,235) $ (5,849)
Non-U.S (100) 10,922 128,763
-------- -------- ---------
Total $(40,144) $ 5,687 $ 122,914
======== ======== =========
Income tax (benefit) expense was as follows (in thousands):
Current: 2002 2001 2000
-------- -------- --------
Federal $ 608 $ (1,174) $ 3,382
State and local (775) 1,781 458
Non-U.S 2,387 2,614 24,005
-------- -------- --------
2,220 3,221 27,845
Deferred tax (benefit) expense (14,565) (318) (4,239)
-------- -------- --------
$ 12,345 $ 2,903 $ 23,606
======== ======== ========
Amounts credited to additional paid-in capital include the tax benefit of
certain components of employee compensation related to our 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.
A reconciliation of the statutory federal income tax rate with the
effective income tax rate follows:
2002 2001 2000
--- --- ---
Statutory federal income tax rate 35% 35% 35%
Increase (decrease) resulting from:
Tax-exempt earnings of subsidiary in
Puerto Rico 1 (3) (1)
State and local income taxes, net of
federal tax effect 5 20 1
Non-deductible expenses and other
foreign income subject to U.S.
income tax (5) 34 3
Foreign (8) (15) (19)
Other, net 3 (20) --
--- --- ---
Effective tax rate 31% 51% 19%
=== === ===
Page 43 of 62
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(6) Income Taxes, continued
The effect on the effective tax rate of non-deductible expenses is due to
the nature and timing of the restructuring and other unusual and infrequent
items. The effect on the effective tax rate of other, net is attributable to
alternative minimum tax and research and development tax credits.
Deferred tax assets and liabilities included the following (in thousands):
2002 2001
-------- --------
Assets:
Inventories $ 772 $ 1,982
Plant and equipment 1,646 996
Vacation pay and other compensation 1,292 1,317
Pension expense 1,029 743
Stock awards 1,462 1,592
Accrued liabilities 5,098 5,029
Net operating losses and tax credits 12,218 5,715
Capital losses carryover -- 6,582
Other 1,014 2,121
-------- --------
Total deferred tax assets 24,531 26,077
Valuation allowance (2,804) (7,854)
-------- --------
Net deferred tax assets 21,727 18,223
Liabilities:
Deferred taxes on acquired intangibles 5,170 2,800
-------- --------
Total deferred tax liabilities 5,170 2,800
-------- --------
Net deferred tax assets 16,557 15,423
Less current deferred tax assets 4,814 5,924
-------- --------
Long-term deferred income taxes $ 11,743 $ 9,499
======== ========
The capital loss carry over expired in 2002. Consequentially, the
associated deferred tax asset and related valuation allowance were reversed in
2002 without any statement of operations impact.
Based on our history of taxable income and our projection of future
earnings, we believe 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.
We have not provided for U.S. federal income and foreign withholding taxes
on approximately $307.6 million of non-U.S. subsidiaries' undistributed earnings
(as calculated for income tax purposes) as of December 27, 2002. 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.
Unrecognized deferred taxes on these undistributed earnings are estimated to be
approximately $93.7 million. Where excess cash has accumulated in our non-U.S.
subsidiaries and it is advantageous for tax reasons, subsidiary earnings may be
remitted.
Page 44 of 62
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(7) Commitments and Contingencies
We conduct a portion of our operations from leased premises and also lease
certain equipment under operating leases. Total rental expense amounts for the
years ended December 27, 2002, December 28, 2001 and December 29, 2000 were $8.2
million, $7.4 million and $5.9 million, respectively. The aggregate minimum
rental commitments under non-cancelable leases in effect at December 27, 2002
were as follows (in thousands):
Year
Ending
------
2003 $ 7,535
2004 4,664
2005 3,307
2006 1,660
2007 1,020
Thereafter 4,143
-------
$22,329
=======
The aggregate minimum rental commitments schedule does not include $43.5
million due under precious metal consignment-type leases. We expect to make
payments under such leases as the precious metal is consumed and delivered to
customers.
We are involved in several legal actions relating to waste disposal sites.
Our 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, in Sinsheim, Germany, there is shallow groundwater and soil
contamination that is naturally decreasing over time. The German environmental
authorities have not required corrective action to date. As a result of the
acquisition of GTI in 1998, we are involved in studying and undertaking certain
remedial actions with respect to groundwater pollution and soil contamination
conditions at a facility in Leesburg, Indiana. We anticipate making additional
environmental expenditures in future years to continue our environmental
studies, analysis and remediation activities.
We are also subject to various lawsuits, claims and proceedings which
arise in the ordinary course of our business. These actions include routine tax
audits and assessments occurring throughout numerous jurisdictions on a
worldwide basis. We do not believe that the outcome of any of these actions will
have a material adverse effect on our financial results.
We accrue 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. We
believe that any ultimate liability with respect to these actions in excess of
amounts provided will not materially affect our operations or consolidated
financial position, liquidity or operating results.
(8) Shareholders' Equity
Our retained earnings at December 27, 2002 include approximately $10.0
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 our
subsidiaries in the PRC, may not be available for distribution to the U.S.
parent company or our shareholders but is not required to be held in cash.
We completed a follow-on offering of 6,348,000 shares of our common stock
on April 11, 2002. The proceeds of the offering, net of expenses, were
approximately $134.7 million. These proceeds resulted in a common stock increase
of $.8 million and an additional paid-in capital increase of $133.9 million.
Page 45 of 62
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(8) Shareholders' Equity, continued
Effective August 1, 2001 we adopted a new qualified, non-compensatory
employee stock purchase plan that provides substantially all employees an
opportunity to purchase common stock. 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 each currently six months
in duration. In connection with this plan, 1,000,000 shares of common stock are
reserved for issuance under the plan. In 2002, employees purchased approximately
73,000 shares under the plan. In 2001 and 2000, employees purchased
approximately 398,000 and 530,000 shares, respectively, under a predecessor
plan.
On October 19, 2000, our Board of Directors approved a two-for-one split
of our common stock in the form of a 100% common stock dividend for shareholders
of record as of November 6, 2000, payable November 27, 2000. A total of
16,618,381 shares were issued in connection with the split. The stated par value
of each share was not changed from $.125. Relevant share and per share amounts
have been restated to retroactively reflect the stock split.
We have a Shareholder Rights Plan. The Rights are currently not
exercisable, and automatically trade with our common shares. However, after a
person or group has acquired 15% or more of our 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 our 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 our common shares, and we
are acquired in a merger or other business combination transaction, or 50% or
more of our 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 us 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.
Page 46 of 62
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(9) Earnings Per Share
Basic earnings per share are calculated by dividing earnings by the
weighted average number of common shares outstanding during the year (excluding
restricted shares which are considered to be contingently issuable). We have
restricted shares outstanding of 315,000, 361,000, and 386,000 as of December
27, 2002, December 28, 2001 and December 29, 2000 respective, which generally
vest over a three-year term. 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 5,000 in 2002, 24,000 in
2001, and 5,500 in 2000. Relevant share amounts and earnings per share have been
restated to reflect a two-for-one stock split effective on November 27, 2000.
Earnings per share calculations are as follows (in thousands, except per share
amounts):
2002 2001 2000
---------- ---------- ----------
Net earnings (loss) $ (43,537) $ 2,784 $ 99,308
Basic earnings (loss) per share:
Shares 37,281 33,202 32,510
Per share amount, before change in
accounting principle $ (0.75) $ 0.08 $ .05
Change in accounting principle (0.42) -- --
---------- ---------- ----------
Per share amount $ (1.17) $ 0.08 $ 3.05
========== ========== ==========
Diluted earnings (loss) per share:
Shares 37,581 33,566 32,859
Per share amount before change in
accounting principle $ (0.75) $ 0.08 $ 3.02
Change in accounting principle (0.42) -- --
---------- ---------- ----------
Per share amount $ (1.17) $ 0.08 $ 3.02
========== ========== ==========
(10) Employee Benefit Plans
We maintain defined benefit pension plans and make contributions to
multi-employer plans covering certain union employees. Certain of our non-U.S.
subsidiaries have varying types of retirement plans providing benefits for
substantially all of their employees.
Pension (benefit) expense was as follows (in thousands):
2002 2001 2000
---------- ---------- ----------
Principal defined benefit plans $ 960 $ (395) $ 149
Multi-employer and other employee benefit plans 140 221 490
---------- ---------- ----------
$ 1,100 $ (174) $ 639
========== ========== ==========
Page 47 of 62
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(10) Employee Benefit Plans, continued
The expense for the principal defined benefit pension plans include the
following components (in thousands):
2002 2001 2000
------- ------- -------
Service cost $ 1,578 $ 1,192 $ 1,309
Interest cost 1,954 1,667 1,566
Expected return on plan assets (2,546) (2,818) (2,430)
Amortization of transition obligation 18 -- --
Amortization of prior service cost 272 -- --
Recognized actuarial (gain) loss (316) (436) (296)
------- ------- -------
Net periodic pension (benefit) cost $ 960 $ (395) $ 149
======= ======= =======
The financial status of the principal defined benefit plans at December
27, 2002 and December 28, 2001, was as follows (in thousands):
2002 2001
-------- --------
Change in benefit obligation:
Benefit obligation at beginning of year $ 26,416 $ 24,397
Service cost 1,578 1,192
Interest cost 1,954 1,667
Plan amendments 2,879 --
Actuarial (gain)/loss (1,138) 547
Benefits paid (1,139) (1,387)
-------- --------
Benefit obligation at end of year 30,550 26,416
-------- --------
Change in plan assets:
Fair value of plan assets at beginning of year 28,734 31,689
Actual return on plan assets (3,415) (1,568)
Employer contributions -- --
Benefits paid (1,139) (1,387)
-------- --------
Fair value of plan assets at end of year 24,180 28,734
-------- --------
Funded status (6,370) 2,318
Unrecognized actuarial gains (566) (4,625)
Unrecognized prior service cost 3,393 990
Unrecognized transition obligation 20 72
Intangible asset (2,808) (407)
-------- --------
Accrued pension costs at the end of the year $ (6,331) $ (1,652)
======== ========
Page 48 of 62
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, we fund, 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 2002 were as follows:
Discount rate 6.75%
Annual compensation increases 4.25%
Expected long-term rates of return on plan assets 9.00%
Effective on January 1, 2003, we reduced the expected long-term rate of
return on plan assets to 8.0%
We maintain defined contribution 401(k) plans covering substantially all
U.S. employees not affected by certain collective bargaining agreements. Under
the primary 401(k) plan, we contributed a matching amount equal to $1.00 for
each $1.00 of the participant's contribution not in excess of 4% of the
participant's annual wages. The total contribution expense under the 401(k)
plans for employees of continuing operations was $1,188,000, $1,469,000 and
$1,529,000 in 2002, 2001 and 2000 respectively.
We do not provide any significant post-retirement benefits other than the
pension plans and 401(k) plans described above.
(11) Stock-Based Compensation
We have an incentive compensation plan for our employees. One component of
this plan is restricted stock, which grants the recipient the right of ownership
of our common stock, conditional on the achievement of performance objectives
and/or continued employment. Stock options are also granted under this plan. A
summary of the shares under the incentive compensation plan is as follows:
2002 2001 2000
---------- ---------- --------
Shares available to be granted 2,612,406 384,126 474,838
New authorized shares -- 2,500,000 --
Restricted stock and options awarded, net of
cancellations (180,823) (271,720) (90,712)
---------- ---------- --------
Balance available at the end of the year 2,431,583 2,612,406 384,126
========== ========== ========
During the years ended December 27, 2002, December 28, 2001 and December
29, 2000 we issued to employees, net of cancellations, restricted stock having
an approximate fair value at date of issue of $292,981, $1,055,268, and
$2,598,000, respectively. The fair value of the restricted stock is based on
fair market price of the stock at the award date and recorded as deferred
compensation. Compensation is recognized over the vesting period which is
generally three years. Shares are held by us until the continued employment
requirement and/or performance criteria have been attained. For shares subject
to continued employment requirements, the market value of the shares at the date
of grant is charged to expense during the vesting period on a straight-line
basis. For shares subject to performance criteria, the expense varies with the
market value of the shares until the performance criteria are met or are deemed
to be unachievable. Cash awards, which accompany shares released under the
incentive compensation plan and are intended to assist recipients with their
resulting personal tax liability, are based on the market value of the shares
when restrictions lapse. Cash awards are accrued over the restriction period,
and the related expense is variable based on the market value of the shares.
Amounts charged to expense as a result of the restricted stock plan and related
expenses were $1,404,000 in 2002, $1,219,000 in 2001, and $6,990,000 in 2000. A
substantial portion of the shares granted prior to 2002 were subject to variable
accounting, whereby the related compensation expense was adjusted to reflect the
impact of market price of the underlying shares awarded. The shares and expense
associated with variable accounting were 35,400 and $206,000 in 2001, and
112,900 and $3,440,000 in 2000, respectively.
Page 49 of 62
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(11) Stock-Based Compensation, continued
We also have a stock award plan for non-employee directors. The Board of
Directors plan was approved in 1998 to assist us in attracting and retaining
highly qualified persons to serve on our Board of Directors. Under the terms of
the plan, 60,000 shares of our 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 are recorded as an expense at issuance. In
2002, 2001, and 2000, 6,895, 3,448, and 5,096 shares, respectively, (including
those deferred at the directors' election) were issued under the plan. A total
of 25,335 shares remain available for issuance under the plan.
In February of 2001, our Board of Directors Compensation Committee adopted
a stock option plan. All U.S. employees and designated employees of subsidiaries
are eligible to participate in the stock option plan. Except as limited by the
terms of the option plan, the committee has discretion to select the persons to
receive options and to determine the terms and conditions of the option,
including the number of shares underlying the option, the exercise price, the
vesting schedule and term. The options are granted at no cost to the employee
and cannot be granted with an exercise price less than the fair market value at
the date of grant. The options granted in 2002 and 2001 vest equally over four
years and expire in seven years from the date of grant. During the years ended
December 27, 2002 and December 28, 2001 a total of 159,600 and 232,700 options,
net of cancellations, were awarded to employees at a weighted average strike
price of $19.24 and $21.86 per share, respectively. None of the shares granted
in 2002 were vested as of December 27, 2002, whereas 25% of the shares granted
in 2001 were vested as of December 27, 2002.
As permitted by the provisions of SFAS 123, we apply Accounting Principles
Board Opinion 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for our stock option and purchase plans.
Accordingly, no compensation cost has been recognized for our stock and option
purchase plans. The following assumptions were used in estimating fair value; a
2.9% risk-free rate, a 64% volatility and an expected four year life. If
compensation cost for our stock option plan and stock purchase plan had been
determined based on the fair value as required by SFAS 123, our pro forma net
income (loss) and earnings (loss) per basic and diluted share would have been as
follows (amounts are in thousands, except per share amounts):
2002 2001 2000
---- ---- ----
Net income (loss), as reported ($43,537) $ 2,784 $ 99,308
Add: Stock-based compensation expense included
in reported net income (loss), net of taxes 870 744 4,264
Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards, net of taxes (1,533) (8,128) (16,929)
---------- ---------- ----------
Net income (loss) adjusted $ (44,200) $ (4,600) $ 86,643
Basic net income (loss) per share - as reported $ (1.17) $ 0.08 $ 3.05
Basic net income (loss) per share - adjusted $ (1.19) $ (0.14) $ 2.67
Diluted net income (loss) per share - as reported $ (1.17) $ 0.08 $ 3.02
Diluted net income (loss) per share - adjusted $ (1.19) $ (0.14) $ 2.64
(12) Restructuring and Unusual and Infrequent Items
We implemented numerous restructuring initiatives during 2002, 2001 and
2000 in order to reduce our cost structure and capacity in response to the
continuing global recession in the electronics and electrical market.
In 2002, we announced the closure of our production facility in the
Philippines. The production at this facility was transferred to other Pulse
facilities in Asia. We provided for reserves of $3.8 million for this plant
closing, comprised of $1.4 million for severance and related payments and $2.4
million for asset write-downs. The majority of this accrual was utilized by the
end of 2002. We also adopted other restructuring plans during 2002. In this
regard, provisions of $5.9 million were recorded during 2002. Approximately 800
personnel were terminated in 2002 and substantially all of the employee
severance and related payments in connection with these actions were completed
as of December 27, 2002. An additional provision of $7.0 million was recorded in
2002 related to asset write-downs. These assets were primarily Asian-based
production equipment that became idle in 2002. The remaining cost basis of the
assets has been reclassified from fixed assets to assets held for sale in the
balance sheet as of December 27, 2002.
An additional $32.1 million of Excelsus trade name impairment was recorded
in 2002. The impairment charge was triggered by the combined effect of
reorganizing Pulse into product line based organization and updated forecast for
DSL microfilters.
A total of $1.9 million was also recognized as unusual and infrequent
income in 2002, attributable to positive adjustments primarily resulting from
the favorable outcome of certain legal matters of long vintage.
Page 50 of 62
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(12) Restructuring and Unusual and Infrequent Items, continued
During the 2001, we announced the closure of our production facilities in
Thailand and Malaysia. The production at these two facilities was transferred to
other Pulse facilities in Asia. We provided reserves of $3.6 million for these
plant closings, comprised of $2.5 million for severance and related payments and
$1.1 million for other exit costs. The majority of this accrual was utilized by
the end of the first quarter of 2002. We also adopted other restructuring plans
during 2001. In this regard, provisions of $6.4 million were recorded during
2001. Approximately 3,500 manufacturing personnel primarily in Asia, and
approximately 200 support personnel in North America and Europe were terminated.
Approximately 75% of all of the employee severance and related payments in
connection with these actions were completed as of December 28, 2001.
Approximately $2.3 million of the provision remained as of December 28, 2001 for
severance payments and related expenses which were paid in 2002. An additional
$0.7 million remained accrued at December 28, 2001 for other exit costs at
primarily Thailand and Malaysia. Termination costs for employees at our Thailand
and Malaysian facilities have been included in the provisions for exiting those
facilities. In addition to these terminations, headcount was reduced by
approximately 12,300 additional personnel, net of new hires, during fiscal 2001
through voluntary employee attrition and involuntary workforce reductions
primarily at manufacturing facilities in the PRC where severance payments are
not necessary. In addition, a charge of $3.5 million was recorded during the
third quarter of 2001 to write-down the value of certain Pulse fixed assets to
their disposal value.
In 2000, AMI Doduco recorded a $5.5 million provision for restructuring
initiatives due to a reduction in employment levels by approximately 120 people,
primarily in Germany. The Company provided $3.7 million for employee severance
and related payments, $0.9 million related to the impairment of certain assets
and $0.9 million for other exit costs. Offsetting these costs was a gain of $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.
As a result of our continuing focus on both economic and operating profit,
we will continue to aggressively size both Pulse and AMI Doduco so that costs
are minimized while we wait for the recovery in demand and pursue additional
growth opportunities. The amounts of additional charges will depend on specific
actions taken. The actions taken over the past two years such as plant closures,
asset impairments and reduction in personnel worldwide have resulted in the
elimination of a variety of costs. The majority of these costs represent the
annual salaries and benefits of terminated employees, both those directly
related to manufacturing and those providing selling, general and administrative
services. The eliminated costs also include depreciation savings from disposed
equipment and the relocation of capacity to factories in lower cost countries,
primarily the PRC. If incoming orders increase substantially, additional hiring
may be necessary to expand capacity. However, we do not anticipate requiring
additional capacity in the foreseeable future.
Our restructuring charges are summarized for 2002 as follows:
AMI
Restructuring provision (in millions): Doduco Pulse Total
------ ----- -----
Balance accrued at December 28, 2001 $ 0.6 $ 2.4 $ 3.0
Accrued for the twelve months ended December 27, 2002 4.0 12.7 16.7
Severance and other cash payments (2.4) (5.6) (8.0)
Non-cash asset disposals (.2) (7.3) (7.5)
----- ----- -----
Balance accrued at December 27, 2002 $ 2.0 $ 2.2 $ 4.2
===== ===== =====
Page 51 of 62
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(13) Supplementary Information
The following amounts were charged directly to costs and expenses (in
thousands):
2002 2001 2000
------- ------- -------
Depreciation $18,137 $21,177 $18,548
Amortization of intangible assets 1,633 5,376 3,830
Advertising 248 552 662
Repairs and maintenance 7,524 6,668 10,382
Bad debt expense 899 697 1,063
Cash payments made:
Income taxes $ 9,027 $11,736 $14,218
Interest 3,318 5,470 3,530
Accumulated other comprehensive income as disclosed in the Consolidated
Statements of Changes in Shareholders' Equity consists principally of foreign
currency translation items.
(14) Segment and Geographical Information
We operate our business in two segments: the Electronic Components
Segment, which operates under the name Pulse, and the Electrical Contact
Products Segment, which operates under the name AMI Doduco. We refer to these
segments as ECS or Pulse, and ECPS and AMI Doduco, respectively. Each segment is
managed by a President who reports to our Chief Executive Officer.
Pulse designs and manufactures a wide variety of highly-customized passive
magnetics-based electronic components. These components manage and regulate
electronic signals and power for use in a variety of devices by filtering out
radio frequency interference and adjusting and ensuring proper current and
voltage. These products are often referred to as chokes, inductors, filters and
transformers. Pulse sells its products to multinational original equipment
manufacturers, contract manufacturers and distributors.
AMI Doduco is a global manufacturer of a full range of electrical contact
products, from contact materials to completed contact subassemblies. Contact
products complete or interrupt electrical circuits in virtually every electrical
device. AMI Doduco provides its customers with a broad array of highly
engineered products and tools designed to meet unique customer needs.
Page 52 of 62
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(14) Segment and Geographical Information, continued
Amounts are in thousands:
2002 2001 2000
--------- --------- ---------
Net sales from continuing operations
Pulse $ 204,570 $ 253,281 $ 438,770
AMI Doduco 201,784 220,918 225,608
--------- --------- ---------
Total $ 406,354 $ 474,199 $ 664,378
========= ========= =========
Operating profit(loss) before income taxes
Pulse $ 4,503 $ 9,381 $ 110,892
Pulse restructuring and other infrequent and unusual
items (43,023) (13,053) --
AMI Doduco 2,717 6,300 12,517
AMI Doduco restructuring and other infrequent and
unusual items (3,959) (541) (3,305)
--------- --------- ---------
Total operating profit (39,762) 2,087 120,104
Items not included in segment profit (1) (382) 3,282 2,810
--------- --------- ---------
Earnings (loss) before income taxes and cumulative
effect of accounting change $ (40,144) $ 5,687 $ 122,914
========= ========= =========
Assets at end of year
Pulse $ 195,407 $ 237,237 $ 229,560
AMI Doduco 104,665 114,476 112,085
--------- --------- ---------
Segment assets 300,072 351,713 341,645
Assets not included in Segment assets (2) 247,316 173,307 179,126
--------- --------- ---------
Total $ 547,388 $ 525,020 $ 520,771
========= ========= =========
Capital expenditures (3)
Pulse $ 681 $ 10,302 $ 23,323
AMI Doduco 5,074 10,204 8,379
--------- --------- ---------
Total $ 5,755 $ 20,506 $ 31,702
========= ========= =========
Depreciation and amortization
Pulse $ 12,501 $ 17,183 $ 14,129
AMI Doduco 7,269 9,370 8,249
--------- --------- ---------
Total $ 19,770 $ 26,553 $ 22,378
========= ========= =========
(1) Includes interest income, interest expense and other non-operating items
disclosed in our Consolidated Statements of Operations. We exclude these
items when measuring segment operating profit.
(2) Cash and cash equivalents are the primary corporate assets. We exclude net
deferred tax assets when measuring segment assets.
(3) During the past three years, we have acquired several companies. We have
included acquired property, plant and equipment in these capital
expenditure amounts.
Page 53 of 62
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(14) Segment and Geographical Information, continued
We have no significant intercompany revenue between our segments. We do
not use income taxes when measuring segment results; however, we allocate income
taxes to our segments to determine certain performance measures. These
performance measures include 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 our respective segment's operating profit by the relevant estimated
effective tax rate for the year. The allocated tax expense amounts for Pulse
were, in thousands, $(13,395), $2,123, and $18,850 in 2002, 2001 and 2000,
respectively. For AMI Doduco, they were, in thousands,$1,050, $780 and $4,756 in
2002, 2001 and 2000, respectively.
We sell our products to customers 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:
2002 2001 2000
-------- -------- --------
Sales to customers in:
United States $127,256 $166,237 $295,864
Europe, other than Germany 105,877 126,736 130,611
Asia 86,841 80,691 109,784
Germany 54,871 70,792 76,279
North America, other than U.S. 28,445 25,163 46,664
Other 3,064 4,580 5,176
-------- -------- --------
Total $406,354 $474,199 $664,378
======== ======== ========
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 the relevant assets that have
long useful lives. Amounts are in thousands:
2002 2001 2000
------- ------- -------
Net property, plant and equipment located in:
United States $16,308 $22,180 $23,896
China 17,703 23,057 27,210
Germany 15,796 12,456 13,935
Europe, other than Germany 10,576 12,793 10,477
Asia, other than China 2,020 9,191 14,220
Other 2,458 3,375 2,660
------- ------- -------
Total $64,861 $83,052 $92,398
======= ======= =======
Page 54 of 62
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(15) Quarterly Financial Data (Unaudited)
Quarterly results of operations (unaudited) for 2002 and 2001 are
summarized as follows (in thousands, except per share data):
Quarter Ended
-------------
Mar. 29 June 28 Sept. 27 Dec. 27
--------- --------- --------- ---------
2002:
Net sales $ 93,420 $ 106,185 $ 103,626 $ 103,123
Gross profit 19,252 24,666 25,901 26,687
Earnings (loss) before cumulative
effect of accounting change (7,542) (41,479) 3,228 5,649
Net earnings (loss) (20,899) (29,045) 2,123 4,284
Net earnings (loss) per share:
Basic $ (.63) $ (.75) $ .05 $ .11
Diluted $ .63) $ (.75) $ .05 $ .11
Mar. 30 June 29 Sept. 28 Dec. 28
--------- --------- --------- ---------
2001:
Net sales $ 157,244 $ 112,835 $ 100,846 $ 103,274
Gross profit 50,377 24,771 22,153 17,217
Earnings (loss) before cumulative
effect of accounting change 22,861 (1,811) (9,795) (5,568)
Net earnings (loss) 17,994 (1,353) (9,184) (4,673)
Net earnings (loss) per share:
Basic $ .55 $ (.04) $ (.27) $ (.14)
Diluted $ .54 $ (.04) $ (.27) $ (.14)
In the first quarter of 2002, we recorded a goodwill impairment charge of
$15.7 million, net of income tax benefit, related to AMI Doduco as a cumulative
effect of accounting change. In the second quarter of 2002, we recorded a
tradename impairment charge of $32.1 million, less a $12.8 million income tax
benefit, related to Pulse.
Earnings per share amounts reflect stock splits through December 27, 2002.
We also restated prior period amounts to reflect equity earnings in FRE
investment.
(16) Equity Method Investment
During the quarter ended September 27, 2002 our ownership in a cost basis
method investment in FRE increased from approximately 19% to 29%. In accordance
with generally accepted accounting principles, we adjusted 2001 to reflect the
impact of a change in accounting for our ownership in this investment from the
cost basis method to the equity method of accounting, as if the 19% investment
was accounted for as an equity method investment since the initial investment.
Our cumulative earnings recognized as of December 28, 2001 were $0.3 million. An
additional $0.3 million of equity earnings were recorded for the year ended
December 27, 2002. All prior period amounts have been adjusted to reflect this
recognition of equity earnings as if it occurred at the time of the original
investment in April 2001. This investment is reflected in the Other Assets
caption on the Consolidated Balance Sheets.
Page 55 of 62
Technitrol, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
(17) Adoption of SFAS 142
In July 2001, the FASB issued Statement No. 142, Goodwill and Other
Intangible Assets (SFAS 142"). SFAS 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead they are
tested for impairment at least annually in accordance with the provisions of
SFAS 142. SFAS 142 also requires that other intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
144. Amounts are in thousands, except per share amounts:
2002 2001 2000
-------- ------- ---------
Net earnings (loss) - as reported $(43,537) $ 2,784 $ 99,308
Adjustments:
Amortization of goodwill -- 4,638 2,698
Cumulative effect of accounting change 15,763 -- --
Income tax effect (25) (93) (22)
-------- ------- ---------
Net adjustments 15,738 4,545 2,676
-------- ------- ---------
Net earnings (loss) - adjusted $(27,799) $ 7,329 $ 101,984
======== ======= =========
Basic net income (loss) per share - as reported $ (1.17) $ 0.08 $ 3.05
Basic net income (loss) per share - adjusted $ (0.75) $ 0.22 $ 3.14
Diluted net income (loss) per share - as reported $ (1.17) $ 0.08 $ 3.02
Diluted net income (loss) per share - adjusted $ (0.75) $ 0.22 $ 3.10
In the first quarter of 2002, upon our transitional assessment, we
recorded a goodwill impairment charge of $15.7 million, net of income tax
benefit, related to AMI Doduco, as a cumulative effect of accounting change.
During the quarter ended June 28, 2002, we recorded an impairment charge of
$32.1 million of the value assigned to the Excelsus trade names, less a $12.8
million income tax benefit. The charge was included in line "restructuring and
unusual and infrequent items" on the consolidated statement of operations. This
charge was triggered by the combined effect of reorganizing Pulse into a
product-line based organization and updated financial forecasts for DSL
mircofilters.
(18) Application of Statement No. 123, Accounting for Stock Based Compensation
On October 21, 2002 we announced our plan to recognize compensation
expense for all stock option awards granted beginning in the 2003 fiscal year,
according to SFAS 123 as amended by SFAS 148. We intend to implement the
prospective method approach per SFAS 148, whereby compensation expense will be
recorded for all awards subsequent to adoption. On a proforma basis, if we
applied SFAS 123 for all stock option awards granted in the fiscal year ended
December 27, 2002, we would have recognized additional after-tax compensation
expense of $.5 million, or approximately $.01 per share, for the full year.
At December 27, 2002 we had approximately 367,000 options outstanding,
representing less than 1% of the our outstanding shares of common stock. The
value of restricted stock has always been and continues to be recorded as
compensation expense over the restricted period, and such expense is included in
the results of operations for the period ended December 27, 2002 and all prior
periods.
(19) Subsequent Event
We filed a Form 8-K on January 9, 2003 regarding our completed acquisition
of Eldor High Tech Wire Wound Components S.r.L. for $84.5 million in cash, plus
related acquisition costs and expenses. Eldor is headquartered in Orsenigo,
Italy with production operations in Istanbul and Izmir, Turkey. Annual sales in
2003 are estimated to be approximately $78 million. Eldor will form the nucleus
of a new consumer division at Pulse.
Page 56 of 62
Technitrol, Inc. and Subsidiaries
Financial Statement Schedule II
Valuation and Qualifying Accounts
(In thousands of dollars)
Additions (Deductions)
---------------------
Charged to Write-offs
Opening costs and and Ending
Description Balance expenses payments Balance
----------- ------- --------- ---------- -------
Year ended December 27, 2002:
Provisions for obsolete and slow-moving
inventory $23,517 $ 2,214 $(10,167) $15,564
======= ======= ======== =======
Allowances for doubtful accounts $ 2,560 $ 899 $ (204) $ 3,255
======= ======= ======== =======
Year ended December 28, 2001:
Provisions for obsolete and slow-moving
inventory $ 9,226 $20,295 $ (6,004) $23,517
======= ======= ======== =======
Allowances for doubtful accounts $ 1,908 $ 697 $ (45) $ 2,560
======= ======= ======== =======
Year ended December 29, 2000:
Provisions for obsolete and slow-moving
inventory $ 6,283 $ 8,129 $ (5,186) $ 9,226
======= ======= ======== =======
Allowances for doubtful accounts $ 882 $ 1,063 $ (37) $ 1,908
======= ======= ======== =======
Page 57 of 62
Exhibit Index
2.1 Agreement and Plan of Merger, dated as of May 23, 2001, as amended
as of July 6, 2001, by and among Pulse Engineering, Inc., Pulse
Acquisition Corporation, Excelsus Technologies, Inc., and certain
principal shareholders of Excelsus Technologies, Inc. that are
signatories thereto (incorporated by reference to Exhibit 2 to our
Form 8-K dated August 21, 2001).
2.2 Share Purchase Agreement, dated as of January 9, 2003, by Pulse
Electronics (Singapore) Pte. Ltd. and Forfin Holdings B.V. that are
signatories thereto (incorporated by reference to Exhibit 2 to our
Form 8-K dated January 10, 2003).
3.1 Amended and Restated Articles of Incorporation (incorporated by
reference to Exhibit 1 to our Registration Statement on Form 8-A/A
dated April 10, 1998).
3.2 Amendment to Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 3(i)(a) to our Form 10-Q for
the quarter ended June 29, 2001).
3.3 By-laws (incorporated by reference to Exhibit 3.3 to our Form 10-K
for the year ended December 28, 2001).
4.1 Rights Agreement, dated as of August 30, 1996, between Technitrol,
Inc. and Registrar and Transfer Company, as Rights Agent
(incorporated by reference to Exhibit 3 to our Registration
Statement on Form 8-A dated October 24, 1996).
4.2 Amendment No. 1 to the Rights Agreement, dated March 25, 1998,
between Technitrol, Inc. and Registrar and Transfer Company, as
Rights Agent (incorporated by reference to Exhibit 4 to our
Registration Statement on Form 8-A/A dated April 10, 1998).
4.3 Amendment No. 2 to the Rights Agreement, dated June 15, 2000,
between Technitrol, Inc. and Registrar and Transfer Company, as
Rights Agent (incorporated by reference to Exhibit 5 to our
Registration Statement on Form 8-A/A dated July 5, 2000).
10.1 Technitrol, Inc. 2001 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 4.1 to our Registration Statement on Form S-8
dated June 28, 2001, File Number 333-64060).
10.2 Technitrol, Inc. Restricted Stock Plan II, as amended and restated
as of January 1, 2001 (incorporated by reference to Exhibit C, to
our Definitive Proxy on Schedule 14A dated March 28, 2001).
10.3 Technitrol, Inc. 2001 Stock Option Plan (incorporated by reference
to Exhibit 4.1 to our Registration Statement on Form S-8 dated June
28, 2001, File Number 333-64068).
10.4 Technitrol, Inc. Board of Directors Stock Plan (incorporated by
reference to Exhibit 4.1 to our Registration Statement on Form S-8
dated June 1, 1998, File Number 333-55751).
10.5 Revolving Credit Agreement, by and among Technitrol, Inc. and
certain of its subsidiaries, Bank of America, N.A. as Agent and
Lender, and certain other Lenders that are signatories thereto,
dated as of June 20, 2001 (incorporated by reference to Exhibit
10.(a) to the Company's Form 10-Q for the quarter ended June 29,
2001).
10.6 Lease Agreement, dated October 15, 1991, between Ridilla-Delmont and
AMI Doduco, Inc. (formerly known as Advanced Metallurgy
Incorporated), as amended September 21, 2001 (incorporated by
reference to Exhibit 10.6 to the Company's Amendment No. 1 to
Registration Statement on Form S-3 dated February 28, 2002, File
Number 333-81286).
10.7 Incentive Compensation Plan of Technitrol, Inc. (incorporated by
reference to Exhibit 10.7 to Amendment No. 1 to our Registration
Statement on Form S-3 filed on February 28, 2002, File Number
333-81286).
Page 58 of 62
Exhibit Index, continued
10.8 Technitrol, Inc. Supplemental Retirement Plan, Amended and Restated
January 1, 2002 (incorporated by reference to Exhibit 10.8 to
Amendment No. 1 to our Registration Statement on Form S-3 filed on
February 28, 2002, File Number 333-81286).
10.9 Agreement between Technitrol, Inc. and James M. Papada, III, dated
July 1, 1999, as amended April 23, 2001, relating to the Technitrol,
Inc. Supplemental Retirement Plan (incorporated by reference to
Exhibit 10.9 to Amendment No. 1 to our Registration Statement on
Form S-3 filed on February 28, 2002, File Number 333-81286).
10.10 Letter Agreement between Technitrol, Inc. and James M. Papada, III,
dated April 16, 1999, as amended October 18, 2000 (incorporated by
reference to Exhibit 10.10 to Amendment No. 1 to our Registration
Statement on Form S-3 filed on February 28, 2002, File Number
333-81286).
10.11 Form of Indemnity Agreement (incorporated by reference to Exhibit
10.11 to our Form 10-K for the year ended December 28, 2001).
10.12 Amendment 1 to Revolving Credit Agreement, by and among Technitrol,
Inc. and certain of its subsidiaries, Bank of America, N.A. as Agent
and Lender, and certain other Lenders that are signatories thereto,
dated as of May 15, 2002.
10.13 Amendment 2 to Revolving Credit Agreement, by and among Technitrol,
Inc. and certain of its subsidiaries, Bank of America, N.A. as Agent
and Lender, and certain other Lenders that are signatories thereto,
dated as of December 20, 2002.
21. Subsidiaries of Registrant
23. Consent of Certified Public Accountants
99.1 Certification of Principal Executive Officer
99.2 Certification of Principal Financial Officer
Page 59 of 62
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, President and CEO
Date March 5, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/Stanley E. Basara By /s/Edward M. Mazze
--------------------------- ----------------------------------
Stanley E. Basara Edward M. Mazze
Director Director
Date March 5, 2003 Date March 5, 2003
By /s/John E. Burrows, Jr. By /s/ C. Mark Melliar-Smith
--------------------------- ----------------------------------
John E. Burrows, Jr. C. Mark Melliar-Smith
Director Director
Date March 5, 2003 Date March 5, 2003
By /s/Rajiv L. Gupta By /s/James M. Papada, III
--------------------------- ----------------------------------
Rajiv L. Gupta James M. Papada, III
Director Chairman, President and CEO
(Principal Executive Officer)
Date March 5, 2003 Date March 5, 2003
By /s/David H. Hofmann By /s/Drew A. Moyer
--------------------------------- ----------------------------------
David H. Hofmann Drew A. Moyer
Director Vice President, Corporate
Controller and Secretary
Date March 5, 2003 (Principal Financial and
Accounting Officer)
By /s/Graham Humes
---------------------------------
Graham Humes Date March 5, 2003
Director
Date March 5, 2003
Page 60 of 62
Certification
I, James M. Papada, III, certify that:
1. I have reviewed this Annual Report on Form 10-K of Technitrol;
2. Based on my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under with such statements were made, not misleading with respect to
the period covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Technitrol as of, and for the periods presented in
this Annual Report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this Annual Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Annual Report (the "Evaluation Date");
and
c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this Annual Report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 5, 2003 /s/ James M. Papada, III
------------------------
James M. Papada, III
Chairman, President and CEO
(Principal Executive Officer)
Page 61 of 62
Certification
I, Drew A. Moyer, certify that:
1. I have reviewed this Annual Report on Form 10-K of Technitrol;
2. Based on my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under with such statements were made, not misleading with respect to
the period covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Technitrol as of, and for the periods presented in
this Annual Report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this Annual Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Annual Report (the "Evaluation Date");
and
c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
The registrant's other certifying officer and I have indicated in this Annual
Report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 5, 2003 /s/ Drew A. Moyer
-----------------
Drew A. Moyer
Vice President, Corporate Controller
and Secretary
(Principal Financial and Accounting
Officer)
Page 62 of 62