form10-q.htm
UNITED
STATES
SECURITIES
& EXCHANGE COMMISSION
Washington,
D.C. 20549
______________________
FORM
10-Q
x The Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the
quarterly period ended September 25, 2009, or
oTransition 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 its Charter)
PENNSYLVANIA
|
23-1292472
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification Number)
|
1210
Northbrook Drive, Suite 470
|
|
Trevose,
Pennsylvania
|
19053
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
|
Registrant's
telephone number, including area code:
|
215-355-2900
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirements for
at least the past 90 days.
Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company (as
defined in Rule 12b-2 of the Exchange Act).
Large accelerated
filer x |
Accelerated
filer o |
Non-accelerated
filer o |
Smaller reporting
company o |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of Common
Stock, as of November 4, 2009: 41,168,543
PART
I
|
FINANCIAL
INFORMATION
|
PAGE
|
|
|
|
Item
1.
|
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|
3
|
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|
4
|
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|
5
|
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6
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7
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Item
2.
|
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23
|
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Item
3.
|
|
32
|
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|
Item
4.
|
|
32
|
|
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|
PART
II
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
|
34
|
|
|
|
Item
1a.
|
|
34
|
|
|
|
Item
2.
|
|
34
|
|
|
|
Item
3.
|
|
34
|
|
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|
Item
4.
|
|
34
|
|
|
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Item
5.
|
|
34
|
|
|
|
Item
6.
|
|
34
|
|
|
|
|
|
44
|
PART
I. FINANCIAL INFORMATION
Technitrol,
Inc. and Subsidiaries
In
thousands
|
|
September
25,
|
|
|
December
26,
|
Assets
|
|
2009
|
|
|
2008
|
|
|
(Unaudited)
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
39,516 |
|
|
$ |
41,401 |
|
Accounts
receivable, net
|
|
|
66,823 |
|
|
|
128,010 |
|
Inventories
|
|
|
43,124 |
|
|
|
127,074 |
|
Prepaid
expenses and other current assets
|
|
|
19,336 |
|
|
|
58,568 |
|
Assets
of discontinued operations held for sale
|
|
|
85,047 |
|
|
|
-- |
|
Total
current assets
|
|
|
253,846 |
|
|
|
355,053 |
|
|
|
|
|
|
|
|
|
|
Long-term
assets:
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
135,090 |
|
|
|
323,847 |
|
Less
accumulated depreciation
|
|
|
92,502 |
|
|
|
171,116 |
|
Net
property, plant and equipment
|
|
|
42,588 |
|
|
|
152,731 |
|
Deferred
income taxes
|
|
|
33,213 |
|
|
|
34,933 |
|
Goodwill,
net
|
|
|
16,083 |
|
|
|
164,778 |
|
Other
intangibles, net
|
|
|
24,604 |
|
|
|
51,351 |
|
Other
assets
|
|
|
9,788 |
|
|
|
11,065 |
|
|
|
$ |
380,122 |
|
|
$ |
769,911 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’
Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
installments of long-term debt
|
|
$ |
-- |
|
|
$ |
17,189 |
|
Accounts
payable
|
|
|
53,512 |
|
|
|
75,511 |
|
Accrued
expenses and other current liabilities
|
|
|
60,169 |
|
|
|
86,477 |
|
Liabilities
of discontinued operations held for sale
|
|
|
30,092 |
|
|
|
-- |
|
Total
current liabilities
|
|
|
143,773 |
|
|
|
179,177 |
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
Long-term
debt, excluding current installments
|
|
|
127,000 |
|
|
|
326,000 |
|
Deferred
income taxes
|
|
|
12,157 |
|
|
|
16,255 |
|
Other
long-term liabilities
|
|
|
38,892 |
|
|
|
40,347 |
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Technitrol,
Inc. shareholders’ equity:
|
|
|
|
|
|
|
|
|
Common
stock and additional paid-in capital
|
|
|
222,892 |
|
|
|
225,117 |
|
Retained
loss
|
|
|
(195,133 |
) |
|
|
(1,045 |
) |
Accumulated
other comprehensive income (loss)
|
|
|
19,404 |
|
|
|
(26,626 |
) |
Total
Technitrol, Inc. shareholders’ equity
|
|
|
47,163 |
|
|
|
197,446 |
|
Non-controlling
interest
|
|
|
11,137 |
|
|
|
10,686 |
|
Total
equity
|
|
|
58,300 |
|
|
|
208,132 |
|
|
|
$ |
380,122 |
|
|
$ |
769,911 |
|
See
accompanying Notes to Unaudited Consolidated Financial
Statements.
Technitrol,
Inc. and Subsidiaries
(Unaudited)
In
thousands, except per share data
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended |
|
|
September
25,
|
|
|
September
26,
|
|
|
|
|
|
September
26,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
sales
|
|
$ |
101,381 |
|
|
$ |
168,974 |
|
|
$ |
293,425 |
|
|
$ |
501,978 |
|
Cost
of sales
|
|
|
74,154 |
|
|
|
126,339 |
|
|
|
220,305 |
|
|
|
381,827 |
|
Gross
profit
|
|
|
27,227 |
|
|
|
42,635 |
|
|
|
73,120 |
|
|
|
120,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
23,399 |
|
|
|
29,144 |
|
|
|
66,503 |
|
|
|
93,136 |
|
Severance,
impairment and other associated costs
|
|
|
2,619 |
|
|
|
4,860 |
|
|
|
82,867 |
|
|
|
9,272 |
|
Operating
profit (loss)
|
|
|
1,209 |
|
|
|
8,631 |
|
|
|
(76,250 |
) |
|
|
17,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(757 |
) |
|
|
(1,022 |
) |
|
|
(2,091 |
) |
|
|
(2,147 |
) |
Other
income (expense), net
|
|
|
3,190 |
|
|
|
(833 |
) |
|
|
5,083 |
|
|
|
6,051 |
|
Total
other income (expense)
|
|
|
2,433 |
|
|
|
(1,855 |
) |
|
|
2,992 |
|
|
|
3,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from continuing operations before income
taxes
|
|
|
3,642 |
|
|
|
6,776 |
|
|
|
(73,258 |
) |
|
|
21,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
1,368 |
|
|
|
(2,902 |
) |
|
|
2,856 |
|
|
|
589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) from continuing operations
|
|
|
2,274 |
|
|
|
9,678 |
|
|
|
(76,114 |
) |
|
|
21,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from discontinued operations
|
|
|
(13,358 |
) |
|
|
(4,123 |
) |
|
|
(117,523 |
) |
|
|
(896 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) earnings
|
|
|
(11,084 |
) |
|
|
5,555 |
|
|
|
(193,637 |
) |
|
|
20,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Net earnings attributable to non-controlling interest
|
|
|
352 |
|
|
|
204 |
|
|
|
451 |
|
|
|
598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) earnings attributable to Technitrol, Inc.
|
|
$ |
(11,436 |
) |
|
$ |
5,351 |
|
|
$ |
(194,088 |
) |
|
$ |
19,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
attributable to Technitrol, Inc. common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) from continuing operations
|
|
$ |
1,922 |
|
|
$ |
9,474 |
|
|
$ |
(76,565 |
) |
|
$ |
20,460 |
|
Net
loss from discontinued operations
|
|
|
(13,358 |
) |
|
|
(4,123 |
) |
|
|
(117,523 |
) |
|
|
(896 |
) |
Net
(loss) earnings
|
|
$ |
(11,436 |
) |
|
$ |
5,351 |
|
|
$ |
(194,088 |
) |
|
$ |
19,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) from continuing operations
|
|
$ |
0.05 |
|
|
$ |
0.23 |
|
|
$ |
(1.88 |
) |
|
$ |
0.50 |
|
Net
loss from discontinued operations
|
|
|
(0.33 |
) |
|
|
(0.10 |
) |
|
|
(2.88 |
) |
|
|
(0.02 |
) |
Net
(loss) earnings
|
|
$ |
(0.28 |
) |
|
$ |
0.13 |
|
|
$ |
(4.76 |
) |
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) from continuing operations
|
|
$ |
0.05 |
|
|
$ |
0.23 |
|
|
$ |
(1.88 |
) |
|
$ |
0.50 |
|
Net
loss from discontinued operations
|
|
|
(0.33 |
) |
|
|
(0.10 |
) |
|
|
(2.88 |
) |
|
|
(0.02 |
) |
Net
(loss) earnings
|
|
$ |
(0.28 |
) |
|
$ |
0.13 |
|
|
$ |
(4.76 |
) |
|
$ |
0.48 |
|
See
accompanying Notes to Unaudited Consolidated Financial
Statements.
Technitrol,
Inc. and Subsidiaries
(Unaudited)
In
thousands
|
|
Nine
Months Ended
|
|
|
|
September
25,
|
|
|
September
26,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
(loss) earnings
|
|
$ |
(193,637 |
) |
|
$ |
20,162 |
|
Net
loss (earnings) from discontinued operations
|
|
|
117,523 |
|
|
|
(896 |
) |
Adjustments
to reconcile net (loss) earnings attributable to Technitrol, Inc. to net
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
13,791 |
|
|
|
22,041 |
|
Goodwill
impairment
|
|
|
70,982 |
|
|
|
-- |
|
Changes
in assets and liabilities, net of divestitures and acquisitions
affect:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
2,659 |
|
|
|
12,754 |
|
Inventories
|
|
|
10,288 |
|
|
|
(679 |
) |
Prepaid
expenses and other current assets
|
|
|
539 |
|
|
|
(3,905 |
) |
Accounts
payable and accrued expenses
|
|
|
(1,665 |
) |
|
|
(16,745 |
) |
Severance,
impairment and other associated costs
|
|
|
3,956 |
|
|
|
(696 |
) |
Other,
net
|
|
|
(499 |
) |
|
|
84 |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
23,937 |
|
|
|
32,120 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisitions,
net of cash acquired of $6,556
|
|
|
-- |
|
|
|
(425,999 |
) |
Cash
received from dispositions
|
|
|
207,809 |
|
|
|
-- |
|
Capital
expenditures
|
|
|
(786 |
) |
|
|
(9,551 |
) |
Purchases
of grantor trust investments available for sale
|
|
|
(5,899 |
) |
|
|
(368 |
) |
Proceeds
from sale of property, plant and equipment
|
|
|
2,110 |
|
|
|
6,598 |
|
Foreign
currency impact on intercompany lending
|
|
|
(2,980 |
) |
|
|
(1,082 |
) |
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
200,254 |
|
|
|
(430,402 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Long-term
borrowings
|
|
|
-- |
|
|
|
414,000 |
|
Principal
payments of long-term debt
|
|
|
(209,000 |
) |
|
|
(67,943 |
) |
Dividends
paid
|
|
|
(5,639 |
) |
|
|
(10,741 |
) |
Exercise
of stock options
|
|
|
-- |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
(214,639 |
) |
|
|
335,368 |
|
|
|
|
|
|
|
|
|
|
Net
effect of exchange rate changes on cash
|
|
|
5,605 |
|
|
|
3,529 |
|
|
|
|
|
|
|
|
|
|
Cash
flows of discontinued operations:
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
1,053 |
|
|
|
9,487 |
|
Net
cash used in investing activities
|
|
|
(11,474 |
) |
|
|
(29,694 |
) |
Net
cash used in financing activities
|
|
|
(7,413 |
) |
|
|
-- |
|
Net
effect of exchange rate changes on cash
|
|
|
792 |
|
|
|
4,636 |
|
Net
decrease in cash and cash equivalents from discontinued
operations
|
|
|
(17,042 |
) |
|
|
(15,571 |
) |
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(1,885 |
) |
|
|
(74,956 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
41,401 |
|
|
|
116,289 |
|
Cash
and cash equivalents at end of period
|
|
$ |
39,516 |
|
|
$ |
41,333 |
|
See
accompanying Notes to Unaudited Consolidated Financial
Statements.
Technitrol,
Inc. and Subsidiaries
Nine
Months Ended September 25, 2009
(Unaudited)
In
thousands, except per share data
|
|
Common
stock and
paid-in capital
|
|
|
Retained
loss
|
|
|
Accumulated
other
compre-
hensive
(loss)
income
|
|
|
Non-
control-
ling
interest
|
|
|
Total
equity
|
|
|
Compre-
hensive loss
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 26, 2008
|
|
|
40,998 |
|
|
$ |
225,117 |
|
|
$ |
(1,045 |
) |
|
$ |
(26,626 |
) |
|
$ |
10,686 |
|
|
$ |
208,132 |
|
|
|
|
Stock
options, awards and related compensation
|
|
|
171 |
|
|
|
855 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
855 |
|
|
|
|
Dividends
declared ($0.075 per share)
|
|
|
-- |
|
|
|
(3,080 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(3,080 |
) |
|
|
|
Adjustment
to defined benefit plans
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
1,772 |
|
|
|
-- |
|
|
|
1,772 |
|
|
|
|
Net
(loss) earnings
|
|
|
-- |
|
|
|
-- |
|
|
|
(194,088 |
) |
|
|
-- |
|
|
|
451 |
|
|
|
(193,637 |
) |
|
$ |
(193,637 |
) |
Currency
translation adjustments
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
42,633 |
|
|
|
-- |
|
|
|
42,633 |
|
|
|
42,633 |
|
Unrealized
holding gains on
securities
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
1,625 |
|
|
|
-- |
|
|
|
1,625 |
|
|
|
1,625 |
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(149,379 |
) |
Balance
at September 25, 2009
|
|
|
41,169 |
|
|
$ |
222,892 |
|
|
$ |
(195,133 |
) |
|
$ |
19,404 |
|
|
$ |
11,137 |
|
|
$ |
58,300 |
|
|
|
|
|
See
accompanying Notes to Unaudited Consolidated Financial Statements.
Technitrol,
Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For a
complete description of the accounting policies of Technitrol, Inc. and its
consolidated subsidiaries, refer to Note 1 of Notes to Consolidated Financial
Statements included in Technitrol, Inc.’s Form 10-K filed for the year ended
December 26, 2008. We sometimes refer to Technitrol, Inc. as “Technitrol,” “we”
or “our”. We operate our continuing business in a single segment, our
Electronic Components Group, which we refer to as Electronics and is known as
Pulse in its markets. A second segment, the Electrical Contact
Products Group or Electrical, as we refer to it, or AMI Doduco, as it is known
in its markets, is held for sale and classified as discontinued operations in
our Consolidated Financial Statements.
The
results for the nine months ended September 25, 2009 and September 26, 2008 have
been prepared by our management without audit by our independent registered
public accountants. In the opinion of management, the consolidated financial
statements fairly present in all material respects, the financial position,
results of operations and cash flows for the periods presented. To
the best of our knowledge and belief, all adjustments have been made to properly
reflect income and expenses attributable to the periods
presented. Except for severance, impairment and other associated
costs, all such adjustments are of a normal recurring nature. Operating results
for the nine months ended September 25, 2009 are not necessarily indicative of
annual results.
Recently Adopted Accounting
Pronouncements
In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB Statement No. 162 (“SFAS 168”). This is FASB’s
last SFAS as this statement established the FASB Accounting Standards
Codification (“ASC”) as the authoritative source of U.S. Generally Accepted
Accounting Principles (“GAAP”). This pronouncement is now codified as ASC Topic
105, Generally Accepted
Accounting Principles (“ASC 105”). ASC 105 does not change
current GAAP, but is intended to simplify user research by providing all FASB
literature in a topical manner and in a single set of rules. All existing
accounting standard documents are superseded and all other accounting literature
not included in the ASC is considered non-authoritative. These provisions of ASC
105 are effective for fiscal years and interim periods ending after
September 15, 2009. We adopted this statement as of September 15, 2009, and
we have revised our disclosures by eliminating all references to
pre-codification standards as required by ASC 105.
In
May 2009, FASB issued guidance codified as ASC Topic 855, Subsequent Events (“ASC
855”), which establishes general standards of accounting for, and disclosures
of, events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. ASC 855 is effective for
interim or fiscal periods ending after June 15, 2009. We adopted ASC 855 on
June 26, 2009 and the adoption of these provisions did not have a material
impact on our consolidated financial position, results of operations or cash
flows. We have evaluated and recognized no material subsequent events for the
period from September 25, 2009, the date of these financial statements,
through November 4, 2009, which is the date these financial statements were
issued.
In April
2009, FASB issued ASC Topic 820, Fair Value Measurements and
Disclosures (“ASC 820”), which provides additional guidance on estimating
fair value when the volume and level of activity for an asset or liability has
significantly decreased in relation to the normal market activity for the asset
or liability. Also, ASC 820 provides guidance on circumstances that
may indicate that a transaction is not orderly. These additions to ASC 820 were
effective for interim and annual periods ending after June 15, 2009. We
adopted the provisions of ASC 820 as of June 15, 2009 and the adoption had no
impact on our financial statements.
Technitrol,
Inc. and Subsidiaries
Notes to Unaudited Consolidated
Financial Statements, continued
(1) Accounting policies,
continued
In
November 2008, FASB issued guidance codified in ASC Topic 323, Investments – Equity Method and
Joint Ventures (“ASC 323”), which clarifies the accounting for certain
transactions and impairment considerations involving equity method
investments. We adopted these provisions of ASC 323 as of December
27, 2008 and this adoption had no impact on our financial
statements.
In
June 2008, FASB issued guidance codified in ASC Topic 260, Earnings Per Share (“ASC
260”). Under ASC 260, unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents are required to be
treated as participating securities and should be included in the two-class
method of computing earnings per share. Adoption of these additions to ASC 260
is retrospective, therefore, all previously reported earnings per share data is
restated to conform with the requirements of this pronouncement. We adopted
these provisions of ASC 260 as of December 27, 2008 and calculated basic and
diluted earnings per share under both the treasury stock method and the
two-class method. For both the three and nine months ended September
25, 2009 and September 26, 2008, there were not significant differences in the
per share amounts calculated under the two methods, therefore, we have not
presented the reconciliation of earnings per share under the two class
method. See Note 10 regarding adoption of this guidance.
In April
2008, FASB issued guidance codified in ASC Topic 350, Intangibles – Goodwill and
Other (“ASC 350”), which amends the factors an entity should consider in
developing renewal or extension assumptions used in determining the useful life
of recognized intangible assets. These additions to ASC 350 apply
prospectively to intangible assets that are acquired individually or with a
group of other assets in business combinations and asset
acquisitions. We adopted these provisions of ASC 350 as of December
27, 2008 and the adoption had no impact on our financial
statements.
In March
2008, FASB issued guidance codified in ASC Topic 815, Derivatives and Hedging (“ASC
815”), which applies to the disclosure requirements for all derivative
instruments and hedged items. These additions to ASC 815 amend and expand
previous disclosure requirements, requiring qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts and gains and losses on derivative instruments, and
disclosures about the credit risk related contingent features in derivative
agreements. We adopted these provisions of ASC 815 as of December 27,
2008 and have expanded our disclosures as required. See Note 12
regarding adoption of this guidance.
In December 2007, FASB issued guidance
codified in ASC Topic 810, Consolidation (“ASC 810”).
These provisions of ASC 810 changed the accounting and reporting for minority
interests, which were recharacterized as non-controlling interests and
classified as a component of equity. In addition, companies are
required to report a net income (loss) measure that includes the amounts
attributable to such non-controlling interests. We adopted these additions to
ASC 810 as of December 27, 2008 and they were applied prospectively to all
non-controlling interests. However, the presentation and disclosure requirements
of these additions to ASC 810 were applied retrospectively for all periods
presented.
In
December 2007, FASB issued guidance codified in ASC Topic 805, Business Combinations (“ASC
805”), which changed the accounting for business combinations in a number of
areas including the treatment of contingent consideration, contingencies,
acquisition costs, in-process research and development costs and restructuring
costs. In addition, these provisions of ASC 805 change the method of
measurement for deferred tax asset valuation allowances and acquired income tax
uncertainties in a business combination. We adopted these additions
to ASC 805 as of December 27, 2008 and the adoption had no impact on our
financial statements.
Technitrol,
Inc. and Subsidiaries
Notes to Unaudited Consolidated
Financial Statements, continued
(1) Accounting policies,
continued
New Accounting
Pronouncements
In June
2009, FASB issued additional guidance codified in ASC 810, which requires
reporting entities to evaluate former Qualified Special Purpose Entities
(“QSPE”) for consolidation, changing the approach to determine a Variable
Interest Entity’s (“VIE”) primary beneficiary from a quantitative to a
qualitative assessment and increasing the frequency of reassessments for
determining whether a company is the primary beneficiary of a
VIE. This guidance also clarifies the characteristics that identify a
VIE. These provisions of ASC 810 are effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2009. We are currently evaluating the effect that this
pronouncement may have on our financial statements.
In
December 2008, FASB issued guidance codified in ASC Topic 715, Compensation – Retirement
Benefits (“ASC 715”), which provides guidance on an employer’s
disclosures about plan assets of a defined benefit pension plan or other
postretirement plans. Specifically, these provisions of ASC 715
provide guidance on concentrations of risk in pension and postretirement plans,
and are effective for financial statements issued for fiscal years and interim
periods beginning after December 15, 2009. We are currently evaluating the
effect that this pronouncement may have on our financial
statements.
Reclassifications
Certain amounts in the prior-year
financial statements have been reclassified to conform with the current-year
presentation.
(2) Divestitures
Electrical: In 2009, our
board of directors approved a plan to divest our Electrical Contact Products
Group (“Electrical”). Electrical’s manufacturing facilities in
Germany, Spain, China, Mexico and the United States produce a full array of
precious metal electrical contact products that range from materials used in the
fabrication of electrical contacts to completed contact subassemblies. The
divestiture is expected to be completed by the end of June 2010. We
have reflected the results of Electrical as a discontinued operation on the
Consolidated Statements of Operations for all periods presented.
Electrical’s
net sales and (loss) earnings before income taxes were as follows (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
25,
|
|
|
September
26,
|
|
|
September
25,
|
|
|
September
26,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
sales
|
|
$ |
63,474 |
|
|
$ |
97,374 |
|
|
$ |
177,898 |
|
|
$ |
311,426 |
|
(Loss)
earnings before income taxes
|
|
|
(5,897 |
) |
|
|
2,137 |
|
|
|
(66,520 |
) |
|
|
14,198 |
|
Electrical’s
loss before income taxes includes interest expense allocated pro-rata based upon
the debt expected to be retired from the Electrical disposition, an estimate of
the write down of Electrical’s net assets to the expected net proceeds we
anticipate receiving on the completion of the sale, an estimate of the
settlement of certain retirement plan benefits under the Technitrol, Inc.
Supplemental Retirement Plan that will result from the sale of substantially all
of Electrical and other charges. These charges were approximately
$4.7 million and $0.7 million for the three months ended September 25, 2009 and
September 26, 2008, respectively, and approximately $59.3 million and $1.7
million for the nine months ended September 25, 2009 and September 26, 2008,
respectively.
Technitrol,
Inc. and Subsidiaries
Notes to Unaudited Consolidated
Financial Statements, continued
(2) Divestitures,
continued
We also
expect to record a curtailment and settlement related to the Technitrol, Inc.
Retirement Plan, however, these amounts were not estimable as of September 25,
2009. These adjustments will be recorded upon the earlier of the
Electrical divestiture or when such amounts are estimable.
Electrical
has approximately $83.9 million of assets and $29.1 million of liabilities that
are considered held for sale and are included in current assets and current
liabilities, respectively, on the September 25, 2009 Consolidated Balance
Sheet. The assets are available for immediate sale in their present
condition subject only to terms that are usual and
customary. Although we continue to manufacture Electrical products,
we expect that open customer orders will be transferred to the buyer in the
divestiture.
Medtech: On
June 25, 2009, we completed the disposition of our Medtech components business
(“Medtech”) to Altor Fund III (“Altor”). Medtech is headquartered in Roskilde,
Denmark with manufacturing facilities in Denmark, Poland and Vietnam producing
the former Sonion A/S (“Sonion”) components for the hearing aid, high-end audio
headset and medical device markets. We received approximately $201.4
million in cash. However, these proceeds are subject to final working capital
and financial indebtedness adjustments. The net proceeds were used
primarily to repay outstanding debt under our credit facility. We
have reflected the results of Medtech as a discontinued operation on the
Consolidated Statement of Operations for all periods presented.
Medtech’s
net sales and loss before income taxes were as follows (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
25,
|
|
|
September
26,
|
|
|
September
25,
|
|
|
September
26,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
sales
|
|
$ |
-- |
|
|
$ |
26,851 |
|
|
$ |
49,704 |
|
|
$ |
70,960 |
|
Loss
before income taxes
|
|
|
(9,751 |
) |
|
|
(2,504 |
) |
|
|
(44,975 |
) |
|
|
(12,668 |
) |
Medtech’s
loss before income taxes includes interest expense allocated pro-rata based upon
the debt retired from the proceeds of the Medtech disposition, a charge recorded
to write down our net investment in Medtech to the net proceeds received,
including an adjustment of $9.4 million in the three months ended September 25,
2009, a charge for the curtailment and settlement of certain retirement plan
benefits under the Technitrol, Inc. Supplemental Retirement Plan that was
triggered by the Medtech sale and other charges. These charges were
approximately $9.8 million and $1.9 million for the three months ended September
25, 2009 and September 26, 2008, respectively, and approximately $49.6 million
and $4.9 million for the nine months ended September 25, 2009 and September 26,
2008, respectively.
All open
customer orders were transferred to Altor upon disposition. We have
no material continuing involvement with the Medtech business after its June 25,
2009 disposition.
MEMS:
During the year ended December 26, 2008, our board of directors approved a plan
to divest our non-core microelectromechanical systems (“MEMS”) microphone
business located in Denmark and Vietnam. In the second quarter of 2009, we
received an amount immaterial to our Consolidated Financial Statements for the
assets of MEMS. To reflect MEMS’ net assets at their net sales
proceeds, we recorded a $2.7 million charge during 2009. We have
reflected the results of MEMS as a discontinued operation on the Consolidated
Statements of Operations for all periods presented.
Technitrol,
Inc. and Subsidiaries
Notes to Unaudited Consolidated
Financial Statements, continued
(2) Divestitures,
continued
Net sales
and earnings (loss) before income taxes were as follows (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
25,
|
|
|
September
26,
|
|
|
September
25,
|
|
|
September
26,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
sales
|
|
$ |
626 |
|
|
$ |
2,857 |
|
|
$ |
1,438 |
|
|
$ |
6,039 |
|
Earnings
(loss) before income taxes
|
|
|
413 |
|
|
|
(425 |
) |
|
|
(6,216 |
) |
|
|
(1,462 |
) |
MEMS was
purchased as part of the Sonion acquisition. There is approximately $1.1 million
of assets and $1.0 million of liabilities remaining at MEMS that are considered
held for sale and are included in current assets and current liabilities,
respectively, on the September 25, 2009 Consolidated Balance
Sheet. We are contractually obligated to fulfill an immaterial amount
of customer orders before we can fully exit MEMS. The assets and
liabilities that remain on our Consolidated Balance Sheet as of September 25,
2009 primarily relate to these customer orders.
Sonion
A/S: On
February 28, 2008, we acquired all of the capital stock of Sonion, headquartered
in Roskilde, Denmark with manufacturing facilities in Denmark, Poland, China and
Vietnam. The results of Sonion’s operations have been included in the
consolidated financial statements since February 29, 2008. Sonion
produced components used in hearing instruments, medical devices and mobile
communications devices. Our total investment was $426.4 million, which included
$243.3 million, net of cash acquired of $6.6 million, for the outstanding
capital stock, $177.8 million of acquired debt which was repaid concurrent with
the acquisition and $5.3 million of costs directly associated with the
acquisition. We financed the acquisition with proceeds from our multi-currency
credit facility and with cash on hand. The fair value of the net tangible assets
acquired, excluding the assumed debt, approximated $99.7 million. In
addition to the fair value of assets acquired, purchase price allocations
included $73.5 million for customer relationship intangibles, $27.7 million for
technology intangibles and $232.1 million allocated to goodwill. For goodwill
impairment testing purposes, Sonion’s mobile communications group is included in
Electronics’ wireless group. Prior to its disposition in June 2009,
Sonion’s Medtech components business was treated as a separate reporting
unit.
(4) Inventories
Inventories
consisted of the following (in
thousands):
|
|
September
25,
|
|
|
December
26,
|
|
|
|
2009
|
|
|
2008
|
|
Finished
goods
|
|
$ |
19,047 |
|
|
$ |
46,747 |
|
Work
in process
|
|
|
5,023 |
|
|
|
29,451 |
|
Raw
materials and supplies
|
|
|
19,054 |
|
|
|
50,876 |
|
|
|
$ |
43,124 |
|
|
$ |
127,074 |
|
(5) Goodwill and other
intangibles, net
We perform an annual review of goodwill
in our fourth fiscal quarter of each year, or more frequently if indicators of a
potential impairment exist, to determine if the carrying amount of our goodwill
is impaired. The test is a two-step process. The first
step of the impairment review is to compare the fair
Technitrol,
Inc. and Subsidiaries
Notes to Unaudited Consolidated
Financial Statements, continued
(5) Goodwill and other
intangibles, net, continued
value of each
reporting unit where goodwill resides with the carrying value of the reporting
unit. If the carrying value of the reporting unit exceeds its fair
value, we would perform the second step of the impairment test that requires an
allocation of the reporting unit’s fair value to all of its assets and
liabilities in a manner similar to a purchase price allocation, with any
residual fair value being allocated to goodwill. An impairment charge
will be recognized only when the implied fair value of a reporting unit’s
goodwill is less than its carrying amount. We have three reporting
units within Electronics, which are our legacy group, including our power and
network divisions but excluding the connector business, our wireless group and
our connector group.
Our reviews incorporate both an income
and a comparable-companies market approach to estimate the
impairment. The income approach is based on estimating future cash
flows using various growth assumptions and discounting based on a present value
factor. The growth rates we use are estimated based on the future
growth of the industries in which we participate. Our discount rate
assumption is based on our estimated cost of capital, which we determine based
on our estimated costs of debt and equity relative to our capital
structure.
The
comparable-companies market approach considers the trading multiples of our peer
companies to compute our estimated fair value. We, as well as
substantially all of the comparable companies utilized in our
evaluation, are included in the Dow Jones U.S. Electrical Components and
Equipment Industry Group Index. We believe the use of multiple
valuation techniques results in a more accurate indicator of the fair value of
each reporting unit, rather than only using the income approach.
We
performed step one of the goodwill impairment test during the first quarter of
2009 as a result of the decline in our stock price and a decrease in our
forecasted operating profit. Our wireless group did not pass the
first step of the impairment test. The second step of the impairment
test yielded a $71.0 million goodwill impairment at the wireless group as of
March 27, 2009, $68.9 million of which was recorded as an estimate in the first
quarter of 2009. This analysis was finalized during the second
quarter of 2009 resulting in an additional charge of $2.1 million.
We also assess the impairment of
long-lived assets, including identifiable intangible assets subject to
amortization and property, plant and equipment, whenever events or changes in
circumstances indicate the carrying value may not be
recoverable. Factors we consider important that could trigger an
impairment review include significant changes in the use of any asset, changes
in historical trends in operating performance, changes in projected operating
performance, stock price and significant negative economic
trends. The impairment review was also triggered by our declined
stock price and our lower operating profit forecast in the first quarter of
2009. Prior to completing the review of goodwill in the first quarter of 2009,
we performed a recoverability test on certain definite and indefinite-lived
intangible assets. The recoverability test performed as of March 27,
2009 yielded no impairment of identifiable intangible assets.
Changes in the carrying amount of
goodwill for the nine months ended September 25, 2009 were as follows (in thousands):
Balance
at December 26, 2008
|
|
$ |
164,778 |
|
|
|
|
|
|
Goodwill
impairment
|
|
|
(70,982 |
) |
Goodwill
of divested reporting unit
|
|
|
(77,816 |
) |
Currency
translation adjustment
|
|
|
103 |
|
|
|
|
|
|
Balance
at September 25, 2009
|
|
$ |
16,083 |
|
Technitrol,
Inc. and Subsidiaries
Notes to Unaudited Consolidated
Financial Statements, continued
(5) Goodwill and other
intangibles, net, continued
Other
intangible assets were as follows (in thousands):
|
|
September
25,
|
|
|
December
26,
|
|
|
|
2009
|
|
|
2008
|
|
Intangible
assets subject to amortization (definite
lives):
|
|
|
|
|
|
|
Technology
|
|
$ |
6,738 |
|
|
$ |
27,210 |
|
Customer
relationships
|
|
|
26,332 |
|
|
|
30,999 |
|
Tradename
/ trademark
|
|
|
425 |
|
|
|
408 |
|
Other
|
|
|
2,379 |
|
|
|
2,567 |
|
Total
|
|
$ |
35,874 |
|
|
$ |
61,184 |
|
|
|
|
|
|
|
|
|
|
Accumulated
amortization:
|
|
|
|
|
|
|
|
|
Technology
|
|
$ |
(1,737 |
) |
|
$ |
(2,370 |
) |
Customer
relationships
|
|
|
(10,641 |
) |
|
|
(8,746 |
) |
Tradename
/ trademark
|
|
|
(425 |
) |
|
|
(408 |
) |
Other
|
|
|
(1,377 |
) |
|
|
(1,219 |
) |
Total
|
|
$ |
(14,180 |
) |
|
$ |
(12,743 |
) |
|
|
|
|
|
|
|
|
|
Net
intangible assets subject to amortization
|
|
$ |
21,694 |
|
|
$ |
48,441 |
|
|
|
|
|
|
|
|
|
|
Intangible
assets not subject to amortization (indefinite lives):
|
|
|
|
|
|
|
|
|
Tradename
|
|
|
2,910 |
|
|
|
2,910 |
|
|
|
|
|
|
|
|
|
|
Other
intangibles, net
|
|
$ |
24,604 |
|
|
$ |
51,351 |
|
Amortization expense was approximately
$2.5 million and $4.2 million for the nine months ended September 25, 2009 and
September 26, 2008, respectively. The decrease in amortization
expense is the result of lower amortizing intangibles in the nine months ended
September 25, 2009 as compared to the same period of 2008, due to the intangible
impairment recorded in the fourth quarter of 2008. Estimated annual
amortization expense for each of the next five years is as follows (in thousands):
Year Ending
|
|
|
|
2010
|
|
$ |
3,817 |
|
2011
|
|
$ |
3,540 |
|
2012
|
|
$ |
3,434 |
|
2013
|
|
$ |
3,434 |
|
2014
|
|
$ |
2,963 |
|
(6) Income
taxes
At September 25, 2009, we had
approximately $20.3 million of unrecognized tax benefits, $18.2 million of which
are classified as other long-term liabilities and are not expected to be
realized within the next twelve months. All of these tax benefits
would affect our effective tax rate, if recognized.
Our continuing practice is to recognize
interest and penalties, if any, related to income tax matters as income tax
expense. As of September 25, 2009, we have $0.9 million accrued for
interest and penalties related to uncertain income tax positions.
Technitrol,
Inc. and Subsidiaries
Notes to Unaudited Consolidated
Financial Statements, continued
(6) Income taxes,
continued
We are subject to U.S. federal income
tax as well as income tax in multiple state and non-U.S.
jurisdictions. Federal and state income tax returns for all years
after 2005 are subject to future examination by the respective tax
authorities. With respect to material non-U.S. jurisdictions where we
operate, we have open tax years ranging from 2 to 10 years.
The
effective tax rate of (3.9)% for the nine months ended September 25, 2009 was
impacted primarily by the $71.0 million goodwill impairment charge recorded in
2009. The goodwill impairment was non-deductible for income tax
purposes. Also, certain losses incurred related to our divestitures
are not expected to be deductible for income tax purposes. Excluding
the $71.0 million impairment charge, the effective tax rate would have been
13.7% for the nine months ended September 25, 2009.
(7) Defined benefit
plans
The
Medtech disposition triggered a curtailment and settlement of certain retirement
plan benefits related to the Technitrol, Inc. Supplemental Retirement Plan that
totaled $4.9 million. The disposition of substantially all of the business of
Electrical will also result in the acceleration of certain retirement plan
benefits under the Technitrol, Inc. Supplemental Retirement Plan. We
recorded a charge of $5.1 million as an estimate of this benefit. Our net
periodic expense, excluding these charges, was approximately $0.1 million and
$0.3 million for the three months ended September 25, 2009 and September 26,
2008, respectively, and $0.4 and $0.8 million for the nine months ended
September 25, 2009 and September 26, 2008, respectively. Our net periodic
expense, also excluding the settlement charges, is expected to be approximately
$0.5 million for 2009. In the nine months ended September 25, 2009,
we contributed approximately $6.1 million to our principal defined benefit plans
and we expect to contribute approximately $11.0 million in the 2009 fiscal year.
Of the $11.0 million we expect to contribute, approximately $4.9 million is
contingent upon the sale of substantially all of the Electrical
business.
(8) Debt
We were
in compliance with the covenants of our credit agreement as of September 25,
2009. On June 8, 2009, we finalized an amendment to our credit
agreement that allowed for the divestiture of Medtech and Electrical and
adjusted certain debt covenants and other provisions in connection with such
divestitures (“the amendment”).
On
February 20, 2009, we amended and restated our February 28, 2008 credit
agreement (“restated credit agreement”). The restated credit
agreement, as further amended on June 8, 2009, provided for a $200.0 million
senior term loan facility and a senior revolving credit facility consisting of
an aggregate U.S. dollar-equivalent revolving line of credit in the principal
amount of up to $175.0 million, and provides for borrowings in U.S. dollars,
euros and yen, including individual sub limits of:
-
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;
and
- a
Singapore sub-facility not to exceed the U.S. dollar equivalent of $29.2
million.
The $200 million senior term loan
facility was retired in connection with the Medtech divestiture during the
second quarter of 2009, but the $175.0 million senior revolving credit facility
and all related terms remain in effect. However, upon the completion
of the Electrical disposition, the $29.2 million Singapore sub-facility will be
eliminated, thereby decreasing our total line of credit to $145.8
million.
Technitrol,
Inc. and Subsidiaries
Notes to Unaudited Consolidated
Financial Statements, continued
(8) Debt,
continued
Neither the restated credit agreement
nor the amendment permit us to increase the total commitment without the consent
of our lenders. Therefore, the total amount outstanding under the revolving
credit facility may not exceed $175.0 million, or $145.8 million after the
completion of the Electrical divestiture. Of the $175.0 million currently
available to borrow, the amount outstanding as of September 25, 2009 was $127.0
million.
Outstanding borrowings are subject to
leverage and fixed charges covenants, which are computed on a rolling
twelve-month basis as of the most recent quarter-end. Each covenant
requires the calculation of EBITDA according to a definition prescribed by the
restated credit agreement and the amendment. The restated credit
agreement’s leverage covenant requires our total debt outstanding to not exceed
the following multiples of our prior four quarters’ EBITDA:
Applicable
date
|
|
EBITDA
|
(Period or quarter
ended)
|
|
Multiple
|
March
2009 to December 2009
|
|
4.50x
|
March
2010
|
|
4.00x
|
June
2010
|
|
3.75x
|
September
2010
|
|
3.50x
|
Thereafter
|
|
3.00x
|
Upon the disposition of Electrical, the
amendment reduces our leverage covenant and requires that our total debt
outstanding cannot exceed the following multiples of our prior four quarters’
EBITDA:
Applicable
date
|
|
EBITDA
|
(Period or quarter
ended)
|
|
Multiple
|
September
2009
|
|
4.00x
|
December
2009
|
|
3.50x
|
March
2010
|
|
3.00x
|
Thereafter
|
|
2.75x
|
The
restated credit agreement’s fixed charges covenant requires that our EBITDA
exceed total fixed charges, as defined by the restated credit agreement, by the
following multiples:
Applicable
date
|
|
EBITDA
|
(Period or quarter
ended)
|
|
Multiple
|
September
2009 to March 2010
|
|
1.75x
|
June
2010 to December 2010
|
|
1.50x
|
Thereafter
|
|
1.25x
|
Upon the
disposition of Electrical, the amendment’s fixed charges covenant requires our
EBITDA to exceed total fixed charges, as defined by the amendment, by the
following multiples:
Applicable
date
|
|
EBITDA
|
(Period or quarter
ended)
|
|
Multiple
|
September
2009 to December 2009
|
|
1.25x
|
Thereafter
|
|
1.50x
|
Technitrol,
Inc. and Subsidiaries
Notes to Unaudited Consolidated
Financial Statements, continued
(8) Debt,
continued
The fee
on the unborrowed portion of the commitment ranges from 0.225% to 0.450% of the
total commitment, depending on the following debt-to-EBITDA ratios:
Total debt-to-EBITDA ratio
|
Commitment fee
percentage
|
Less
than 0.75
|
0.225
%
|
Less
than 1.50
|
0.250
%
|
Less
than 2.25
|
0.300
%
|
Less
than 2.75
|
0.350
%
|
Less
than 3.25
|
0.375
%
|
Less
than 3.75
|
0.400
%
|
Greater
than 3.75
|
0.450
%
|
The
interest rate for each currency’s borrowing is a combination of the base rate
for that currency plus a credit margin spread. The base rate is
different for each currency.
The
credit margin spread is maintained from the restated credit agreement to the
amendment. The percentage is the same for each currency and ranges from 1.25% to
3.25%, depending on the following debt-to-EBITDA ratios:
Total debt-to-EBITDA ratio
|
Credit margin spread
|
Less
than 0.75
|
1.25
%
|
Less
than 1.50
|
1.50
%
|
Less
than 2.25
|
2.00
%
|
Less
than 2.75
|
2.50
%
|
Less
than 3.25
|
2.75
%
|
Less
than 3.75
|
3.00
%
|
Greater
than 3.75
|
3.25
%
|
The
weighted-average interest rate, including the credit margin spread, was
approximately 3.3% as of September 25, 2009.
Also,
effective for dividends after February 2009, both the restated credit agreement
and the amendment limit our annual cash dividends to $5.0 million while our debt
outstanding exceeds two and one-half times our EBITDA. Also, there are covenants
specifying capital expenditure limitations and other customary and normal
provisions.
Multiple
subsidiaries, both domestic and international, have guaranteed the obligations
incurred under the restated credit agreement and the amendment. In
addition, certain domestic and international subsidiaries have pledged the
shares of certain subsidiaries, as well as selected accounts receivable,
inventory, machinery and equipment and other assets as collateral. If we default
on our obligations, our lenders may take possession of the collateral and may
license, sell or otherwise dispose of those related assets in order to satisfy
our obligations.
During 2009, we incurred approximately
$4.9 million in conjunction with the negotiation and finalization of both the
amendment and the restated credit agreement. In addition, we recorded
a charge of approximately $5.5 million to impair the capitalized fees and costs
for our February 28, 2008 credit agreement and its related
amendments. Of the $5.5 million of charges, $4.3 million was
allocated to discontinued operations on a pro-rata basis for the nine months
ended September 25, 2009, based upon the debt expected to be retired from the
dispositions compared to our total debt outstanding. Each of these
fees is classified as interest expense on our Consolidated Statement of
Operations.
Technitrol, Inc. and
Subsidiaries
Notes to Unaudited Consolidated
Financial Statements, continued
(8) Debt,
continued
We had four standby letters of credit
outstanding at September 25, 2009 in the aggregate amount of $1.9 million
securing transactions entered into in the ordinary course of
business.
(9) Accounting for 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, generally conditional on continued employment for a
specified period. Another component is stock options. The following
table presents the amount of stock-based compensation expense included in the
Consolidated Statements of Operations during the three and nine months ended
September 25, 2009 and September 26, 2008 (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
25,
2009
|
|
|
September
26,
2008
|
|
|
September
25,
2009
|
|
|
September
26,
2008
|
|
Restricted
stock
|
|
$ |
570 |
|
|
$ |
835 |
|
|
$ |
1,084 |
|
|
$ |
2,160 |
|
Stock
options
|
|
|
-- |
|
|
|
50 |
|
|
|
-- |
|
|
|
150 |
|
Total
stock-based compensation included in selling,
general and administrative expenses
|
|
|
570 |
|
|
|
885 |
|
|
|
1,084 |
|
|
|
2,310 |
|
Income
tax benefit
|
|
|
(200 |
) |
|
|
(275 |
) |
|
|
(379 |
) |
|
|
(704 |
) |
Total
after-tax stock-based compensation expense
|
|
$ |
370 |
|
|
$ |
610 |
|
|
$ |
705 |
|
|
$ |
1,606 |
|
Restricted
Stock: The value of restricted stock issued is based on the
market price of the stock at the award date. We retain the shares
until the continued employment requirement has been met. The market
value of the shares at the date of grant is charged to expense on a
straight-line basis over the vesting period. Cash awards, which are
intended to assist recipients with their resulting personal tax liability, are
based on the market value of the shares and are accrued over the vesting
period. The expense related to the cash award is fixed and is based
on the value of the awarded stock on the grant date if the recipient makes an
election under Section 83(b) of the Internal Revenue Code. If the
recipient does not make an election under Section 83(b), our accrual relating to
the cash award will fluctuate based on the current market value of the shares
subject to limitation as set forth in our restricted stock plan.
A summary
of the restricted stock activity is as follows (in thousands, except per share
data):
|
|
Shares
|
|
|
Weighted
Average
Stock
Grant
Price
(Per Share)
|
|
Nonvested
at December 26, 2008
|
|
|
208 |
|
|
$ |
24.59 |
|
Granted
|
|
|
131 |
|
|
$ |
5.48 |
|
Vested
|
|
|
(75 |
) |
|
$ |
24.13 |
|
Forfeited/cancelled
|
|
|
(10 |
) |
|
$ |
22.89 |
|
Nonvested
at September 25, 2009
|
|
|
254 |
|
|
$ |
13.37 |
|
|
|
|
|
|
|
|
|
|
Technitrol,
Inc. and Subsidiaries
Notes to Unaudited Consolidated
Financial Statements, continued
(9) Accounting for stock-based
compensation, continued
As of
September 25, 2009, there was approximately $1.6 million of total unrecognized
compensation cost related to restricted stock grants. This
unrecognized compensation is expected to be recognized over a weighted-average
period of approximately 1.5 years.
Stock
Options: Stock options were granted at no cost to the employee and were
not granted at a price lower than the fair market value at date of
grant. These options expire seven years from the date of grant and
vest equally over four years. There have been no options granted
since 2004. We value our stock options according to the fair value method using
the Black-Scholes option-pricing model.
A summary
of the stock options activity is as follows (in thousands, except per share
data):
|
|
Shares
|
|
|
Weighted
Average
Option
Grant
Price
(Per Share)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
as of December 26, 2008
|
|
|
125 |
|
|
$ |
17.99 |
|
|
|
|
Granted
|
|
|
-- |
|
|
|
-- |
|
|
|
|
Exercised
|
|
|
-- |
|
|
|
-- |
|
|
|
|
Forfeited/cancelled
|
|
|
(43 |
) |
|
$ |
18.90 |
|
|
|
|
Outstanding
as of September 25, 2009
|
|
|
82 |
|
|
$ |
17.53 |
|
|
|
-- |
|
Exercisable
at September 25, 2009
|
|
|
82 |
|
|
$ |
17.53 |
|
|
|
-- |
|
As of
September 25, 2009, all compensation cost related to option grants had been
recognized. During the nine months ended September 25, 2009, no stock
options were exercised. For the nine months ended September 26, 2008,
both the cash received on stock options exercised and the intrinsic value of
stock options exercised were less than $0.1 million. Tax benefits
from the deductions in excess of the compensation cost of stock options
exercised are required to be classified as a cash inflow from
financing. There was no effect on the current year net cash provided
by operating activities or net cash used in financing activities as there were
no stock options exercised during the nine months ended September 25,
2009. We have not capitalized any stock-based compensation costs into
inventory or other assets during the nine months ended September 25,
2009.
(10) Earnings per
share
Basic
earnings per share are calculated by dividing net earnings by the weighted
average number of common shares outstanding, excluding restricted shares which
are considered to be contingently issuable. For calculating diluted earnings per
share, common share equivalents are added to the weighted average number of
common shares outstanding. Common share equivalents are computed based on the
number of outstanding options to purchase common stock and restricted shares as
calculated using the treasury stock method. However, in periods when
we have a net loss or the exercise price of stock options, by grant, are greater
than the actual stock price as of the end of the period, those common share
equivalents will be excluded from the calculation of diluted earnings per
share. As a result of positive net earnings from continuing
operations, we included approximately 64,000 common share equivalents
for the three months ended September 25, 2009. For the nine months ended
September 25, 2009, there were no common share equivalents included in the
calculation of diluted earnings per share due to our net loss. There
were approximately 52,000 and 92,000 common share equivalents for the three and
nine months ended September 26, 2008, respectively. We had
approximately 82,000 and 130,000 stock options outstanding as of September 25,
2009 and September 26, 2008, respectively. There were unvested
restricted shares
Technitrol, Inc. and
Subsidiaries
Notes to Unaudited Consolidated
Financial Statements, continued
(10) Earnings per share,
continued
outstanding of approximately 254,000 and 222,000 as of September
25, 2009 and September 26, 2008, respectively.
Unvested
share-based payment awards that contain non-forfeitable rights to dividends or
dividend equivalents are required to be treated as participating securities.
Under our restricted stock plan, non-forfeitable dividends are paid on unvested
shares of restricted stock, which meets the qualifications of participating
securities and requires the two-class method of calculating earnings per share
to be applied. We have calculated basic and diluted earnings per share under
both the treasury stock method and the two-class method. For the
three and nine months ended September 25, 2009 and September 26, 2008, there
were no significant differences in the per share amounts calculated under the
two methods, therefore, we have not presented the reconciliation of earnings per
share under the two class method. Earnings per share calculations are
as follows (in thousands,
except per share amounts):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
25,
2009
|
|
|
September
26,
2008
|
|
|
September
25,
2009
|
|
|
September
26,
2008
|
|
Net
earnings (loss) from continuing operations
|
|
$ |
2,274 |
|
|
$ |
9,678 |
|
|
$ |
(76,114 |
) |
|
$ |
21,058 |
|
Net
loss from discontinued operations
|
|
|
(13,358 |
) |
|
|
(4,123 |
) |
|
|
(117,523 |
) |
|
|
(896 |
) |
Less:
Net earnings attributable to
non-controlling interest
|
|
|
352 |
|
|
|
204 |
|
|
|
451 |
|
|
|
598 |
|
Net
(loss) earnings attributable to Technitrol, Inc.
|
|
$ |
(11,436 |
) |
|
$ |
5,351 |
|
|
$ |
(194,088 |
) |
|
$ |
19,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
40,886 |
|
|
|
40,774 |
|
|
|
40,831 |
|
|
|
40,734 |
|
Continuing
operations
|
|
$ |
0.05 |
|
|
$ |
0.23 |
|
|
$ |
(1.88 |
) |
|
$ |
0.50 |
|
Discontinued
operations
|
|
|
(0.33 |
) |
|
|
(0.10 |
) |
|
|
(2.88 |
) |
|
|
(0.02 |
) |
Per
share amount
|
|
$ |
(0.28 |
) |
|
$ |
0.13 |
|
|
$ |
(4.76 |
) |
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
(loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
40,950 |
|
|
|
40,826 |
|
|
|
40,831 |
|
|
|
40,826 |
|
Continuing
operations
|
|
$ |
0.05 |
|
|
$ |
0.23 |
|
|
$ |
(1.88 |
) |
|
$ |
0.50 |
|
Discontinued
operations
|
|
|
(0.33 |
) |
|
|
(0.10 |
) |
|
|
(2.88 |
) |
|
|
(0.02 |
) |
Per
share amount
|
|
$ |
(0.28 |
) |
|
$ |
0.13 |
|
|
$ |
(4.76 |
) |
|
$ |
0.48 |
|
(11) Severance, impairment and
other associated costs
As a result of our continuing focus on
both economic and operating profit, we continue to aggressively size our
operations so that costs are optimally matched to current and anticipated future
revenue and unit demand. The amounts and timing of charges will
depend on specific actions taken. The actions taken include closures,
plant relocations, asset impairments and reductions in personnel worldwide, and
have resulted in the elimination of a variety of costs. The majority
of the non-impairment related 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 from disposed equipment and rental payments from the
termination of lease agreements. We continued restructuring
initiatives during the nine months ended September 25, 2009 that were
implemented in the years ended December 26, 2008 and December 28, 2007 in order
to reduce our cost structure and capacity.
Technitrol,
Inc. and Subsidiaries
Notes to Unaudited Consolidated
Financial Statements, continued
(11) Severance, impairment and
other associated costs, continued
During
the nine months ended September 25, 2009, we determined that approximately $71.0
million of goodwill was impaired. Refer to Note 5 for further
details. Additionally, we incurred a charge of $11.9 million for a
number of cost reduction actions. These accruals include severance
and related payments of $3.0 million and fixed asset impairments of $8.9
million. The impaired assets include production lines associated with
products that have no expected future demand and two properties which were
disposed.
Of the $3.0 million severance charges
incurred during the nine months ended September 25, 2009, approximately $1.1
million related to the transfer of production operations from our facilities in
Europe and North Africa to China. This program began in 2007 and is
now substantially completed. The $1.1 million consists of a $1.6
million charge to adjust the liability to reflect the final negotiated benefits
for approximately 45 employees which was reduced by a $0.5 million adjustment in
the accrual to reflect final benefit projections for approximately 90
employees.
During the year ended December 26,
2008, we initiated a restructuring program at our European, Asian and North
American operations to reduce company-wide costs, which included direct and
indirect labor reductions. During the nine months ended September 25,
2009, we incurred a charge for severance of $1.6 million and other associated
costs of $0.3 million in conjunction with this program. There were
approximately 320 employees severed under these programs. We expect these plans
to be completed by the end of 2009.
The
change in our accrual related to severance, impairment and other associated
costs is summarized as follows (in millions):
|
|
Electronics
|
|
|
|
|
|
Balance
accrued at December 26, 2008
|
|
$ |
7.5 |
|
|
|
|
|
|
Expensed
during the nine months ended September 25, 2009
|
|
|
11.9 |
|
Severance
payments
|
|
|
(7.1 |
) |
Other
associated costs
|
|
|
(0.9 |
) |
Fixed
asset impairments and currency translation adjustments
|
|
|
(9.8 |
) |
|
|
|
|
|
Balance
accrued at September 25, 2009
|
|
$ |
1.6 |
|
(12) Financial
instruments
We utilize derivative financial
instruments, primarily forward exchange contracts, to manage foreign currency
risk. While these instruments are subject to fluctuations in value, such
fluctuations are generally offset by the value of the underlying exposure being
hedged. During the nine months ended September 25, 2009, we utilized forward
contracts to sell forward U.S. dollars to receive Danish krone and to sell
forward euro to receive Chinese renminbi. These contracts were used
to mitigate the risk of currency fluctuations at our former operations in
Denmark and our current operations in the Peoples Republic of China
(“PRC”). At September 25, 2009, we had eight foreign exchange forward
contracts outstanding to sell forward approximately 8.0 million euro, or
approximately $11.7 million, to receive Chinese renminbi. For the
nine months ended September 25, 2009 and September 26, 2008, no financial
instruments were designated as hedges.
Technitrol,
Inc. and Subsidiaries
Notes to Unaudited Consolidated
Financial Statements, continued
(12) Financial
instruments, continued
The following presents the
classifications and fair values of our derivative instruments not designated as
hedges in our Consolidated Balance Sheets and our Consolidated Statements of
Operations (in thousands):
Consolidated
Balance Sheets
(Asset
derivative)
Derivatives |
|
Classification
|
|
September
25, 2009
|
|
|
September
26, 2008
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange forward contracts
|
|
Prepaid
expenses and other current assets |
|
$ |
(0.9 |
) |
|
$ |
0.1 |
|
Total
|
|
|
|
$ |
(0.9 |
) |
|
$ |
0.1 |
|
Consolidated
Statements of Operations
(Unrealized/realized
gains/(losses))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
|
September
25,
|
|
|
September
26,
|
|
|
September
25,
|
|
|
September
26,
|
|
Derivatives
|
|
Classification
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange forward
contracts
|
|
Other
income (expense),
net
|
|
$ |
(0.6 |
) |
|
$ |
0.1 |
|
|
$ |
(0.6 |
) |
|
$ |
0.1 |
|
Total
|
|
|
|
$ |
(0.6 |
) |
|
$ |
0.1 |
|
|
$ |
(0.6 |
) |
|
$ |
0.1 |
|
We have categorized our recurring
financial assets and liabilities on our Consolidated Balance Sheets into a
three-level fair value hierarchy based on inputs used for valuation, which are
categorized as follows:
Level 1
– Financial assets and liabilities whose values are based on quoted
prices for identicalassets or liabilities in an active public
market.
Level 2
– Financial assets and liabilities whose values are based on quoted
prices in markets thatare not active or a valuation using model inputs that are
observable for substantially the full term ofthe asset or
liability.
Level 3
– Financial assets and liabilities whose values are based on prices
or valuation techniquesthat require inputs that are both unobservable and
significant to the overall fair value measurement.These inputs reflect
management’s assumptions and judgments when pricing the asset or
liability.
Technitrol,
Inc. and Subsidiaries
Notes to Unaudited Consolidated
Financial Statements, continued
(12) Financial
instruments, continued
The following table presents our fair
value hierarchy for those financial assets and liabilities measured at fair
value on a recurring basis in our Consolidated Balance Sheets as of September
25, 2009 (in millions):
|
|
September
25,
2009
|
|
|
Quoted
Prices
In
Active Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities (1)
|
|
$ |
7.2 |
|
|
$ |
7.2 |
|
|
$ |
-- |
|
|
$ |
-- |
|
Other
(2)
|
|
|
(0.9 |
) |
|
|
-- |
|
|
|
(0.9 |
) |
|
|
-- |
|
Total
|
|
$ |
6.3 |
|
|
$ |
7.2 |
|
|
$ |
(0.9 |
) |
|
$ |
-- |
|
(1) Amounts
include grantor trust investments in our Consolidated Balance
Sheets.
(2) Amounts
include forward contracts outstanding in our Consolidated Balance
Sheets.
We currently have non-financial assets
and non-financial liabilities that are required to be measured at fair value on
a recurring basis. Management believes that there is no material risk
of loss from changes in inherent market rates or prices in our financial
instruments due to the immateriality of our financial instruments in relation to
our Consolidated Balance Sheets.
Our financial instruments, including
cash and cash equivalents and long-term debt, our financial assets, including
accounts receivable and inventories, and our financial liabilities, including
accounts payable and accrued expenses, are exposed to both interest rate risk
and foreign currency risk. We have policies relating to these
financial instruments and their associated risks and continually monitor
compliance with these policies. All of our financial instruments and
financial assets approximate fair value, as presented on our Consolidated
Balance Sheets. Particularly, all the outstanding borrowings under
our current credit facilities have variable interest rates that approximate
their fair value.
(13) Business segment
information
For the three and nine months ended
September 25, 2009 and September 26, 2008, there were immaterial amounts of
intersegment revenues eliminated in consolidation. During the second quarter of
2009, the basis for determining segment financial information changed due to the
classification of our Electrical segment as a held-for-sale discontinued
operation. We currently have one reportable segment,
Electronics. As a result, segment disclosures required under ASC
Topic 280, Segment
Reporting (“ASC 280”) are no longer required. We will continue
to disclose enterprise-wide information in our Annual Report on Form 10-K to the
extent required.
Item 2: 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 the “Risk Factors”
section of this report on pages 35 through 43.
Critical
Accounting Policies
The
preparation of financial statements and related disclosures in conformity with
U.S. generally accepted accounting principles 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 in our Annual Report on Form 10-K for the period ended
December 26, 2008 describes the significant accounting policies and methods used
in the preparation of the Consolidated Financial Statements including certain
judgments, assumptions and estimates.
The
following critical accounting policies are impacted significantly by judgments,
assumptions and estimates and were used in the preparation of the Consolidated
Financial Statements:
· Goodwill
and identifiable intangibles;
· Contingency
accruals; and
· Severance,
impairment and other associated costs.
Actual
results could differ from these estimates. Please see information concerning our
critical accounting policies in Item 7 – Management’s Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report on Form 10-K
for the period ended December 26, 2008.
Overview
In
February 2009, we announced our intention to explore monetization alternatives
with respect to our Electrical segment, a producer of a full array of precious
metal electrical contact products that range from materials used in the
fabrication of electrical contacts to completed contact
subassemblies. During the second quarter of 2009, we determined that
Electrical met the qualifications to be reported as a discontinued operation in
our Consolidated Statement of Operations for all periods
presented. Also, the assets and liabilities of Electrical are
considered held for sale and reported as current on our Consolidated Balance
Sheet. Whether in whole or in part, we expect a disposition to be
completed by the end of June 2010. In addition, on June 25, 2009, we
divested Electronics’ Medtech components business for approximately $201.4
million. These proceeds are subject to final working capital and financial
indebtedness adjustments. All open customer orders were transferred at the date
of sale. We have no material continuing involvement with the operations of
Medtech after June 25, 2009.
As a
result of reporting Electrical as a discontinued operation, we only have one
reportable segment, our Electronic Components Group, which we refer to as
Electronics and is known as Pulse in its markets. Electronics is a
world-wide producer of precision-engineered electronic components. 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 annual revenues of our primary
markets and our share of those markets relative to our competitors.
General. We define
net sales as gross sales less returns and allowances. We sometimes refer to net
sales as revenue.
Historically,
our gross margin has been significantly affected by acquisitions, product mix
and capacity utilization. Our markets are characterized by relatively
short product life cycles. As a result, significant product turnover
occurs each year and, subsequently, there are frequent variations in the prices
of products sold. Due to the constantly changing quantity of part
numbers we offer and frequent changes in our average selling prices, we cannot
isolate the impact of changes in unit volume and unit prices on our net sales
and gross margin in any given period. Changes in foreign exchange
rates, especially the U.S. dollar to the euro and the U.S. dollar to the Chinese
renminbi also affect U.S. dollar reported sales.
We
believe our focus on acquisitions, technology and cost reduction programs
provides us opportunities for future growth in net sales and operating
profit. However, unfavorable economic and market conditions may
result in a reduction in demand for our products, thus, negatively impacting our
financial performance.
Acquisitions. Acquisitions
have been an important part of our growth strategy. In many cases,
our moves into new product lines and extensions of our existing product lines or
markets have been facilitated by acquisitions. Our acquisitions continually
change our product mix. We have made numerous acquisitions in recent
years which have broadened our product offerings in new or existing
markets. We may pursue additional acquisition opportunities in the
future.
Divestitures. We engage in
divestitures to streamline our operations, focus on our core businesses and
strengthen our financial position. For example, in June 2009 we divested our
Medtech components business for approximately $201.4 million, subject to final
working capital and financial indebtedness adjustments. Medtech was
purchased as part of the Sonion acquisition. Also, in April 2009 we divested our
non-core MEMS business for an amount immaterial to our Consolidated Financial
Statements. In February 2009, we announced our intention to explore
monetization alternatives with respect to Electrical. As of September
25, 2009, the assets and liabilities of Electrical and the remaining assets and
liabilities of MEMS are classified as held for sale in our Consolidated Balance
Sheet. Medtech, MEMS and Electrical are classified as discontinued
operations on our Consolidated Statements of Operations for all periods
presented.
Technology. Our
products must evolve along with changes in technology, availability and price of
raw materials, design and preferences of the end users of our products. Also,
regulatory requirements occasionally impact the design and functionality of our
products. We address these conditions, as well as our customers’ demands, by
continuing to invest in product development and by maintaining a diverse product
portfolio which contains both mature and emerging technologies.
Management
Focus. Our executives focus on a number of important metrics
to evaluate our financial condition and operating performance. For
example, we use revenue growth, gross profit as a percentage of revenue,
operating profit as a percentage of revenue and economic profit as performance
measures. We define economic profit as after-tax operating profit
less our cost of capital. Operating leverage, or incremental
operating profit as a percentage of incremental sales, is also reviewed, as this
reflects the benefit of absorbing fixed overhead and operating
expenses. In evaluating working capital management, liquidity and
cash flow, our executives also use performance measures such as free cash flow,
days sales outstanding, days payables outstanding, inventory turnover and cash
conversion efficiency. Additionally, as the continued success of our business is
largely dependent on meeting and exceeding customers’ expectations,
non-financial performance measures relating to product development, on-time
delivery and quality assist our management in monitoring customer satisfaction
on an on-going basis.
Cost Reduction
Programs. As a result of our focus on both economic and
operating profit, we continue to aggressively size our operations so that
capacity is optimally matched to current and anticipated future revenues and
unit demand. Future expenses associated with these programs will depend on
specific
actions
taken. Actions taken over the past several years such as
divestitures, plant closures, plant relocations, asset impairments and reduction
in personnel at certain locations have resulted in the elimination of a variety
of costs. The majority of the non-impairment related costs that were
eliminated represent the annual salaries and benefits of terminated employees,
including both those related to manufacturing and those providing selling,
general and administrative services. Also, we’ve had depreciation savings from
disposed equipment and rental payments from the termination of lease
agreements. We have also reduced overhead costs as a result of
relocating factories to lower-cost locations. Savings from these
actions will impact cost of sales and selling, general and administrative
expenses. However, the timing of such savings may not be apparent due
to many factors such as unanticipated changes in demand, changes in unit selling
prices, operational challenges or changes in operating strategies.
During
the nine months ended September 25, 2009, we determined that approximately $71.0
million of our wireless group’s goodwill was impaired. Refer to Note
5 in the Notes to the Unaudited Consolidated Financial Statements for further
details. Additionally, we incurred a charge of $11.9 million for a
number of cost reduction actions. These accruals include severance
and related payments of $3.0 million and fixed asset impairments of $8.9
million. The impaired assets include production lines associated with
products that have no expected future demand and two properties which were
disposed.
During
the year ended December 26, 2008, we determined that $310.4 million of goodwill
and other intangibles were impaired, including $170.3 goodwill and identifiable
intangibles of a discontinued operation. Additionally, we incurred a
charge of $13.2 million to our continuing operations for a number of cost
reduction actions. These accruals include severance and related
payments and other associated costs of $5.5 million resulting from the
termination of manufacturing and support personnel at Electronics’ operations
primarily in Asia, Europe and North America and $4.1 million of other costs
primarily resulting from the transfer of manufacturing operations from Europe
and North Africa to Asia. Additionally, we recorded fixed asset
impairments of $3.6 million.
International Operations. At
September 25, 2009, we had manufacturing operations in five countries, three of
which only manufacture Electrical products, and had significant net sales in
U.S. dollars, euros and Chinese renminbi. A majority of our sales in
recent years has been outside of the United States. Changing exchange
rates often impact our financial results and our period-over-period comparisons.
This is particularly true of movements in the exchange rate between the U.S.
dollar and the renminbi and the U.S. dollar and the euro and each of these and
other foreign currencies relative to each other. Sales and net
earnings denominated in currencies other than the U.S. dollar may result in
higher or lower dollar sales and net earnings upon translation for our U.S.
Consolidated Financial Statements. Certain divisions of our wireless
and power groups’ sales are denominated primarily in euros and
renminbi. Net earnings may also be affected by the mix of sales and
expenses by currency within each group. We may also experience a
positive or negative translation adjustment to equity because our investments in
non-U.S. dollar-functional subsidiaries may translate to more or less U.S.
dollars for our U.S. Consolidated Financial
Statements. Foreign currency gains or losses may also be
incurred when non-functional currency denominated transactions are remeasured to
an operation’s functional currency for financial reporting purposes. If a higher
percentage of our transactions are denominated in non-U.S. currencies, increased
exposure to currency fluctuations may result.
In order to reduce our exposure to
currency fluctuations, we may purchase currency exchange forward contracts
and/or currency options. These contracts guarantee a predetermined range of
exchange rates at the time the contract is purchased. This allows us to shift
the majority of the risk of currency fluctuations from the date of the contract
to a third party for a fee. In determining the use of forward
exchange contracts and currency options, we consider the amount of sales,
purchases and net assets or liabilities denominated in local currencies, the
currency to be hedged and the costs associated with the contracts. At
September 25, 2009, we had eight foreign exchange forward contracts outstanding
to sell forward approximately 8.0 million euro, or approximately $11.7 million,
to receive Chinese renminbi. The fair value of these forward
contracts was $(0.9) million as determined through use of Level 2 fair value
inputs. These contracts are used to mitigate the risk of currency
fluctuations at our Chinese operations.
Income Taxes. Our effective
income tax rate is affected by the proportion of our income earned in high-tax
jurisdictions, such as those in Europe and the U.S. and income earned in low-tax
jurisdictions, such as Hong Kong and the PRC. This mix of income can
vary significantly from one period to another. Additionally, our effective
income tax rate will be impacted from period to period by significant
transactions and the deductibility of severance, impairment, financing and other
associated costs. We have benefited over the years from favorable tax
incentives and other tax policies, however, there is no guarantee as to how long
these benefits will continue to exist. Also, changes in operations,
tax legislation, estimates, judgments and forecasts may affect our tax rate from
period to period.
Except in
limited circumstances, we have not provided for U.S. income and foreign
withholding taxes on our non-U.S. subsidiaries’ undistributed earnings. Such
earnings may include our pre-acquisition earnings of foreign entities acquired
through stock purchases, which, with the exception of approximately $40.0
million, are intended to be reinvested outside of the U.S.
indefinitely.
Results
of Operations
Three
months ended September 25, 2009 compared to the three months ended September 26,
2008
The table below presents our results
from continuing operations and the changes in those results from period to
period in both U.S dollars and percentage (in thousands):
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
Results
as %
|
|
|
|
September
25, |
|
|
September
26, |
|
|
Change |
|
|
Change
|
|
|
of
Net Sales |
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
2009
|
|
|
2008
|
|
Net
sales
|
|
$ |
101,381 |
|
|
$ |
168,974 |
|
|
$ |
(67,593 |
) |
|
|
(40.0 |
)% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost
of sales
|
|
|
74,154 |
|
|
|
126,339 |
|
|
|
52,185 |
|
|
|
41.3 |
|
|
|
(73.1 |
) |
|
|
(74.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
27,227 |
|
|
|
42,635 |
|
|
|
(15,408 |
) |
|
|
(36.1 |
) |
|
|
26.9 |
|
|
|
25.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
23,399 |
|
|
|
29,144 |
|
|
|
5,745 |
|
|
|
19.7 |
|
|
|
(23.1 |
) |
|
|
(17.2 |
) |
Severance,
impairment and other associated costs
|
|
|
2,619 |
|
|
|
4,860 |
|
|
|
2,241 |
|
|
|
46.1 |
|
|
|
(2.6 |
) |
|
|
(2.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
1,209 |
|
|
|
8,631 |
|
|
|
(7,422 |
) |
|
|
(86.0 |
) |
|
|
1.2 |
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(757 |
) |
|
|
(1,022 |
) |
|
|
265 |
|
|
|
25.9 |
|
|
|
(0.7 |
) |
|
|
(0.6 |
) |
Other
income (expense), net
|
|
|
3,190 |
|
|
|
(833 |
) |
|
|
4,023 |
|
|
|
483.0 |
|
|
|
3.1 |
|
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
before income taxes
|
|
|
3,642 |
|
|
|
6,776 |
|
|
|
(3,134 |
) |
|
|
(46.3 |
) |
|
|
3.6 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
1,368 |
|
|
|
(2,902 |
) |
|
|
(4,270 |
) |
|
|
(147.1 |
) |
|
|
(1.3 |
) |
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings from continuing operations
|
|
$ |
2,274 |
|
|
$ |
9,678 |
|
|
$ |
(7,404 |
) |
|
|
(76.5 |
)% |
|
|
2.3 |
% |
|
|
5.7 |
% |
Net Sales. Our
consolidated net sales decreased by 40.0% as a result of the decline in customer
demand resulting from the adverse developments in the global
economy. Specifically, decreased demand for certain Electronics’
wireless, network communications and power products negatively affected sales in
the third quarter of 2009 as compared to the same period of
2008. Also, a stronger U.S. dollar relative to
the euro experienced in the third quarter of
2009 versus the comparable period in the prior year resulted in lower U.S.
dollar reported sales.
Cost of Sales. As
a result of lower sales, our cost of sales decreased. Our
consolidated gross margin for the three months ended September 25, 2009 was
26.9% compared to 25.2% for the three months ended September 26,
2008. The primary factors that caused our consolidated gross margin
increase were the positive effects of cost-reducing and price-increasing
activities initiated in late 2008 as a response to the adverse conditions in the
global economy.
Selling, General and Administrative
Expenses. Total selling, general and administrative expenses
decreased primarily due to our overall emphasis on cost reducing measures
initiated in late-2008. Expenses were reduced in virtually all
areas. Intangible amortization expense declined compared to the 2008
period as a result of the impairment charges incurred in the fourth quarter of
2008. Partially offsetting these decreases were $1.2 million of
unplanned legal expenses and dispute settlements.
Research,
development and engineering expenses (“RD&E”) are included in selling,
general and administrative expenses. For the three months ended September 25,
2009 and September 26, 2008, respectively, RD&E was as follows (in thousands):
|
|
2009
|
|
|
2008
|
|
RD&E
|
|
$ |
7,022 |
|
|
$ |
9,538 |
|
Percentage
of sales
|
|
|
6.9 |
% |
|
|
5.6 |
% |
The
decrease in research, development and engineering expenses is due to cost
reducing measures initiated in late 2008. However, as a percentage of
sales, 2009 spending was at a higher level than the 2008 period. We
believe that future sales in the electronic components markets will be driven by
next-generation products. As a result, design and development activities with
our OEM customers continue at an aggressive pace.
Severance, Impairment and Other
Associated Costs. We recorded approximately $2.6 million of
severance and fixed asset impairments during the three months ended September
25, 2009. These charges primarily relate to writing down a property
held for sale prior to its disposal.
Interest. Net
interest expense decreased primarily as a result of decreased debt levels and
lower interest rates incurred during the three months ended September 25,
2009 as compared to the comparable period ended September 26,
2008. Interest expense on our outstanding loans was allocated between
continuing and discontinued operations on a pro-rata basis for the third
quarters of 2009 and 2008, based upon the debt expected to be retired from the
dispositions compared to total debt outstanding. Amortization of our
capitalized loan fees was also allocated in a similar manner.
Other. The change
from other expense to other income from the third quarter of 2008 to the
comparable period in 2009 is primarily attributable to net foreign exchange
gains of approximately $3.0 million realized during the three months ended
September 25, 2009, as compared to foreign exchange losses of approximately $0.8
million realized during the comparable period of 2008. The increase
in foreign exchange gains was due to the effects of the overall strengthening of
the U.S. dollar to euro in the third quarter of 2009 as compared to the same
period of 2008. Gains were also realized as a result of remeasuring
intercompany advances and loans into their respective functional
currencies.
Income Taxes. The
effective tax rate for the three months ended September 25, 2009 was 37.6%
compared to a benefit of (42.8)% for the three months ended September 26,
2008. The increase in the effective tax rate is primarily due to
certain losses and restructuring charges incurred by entities in high-tax
jurisdictions where the future tax benefit is unlikely to be
realized.
Nine
months ended September 25, 2009 compared to the nine months ended September 26,
2008
The table below presents our results
from continuing operations and the changes in those results from period to
period in both U.S dollars and percentage (in thousands):
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
Results
as % |
|
|
|
September
25, |
|
|
September
26, |
|
|
Change |
|
|
|
Change |
|
|
|
of
Net Sales |
|
|
|
2009
|
|
|
2008
|
|
|
$ |
|
|
|
% |
|
|
|
2009 |
|
|
|
2008 |
|
Net
sales
|
|
$ |
293,425 |
|
|
$ |
501,978 |
|
|
$ |
(208,553 |
) |
|
|
(41.5 |
)% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost
of sales
|
|
|
220,305 |
|
|
|
381,827 |
|
|
|
161,522 |
|
|
|
42.3 |
|
|
|
(75.1 |
) |
|
|
(76.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
73,120 |
|
|
|
120,151 |
|
|
|
(47,031 |
) |
|
|
(39.1 |
) |
|
|
24.9 |
|
|
|
23.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
66,503 |
|
|
|
93,136 |
|
|
|
26,633 |
|
|
|
28.6 |
|
|
|
(22.7 |
) |
|
|
(18.6 |
) |
Severance,
impairment and other associated costs
|
|
|
82,867 |
|
|
|
9,272 |
|
|
|
(73,595 |
) |
|
|
(793.7 |
) |
|
|
(28.2 |
) |
|
|
(1.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(expense) income
|
|
|
(76,250 |
) |
|
|
17,743 |
|
|
|
(93,993 |
) |
|
|
(529.7 |
) |
|
|
(26.0 |
) |
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(2,091 |
) |
|
|
(2,147 |
) |
|
|
56 |
|
|
|
(2.6 |
) |
|
|
(0.7 |
) |
|
|
(0.4 |
) |
Other
income, net
|
|
|
5,083 |
|
|
|
6,051 |
|
|
|
968 |
|
|
|
16.0 |
|
|
|
1.7 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
earnings from continuing
operations before
income taxes
|
|
|
(73,258 |
) |
|
|
21,647 |
|
|
|
(94,905 |
) |
|
|
(438.4 |
) |
|
|
(25.0 |
) |
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
2,856 |
|
|
|
589 |
|
|
|
(2,267 |
) |
|
|
(384.9 |
) |
|
|
(1.0 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) earnings from continuing
operations
|
|
$ |
(76,114 |
) |
|
$ |
21,058 |
|
|
$ |
(97,172 |
) |
|
|
(461.4 |
)% |
|
|
(26.0 |
)% |
|
|
4.2 |
% |
Net Sales. Our
consolidated net sales decreased by 41.5% as a result of the decline in customer
demand resulting from the adverse developments in the global
economy. Specifically, decreased demand for certain Electronics’
wireless, network communications and power products negatively affected sales in
the nine months ended September 25, 2009 as compared to the comparable period of
2008. Also, a stronger U.S. dollar relative to the euro experienced
during the nine months ended September 25, 2009 as compared to the same period
of 2008 resulted in lower U.S. dollar reported sales.
Cost of Sales. As
a result of lower sales, our cost of sales decreased. Our
consolidated gross margin for the nine months ended September 25, 2009 was 24.9
% compared to 23.9 % for the nine months ended September 26,
2008. The primary factors that caused our consolidated gross margin
increase were the positive effects of cost-reduction and price increasing
activities initiated in late 2008 as a response to the adverse conditions in the
global economy. Results for the nine months ended September 26, 2008
were also negatively affected by increased training and overtime costs caused by
a temporary decline in China’s workforce, which were partially offset by a
decline in operating leverage as a result of decreased sales of Electronics’
wireless, network communications and power products during 2009.
Selling, General and Administrative
Expenses. Total selling, general and administrative expenses
decreased primarily due to our overall emphasis on cost reducing measures
initiated in late-2008. Expenses were reduced in virtually all
areas. Also, intangible amortization expense declined compared to the
2008 period as a result of the impairment charges incurred in the fourth quarter
of 2008.
Research,
development and engineering expenses (“RD&E”) are included in selling,
general and administrative expenses. For the nine months ended September 25,
2009 and September 26, 2008, respectively, RD&E was as follows (in thousands):
|
|
2009
|
|
|
2008
|
|
RD&E
|
|
$ |
20,087 |
|
|
$ |
29,944 |
|
Percentage
of sales
|
|
|
|