Technitrol Inc. Q3 2009 Earnings Call Transcript

Technitrol Inc. (TNL)

Q3 2009 Earnings Call

November 2, 2009; 5:00 pm ET

Executives

Jim Papada - Chief Executive Officer

Drew Moyer - Chief Financial Officer

Michael Ginnetti - Chief Accounting Officer

David Stakun - Vice President of Corporate Communications

Analysts

Joe Wittine - Longbow Research

Sean Hannan - Needham & Co.

Michael Gallo - CL King

Presentation

Operator

Good afternoon and welcome to the Technitrol Inc. third quarter 2009 results conference call. All participants will be in a listen-only mode. (Operator Instructions)

At this time I’d like to turn the conference call over to David Stakun, Vice President of Corporate Communications. Mr. Stakun, you may begin.

David Stakun

Thank you. Good afternoon everyone. Welcome to Technitrol’s conference call to discuss the third quarter of 2009. With me are Jim Papada our CEO; Drew Moyer our CFO and Mike Ginnetti, the Chief Accounting Officer. In a moment Drew will summarize the results presented in our press release then Jim will quickly review the current business environment and our thoughts for the future.

After Jim’s brief remarks will take questions and we plan to finish up 5.45 pm Eastern. This conference is being recorded to provide replay service and instructions for getting the replay by phone and internet or in the press release. Finally keep in mind that today we will make forward-looking statements as defined in the 1995 Safe Harbor Law.

These statements are based on our best knowledge on November 2, 2009. Actual results may turnout to be materially different because they are subject to risks. The risk factors are discussed in our 10-Q for the June quarter of 2009 and when it’s filed later this week the September quarter of 2009.

With that I will turn it over to Drew.

Drew Moyer

Thanks, Dave. Revenues from continuing operations in the third quarter were $101 million up 10% from the second quarter, but as expected well below the third quarter of 2008. The year-over-year decreased[Author ID1: at Tue Nov 10 17:13:00 2009

] from the third quarter of last year reflects the global demand decline in most markets inflated by a 5% weaker euro on average compared with the third quarter of 2008.

Tables in our earnings release reconcile non-GAAP disclosures with the amounts shown in our GAAP financial statements. Non-GAAP amounts exclude severance impairment and associated costs. Please review these tables in connection with the financial results. Excluding severance and impairments primarily an impairment of unused real estate, operating profit was $3.8 million more than 50% better than $2.5 million in the second quarter.

We continue to realize the benefits of production transfers to lower cost locations and our companywide cost reduction efforts, despite capacity challenges in China and higher than expected legal and dispute settlement expenses, which we do not expect to reoccur. In the third quarter we also absorbed the full impact of added costs from discontinuing furloughs and temporary pay reductions effective on July 1.

U.S. GAAP loss per diluted share was $0.28 for the third quarter. Included was a sizeable loss from discontinued operations primarily the result of asset write downs at Medtech AMI Doduco to estimated disposal values, adjustments to certain liabilities and an allocation of interest expense on our debt. The amount of this loss belies the fact that our electrical business, which we still operate, generated positive EBITDA in the third quarter.

We are pleased to note that the electrical business has begun experiencing a demand recovery stronger than we originally expected leading to stronger than expected operating results, which we expect will continue to improve in the coming quarters. Excluding, the discontinued operations, tax effective severance impairments and other adjustments non-GAAP earnings were $0.11 per diluted share compared with a loss of $0.05 in the previous quarter.

This improvement reflects better operating profit and favorable foreign exchange effects compared with the second quarter. Third quarter EBITDA was $8.4 million up 22% from the second quarter. Our relatively high effective tax rate for the quarter reflects the unwinding of a deferred benefit from cumulative operating losses in a high tax jurisdiction. We made the determination that we will not realize a tax benefit for these losses in the future.

Our cash balance at the end of the quarter was $39.5 million and debt declined by $8 million during the quarter. We retired a term loan related to discontinued operations during the third quarter. Operating cash flow was $9.2 million for the quarter and free cash flow was $8.9 million. This reflects aggressive working capital management and just under $300,000 in CapEx, consistent with our drive to conservative cash and funds only the most worthy projects.

Driving the strong cash flow in the third quarter was 21% reduction in working capital. We are in compliance with covenants of our credit agreement and expect to remain so. On October 16, we paid a dividend of $2.5 per share and as noted in the release, the Board has to clear a similar payout to be made on January 15 of next year.

Jim will now expand on the current business environment.

Jim Papada

Thank you, Drew. We continue to be generally satisfied with the improving demand environmental markets and we continue to maintain our efforts to maximize operating profit in cash flow as our markets begin to recover. The third quarter volumes, as Drew mentioned, validated our belief at the worst of the recent economic hell is behind us.

So in Q3, we ended the temporary non-paid furlough program instituted earlier in the year and restored forfeited work hours to our remaining non-manufacturing full time employees. However, we’re trying to look at the world clearly and honestly and in doing some, we’ll remain foggy as the extent and duration of the recover as it lies ahead.

We also continue to make progress in our efforts to divest the electrical contact business as Drew mention, the process is taken on more complexity due to the variety of buyers in the mix and lack of uniformity as to who wants to buy what. In the meantime, they [Author ID1: at Tue Nov 10 17:36:00 2009

]we [Author ID1: at Tue Nov 10 17:36:00 2009

]were pleased with the level of interest and we remain quite optimistic about completing a transaction in the month.

Now to the third quarter results, as we noted in our release, revenues in the third quarter improved sequentially across all of our product lines to one extent to another. In some markets the recovery is slow and in others it’s pretty frothy. It’s hard to imagine that the future will be up and away, however, given the employments stats projections we and you are seeing in the news media.

In raw percentage terms, we saw the sharpest revenue increase in our power business, where sales were up almost 24% quarter-over-quarter. Driving the jump was to start of a recovery of automotive components shipments, now that our China factory is up and running.

Although in automotive, the downturn had much more to do with component re-qualification after moving to China then with the ultimate demand. Also, driving power revenues was a strong up tick in demand for power management solutions. As we know, power management is all the rage and we’ll likely remain strong in the years to come to one extent to another.

In the communications product group, wireline networking components were up about 13% from the previous quarter, but that number understates the real onslaught of demand in this area, had it not been for capacity constraints that all suppliers are now dealing with in China, network revenues would have increased even more from Q2.

As it happens, production of wireline components is among the most labor intensive of everything we do and the market for production labor in China right now is very tight and very competitive as we and other companies like us attempt to ramp our capacity backup quickly. Luckily for us, we have moved most of this capacity to Western China, where the labor markets while hot are not scalding red hot as they are in Southern China, where our principal competitor is struggling mightily with this issue.

We expect some capacity challenges will remain with us diminishing though through Q4 and we expect impact on our revenues and profits to lessen this time. The networking industry currently believes that much of today’s installed base of information technology is due for replacement, especially because upgrades have been delayed by the recession. So we expect with this business too. We’ll also continue to be strong well into next year.

The other side of the communication product group is our wireless components business where demand trends have been more tempered. We were very pleased with the recent performance of our wireless device antenna lines, which serve make as a GPS, WiFi, WiMax, and automated utility metering systems, a [Author ID1: at Tue Nov 10 17:38:00 2009

]to [Author ID1: at Tue Nov 10 17:38:00 2009

]name just a few. We’re also happy about the growing demand for our acoustical solution from mobile devices. Pulse has done a terrific job for it growing these lines of business, both of which did very well in Q3.

Meanwhile, our mobile handset antenna business is in transmission. Shipments of our handset products were flat from Q3 owing to the fact that a major OEM customer has begun a shift in development and production of full set handset modules to a select few manufacturing partners.

This is part of an overall effort to reduce costs by sourcing entire handsets including the supply of components within them, from the single source as opposed to the current model, in which suppliers like us negotiate prices with the OEM and then each of us separately provides components to the handset manufacture for assembly into a handset module with each supplier and handset manufacturer marking up its goods and services.

This OEM has decided that software applications are far more important than hardware and issuing this strategy to drive that point. The transition is expected to take place over several years and it will affect whether and how we support these OEM’s products. It is unclear at the moment whether the strategy will ultimately be successful. There are those we [Author ID1: at Tue Nov 10 17:39:00 2009

]who [Author ID1: at Tue Nov 10 17:39:00 2009

]will [Author ID1: at Tue Nov 10 17:39:00 2009

]believe it cannot work and if it’s successful to what extent.

Nevertheless, we are acting under the assumption at this changeable eventually take place successfully and we’re addressing it by means of intensive efforts to increase penetration at other handset OEMs, which we expect will continue to source components directly from us and to increase our support for this OEM’s manufacturing sources, none of which possess the Antenna Technology and manufacturing processes that we do effect [Author ID1: at Tue Nov 10 17:39:00 2009

]a fact [Author ID1: at Tue Nov 10 17:39:00 2009

]that they readily of [Author ID1: at Tue Nov 10 17:40:00 2009

]knowledge.

Our goal is to develop the substantially wider customer base, not only for handset antennas, but also our non-cellular antennas and acoustical products. Frankly we believe that over the next few years these actions will leave us in a much better position than we are now. Now moving on to our third quarter profit performance, before special items operating profit from continuing operations improved more than 50% from the second quarter on a revenue increase of about 10%.

This improvement came despite higher cost due to the absence of the unpaid furlough and sure we savings we realized in the previous quarters and significant spending to speed up capacity expansion in the intensely competitive Chinese labor market I mentioned a moment ago. Also extra litigation expenses related to a patent case now settled in our favor and a general desire to beef up a few accruals at the end of Q3 reduced our operating profit by about $1.2 million.

It is quite clear the overall situation has improved market we in the last several weeks it is equally unclear as to what extent this improvement will advance as opposed to all study or cash and flow. We are committed to maintaining our low cost structures while pursuing those opportunities which can add incrementally to our operating profit no matter what happen. Our other overarching goal is to maximum cash flow and to that end I am please to say the pulse team is done a commendable job and [Author ID1: at Tue Nov 10 17:41:00 2009

]of [Author ID1: at Tue Nov 10 17:41:00 2009

]aggressively managing its working capital.

Despite a 10% revenue pickup from Q2 in continuing operations, we nevertheless reduce inventories by another 4% allowed receivables to increase less than 2% and increased payables 13% to more closely mirror receivables. As Drew mentioned our capital spending continues to be minimal, but we remain committed to the development of product lines that serve growing markets.

Fourth quarter spending will again below but above the run rate in the first nine months as we have invested a new three dimensional Antenna Technology to stay at the four [Author ID1: at Tue Nov 10 17:41:00 2009

]fore[Author ID1: at Tue Nov 10 17:41:00 2009

]fronts of innovative product offerings. Now a few thoughts about what we see in the fourth quarter. Clearly, we have come off the bottom point of market demand and so far we are encouraged by the general level of market recovery.

The fact remains that markets are very weak relative to the latter part of 2008 alone 2007 and how long they remain so will be the $64,000 question yet to be answered. I continue to stick with my view that recovery will continue that will be long and slow with steady improvement marked by occasional surges as well as occasional retreats and meaningful pickup in employment remains a year or no away.

During this meandering period however, some exciting trends in communication energy and automotive industries we server[Author ID1: at Tue Nov 10 17:42:00 2009

] will likely play leading rolls for us. These trends include greener more fuel-efficient automobiles, smart electric power grids managed with computers, wireless devices and networking equipment. Public policies mandating wireless or wire line internet access across the country.

More a [Author ID1: at Tue Nov 10 17:42:00 2009

]smart phones with larger antenna rays provided by more manufacturers and then overall increase in sophisticated communication and power equipment at developing nations particularly Indiana[Author ID1: at Tue Nov 10 17:42:00 2009

] and China. Overall, we currently expect fourth quarter revenues to increase slightly from the third quarter to between $103 million and $106 million. With the expected revenue increase in the reductions we have made to our cost structure, we continue to anticipate this portion[Author ID1: at Tue Nov 10 17:43:00 2009

]a disproportionate[Author ID1: at Tue Nov 10 17:43:00 2009

] at [Author ID1: at Tue Nov 10 17:43:00 2009

]increase in operating profit, with EBITDA of at least $9 million.

With that, we can open the call up to a few questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Joe Wittine from Longbow Research.

Joe Wittine - Longbow Research

Hi, good evening.

Jim Papada

Hello.

Drew Moyer

Hello.

Joe Wittine - Longbow Research

This is Joe, calling in for Shawn Harrison. First question, just a real quick question on the OpEx line, you mentioned that end of this quarter,[Author ID1: at Tue Nov 10 17:44:00 2009

] $1.2 million, that you don’t expect to recur just for modeling purposes, should we be modeling, I guess at [Author ID1: at Tue Nov 10 17:44:00 2009

]the current run rate,[Author ID1: at Tue Nov 10 17:44:00 2009

] minus $1.2 million,[Author ID1: at Tue Nov 10 17:44:00 2009

] or is there anything else going on that we should not [Author ID1: at Tue Nov 10 17:44:00 2009

]model [Author ID1: at Tue Nov 10 17:44:00 2009

]going ahead?

Drew Moyer

That’s a little bit of an awkward question, but I think what we said in the release pretty much speaks for itself and you need to decide that.

Joe Wittine - Longbow Research

I guess as a quick follow-up here on the handset customer. I recognize you probably won’t mention who the customer is. Just curious, is it a long term customer or someone that was from LK or was it more recent customer that came over with Sonion?

Drew Moyer

We didn’t have any customers for antenna devices that came with Sonion, because Sonion wasn’t in the antenna business.

Joe Wittine - Longbow Research

Okay, thanks for that and then I mean you gave pretty good commentary that it’s going to be a multiyear or pretty long transition, if in fact it does happen. I mean how do you expect it to happen, linearly I guess right now, I mean anything else you can add on that?

Jim Papada

I would say that, we’ve seen some activity on the part of our customer and we’ve seen some early setbacks on the part of the customer and its manufacturing sources to attempt to successfully pull this off and as a matter of fact, we’ve had to help them out a little bit or more than a little bit. W[Author ID1: at Tue Nov 10 17:46:00 2009

] w[Author ID1: at Tue Nov 10 17:46:00 2009

]e have had to help out with respect to some issues that have already arisen.

So again, it remains to be seen whether and to what extent this will be successful and frankly, as I mentioned, we’re proceeding as though this was absolutely going to be successful and concentrating our efforts in directions that we weren’t necessarily concentrating in before and I think that overall whether they are successful or unsuccessful we are going to end up here in a much better position than we started out in.

Joe Wittine - Longbow Research

Okay, thanks. I’ll hop back in queue.

Operator

Our next question comes from Sean Hannan from Needham & Co.

Sean Hannan - Needham & Co.

Yes, good evening. Thank you.

Jim Papada

Hello.

Sean Hannan - Needham & Co.

So just a follow-up on the wireless or on the antenna customer, there’s a customer where you do some direct and indirect business today, correct? You worked through some of the CN’s in order to provide them with product?

Jim Papada

Of course, yes, so otherwise we wouldn’t be talking about it?[Author ID1: at Tue Nov 10 17:48:00 2009

].[Author ID1: at Tue Nov 10 17:48:00 2009

]

Sean Hannan - Needham & Co.

Sure, well, is there a way if we can get a sense in terms of their size if we were to look at them the combined business for directly and indirectly. What does that represent today?

Jim Papada

We don’t disclose and have never disclosed information with respect to a single customer. I would say that it’s not insignificant, but it’s not the end of the world either.

Sean Hannan - Needham & Co.

Would it be fair to assume that we’d be over a 10% customer if this was all direct?

Jim Papada

Again, we’re not going to get into numbers.

Sean Hannan - Needham & Co.

Okay. So over the multiyear transition, you don’t essentially move all of your business in and lose this customer entirely, for its specific set of antennas. Can you explain a little bit more behind that?

Jim Papada

Let’s go back for a second, maybe it’s beneficial to explain how this business is conducted now. This customer like most customers really in this kind of business has a handset and that handset as you know has a variety of components there and so the way the business is currently conducted, the customers comes and with its engineering teams, it designs an antenna, which I provide and you provide a speaker and David Stakun provides engineers [Author ID1: at Tue Nov 10 17:49:00 2009

]hinges [Author ID1: at Tue Nov 10 17:49:00 2009

]and Drew Moyer, will provide back panels and Mike Ginnetti provides keypad, and somebody else provides steel.

We all negotiate with the OEM on price and then the OEM says to the manufacturer, you’re going to assemble all those things into a module we call sort of semi handset and so here is the price you’re going to pay to these guys and you figure out, how to get the stuff to your factory when you need to be [Author ID1: at Tue Nov 10 17:50:00 2009

]meet [Author ID1: at Tue Nov 10 17:50:00 2009

]my production schedule and then away we go.

Now the OEM comes along it’s I want to do that anymore, I want to buy a handset module from you, Mr. Manufacturer. As far as I’m concerned you can make all those parts yourself. You can design them and you can make them all yourself or, you can go and get yourself a whole budgets [Author ID1: at Tue Nov 10 17:50:00 2009

]bunch [Author ID1: at Tue Nov 10 17:50:00 2009

]of subcontractors and have them make them all themselves for you or you can do some of each and some of the other. [Author ID1: at Tue Nov 10 17:51:00 2009

][Author ID0: at Thu Nov 30 00:00:00 1899

]

[Author ID1: at Tue Nov 10 17:51:00 2009

]

I don’t particularly care, but I don’t want to deal with any of that anymore I want to be a software and applications design house and I want to buy the hardware from you. That’s the change that we’re talking about. So, assuming this was all successful where today we are currently designing antennas and negotiating prices with an OEM,[Author ID1: at Tue Nov 10 17:51:00 2009

] someday in the future will [Author ID1: at Tue Nov 10 17:51:00 2009

]we’ll [Author ID1: at Tue Nov 10 17:51:00 2009

]be designing antennas and [Author ID1: at Tue Nov 10 17:52:00 2009

]and [Author ID1: at Tue Nov 10 17:52:00 2009

]negotiating prices or just designing antennas or just negotiating prices[Author ID1: at Tue Nov 10 17:52:00 2009

] [Author ID1: at Tue Nov 10 17:53:00 2009

].[Author ID0: at Thu Nov 30 00:00:00 1899

]

[Author ID0: at Thu Nov 30 00:00:00 1899

]

We[Author ID1: at Tue Nov 10 17:53:00 2009

]’[Author ID1: at Tue Nov 10 17:53:00 2009

]re just designing antennas we[Author ID1: at Tue Nov 10 17:53:00 2009

]’[Author ID1: at Tue Nov 10 17:53:00 2009

]re just negotiating prices [Author ID1: at Tue Nov 10 17:53:00 2009

]with a manufacturer of handsets who supplies those handsets to the OEM. [Author ID0: at Thu Nov 30 00:00:00 1899

]

[Author ID1: at Tue Nov 10 17:53:00 2009

]

So, you can see how from the OEM’s point of view it has a great deal of attraction, because the several these, I was buying all these components from 30 components in my handsets, 30 different companies each guys has his [Author ID1: at Tue Nov 10 17:54:00 2009

]as [Author ID1: at Tue Nov 10 17:54:00 2009

]own markup, each guy hide in this time we doesn’t handset manufacture we marked up to and so it has got to be cheaper if I just say to a handset manufacturer, listen you figure it out.

Now, whether the handset manufacturer has the where with all to do all that, because it is one thing to stamp out some hinges, it is another thing to design a back panel display or antenna or speaker and build those things. I mean one is totally distinct from the other and that’s why I mentioned and when I said that the manufacturers is [Author ID1: at Tue Nov 10 17:55:00 2009

]that we’re dealing with,[Author ID1: at Tue Nov 10 17:55:00 2009

] we call them handset manufacturers in our example.

They readily acknowledge that they have nowhere near the technological sophistication or manufacturing prowess we do can manufacture this particular component. So what you may see is that handset manufacturer doing some things itself, farming some things out, going [Author ID1: at Tue Nov 10 17:55:00 2009

]doing [Author ID1: at Tue Nov 10 17:55:00 2009

]some combination of two,[Author ID1: at Tue Nov 10 17:56:00 2009

] I don’t know,[Author ID1: at Tue Nov 10 17:56:00 2009

] it is way too early to tell how all this is kind of settle out.

Sean Hannan - Needham & Co.

If I can jump over to another comment you had in your release. Actually, there’s two that are embedded in your non-GAAP results. So, it seems like there may have been some missed revenue based on some of the capacity constraints you have and so is there a way if we can get an understanding of what general frame of reference, what that missed revenue opportunity may have been in the quarter, essentially kind of what was that pent up demand that wasn’t able to be served?

Drew Moyer

I think that generally speaking if we and everybody else and their mother I guess had been able to manufacture in a [Author ID1: at Tue Nov 10 17:57:00 2009

]come to the on[Author ID1: at Tue Nov 10 17:57:00 2009

]completely un[Author ID1: at Tue Nov 10 17:57:00 2009

] [Author ID1: at Tue Nov 10 17:57:00 2009

]constrained way[Author ID1: at Tue Nov 10 17:57:00 2009

] and I’m [Author ID1: at Tue Nov 10 17:57:00 2009

]basing this on our undelivered and delayed [Author ID1: at Tue Nov 10 17:57:00 2009

]late [Author ID1: at Tue Nov 10 17:57:00 2009

]backlog our sales could have been maybe another $10 million.

Sean Hannan - Needham & Co.

So the degree that does not flow into 4Q ties back to the fact that we need to be able to get labor up running and efficient?

Drew Moyer

Yes, the problem is that give you a little bit of flavor on this too in case anybody else has on the same question. As the downturn begin, back end from 2008 and as the Chinese government continued to raise wages and social costs,[Author ID1: at Tue Nov 10 17:58:00 2009

] you remember that we talked in a number of case and number of calls about the number of businesses that went out of business in China and a number of unemployed people at ended up in southern China, so on and so forth.

Many of those people, once they became unemployed just went home they went away. They disappeared from the sort of face of the earth. In addition to that when the Chinese government began to lavishly spend to stimulate its economy, a lot of the surplus employment or surplus unemployment I guess that existed in Southern China, to some extent in Western China as a result of the earthquakes last year was chewed up by the government doing hiring to support public works projects, so on and so forth.

So that combination of people just going home because there was nothing to do last year and beginning of this year and the government picking up the surplus unemployed people has led to a significant shortage of labor particularly in the Southern part of China, which as you know is where most of the manufacturing is.

So the producers there,[Author ID1: at Tue Nov 10 17:59:00 2009

] including to a small extent us are really struggling right now to find people. I mean it’s really, really struggling and we mentioned labor costs going up. It is not so much that the cost of labor in terms of hourly rates has gone up, but the cost of labor in terms of hiring a great number of people and trying to train them and then you have a fair amount of attrition and retention difficulties.

Most labor is found in the southern part of the country by what I would call sort of labor brokers and that is people who go out and sort of find you people and their charges have doubled and in some cases tripled in the last three or four months. So the sort of ancillary non-direct hourly wage cost of doing business has increased substantially and the attendance startup expenses as you try to hire great numbers of people and deal with the attrition and retention difficulties has also cost a great deal of money.

Now in our case, most of our manufacturing was moved to the western part of the country or is in the process of moving and that has its own set of challenges. One is to find labor in an area that’s traditionally bereft of labor. Secondly, they have [Author ID1: at Tue Nov 10 18:01:00 2009

]had [Author ID1: at Tue Nov 10 18:01:00 2009

]the earthquake out there you might remember in sort of the middle of 2008 and the government has been spending a ton of money out there on public works projects and in so doing chewing up a lot of the surplus labor capacity.

Thirdly, people out there have a sort of different mentality. Much more like westerners and that is rather than wanting to work 60 hours a week, seven days a week to make a lot of money and go to home someday. These people want to work 50, 55 hours a week, six days a week and they go home and enjoy the rest of the weekend with the family and comeback on Monday morning and have the job for 20 years. So it’s a totally different kind of labor challenge out there, but one that nevertheless is challenging. So that’s sort of the labor situation in China.

Sean Hannan - Needham & Co.

Jim, that’s actually very helpful. Just my last question, the Forex gain that was included in the $0.11, what was the rough number there?

Jim Papada

Drew?

Drew Moyer

Yes, it’s in the other income and other expense that you’ll see. Let’s see is it in the press release? I’m looking at an early 10-Q draft. It’s about $3 million all in. That’s primarily from the euro versus dollar and inner company lending that we have within the company.

Sean Hannan - Needham & Co.

Thanks. I know that that obviously bops around, but from an internal or from a planning standpoint, how do you think we should be thinking about that for your next quarter?

Michael Ginnetti

Well, we don’t plan it moving one way or the other. So we didn’t plan the gains in the third quarter and we’re not planning any gains or losses in the fourth quarter. I think that the currency situation at least as we sit here in the beginning of November has stabled a bit relative to what was happening in August and September.

Sean Hannan - Needham & Co.

Terrific, thanks so much.

Jim Papada

You’re welcome.

Operator

Our next question comes from Michael Gallo from CL King.

Michael Gallo - CL King

Hi, good afternoon.

Jim Papada

Hello.

Drew Moyer

Hi, Michael.

Michael Gallo - CL King

Couple of questions, when will you be pretty much completely complete with the move to Western China?

Jim Papada

We should be completely complete with the move to Western China by the end of this quarter. We would have been completely complete as you put it by now, but because of the capacity constraints we decided to keep the principal plant from which we were moving open to some extent for the remainder of this quarter to make sure that we can pick up as much and produce as much demand as we possibly can as we move through the end of the year, but by the end of the year beginning of the first quarter, we should be completely complete.

Michael Gallo - CL King

Okay, helpful. Second question I have is just on the write-down and the discontinued option. I think you mentioned in the prepared remarks it was partially on Medtech and partially at AMI. Just wanted to get a feel for how much was in AMI and what the expected proceeds are at this point?

I mean, presumably, you’ve written it down to it looks like just cursory, look at the balance sheet it would be somewhere between $50 million and $55 million. Is that right? Second part of that question is, given the improved level of importance [Author ID1: at Tue Nov 10 18:04:00 2009

]performance [Author ID1: at Tue Nov 10 18:04:00 2009

]in that group,[Author ID1: at Tue Nov 10 18:04:00 2009

] if that’s the case why the reduction in proceeds? Thank you.

Drew Moyer

Yes, I think you’ve got a few questions embedded in there, Michael. So, let me take them one at a time. First of all, the write-down or adjustment to proceeds for Medtech was the majority of the loss in the quarter and I mean like more than three quarters of it was a charge. If you remember, we closed Medtech on June 25, which was the last day of our second quarter.

So we had estimated working capital items and a number of adjustments to the loss on the disposition of Medtech. So that was the primary driver this quarter. With respect to AMI Doduco, your math sounds correct. I mean its right in the neighborhood, but that doesn’t mean that that’s our negotiating position either with buyers, but we want to get write-downs and losses behind us.

We’re focused on the electronics business moving forward and this quarter was one of cleanup on some of these discontinued items. We have got, incidentally another thing that’s in there is, interest expense until we sell AMI Doduco, we’re allocating a portion of our interest expense to the discontinued operations.

Michael Gallo - CL King

Alright, but still just again coming back to it. I think your commentary on the actual business was that the performance was significantly better than your initial expectations. Again, just on a reconcile the additional write-down in AMI, given I think you had a fairly sizeable write-down in Q2.

Drew Moyer

Sure. There’s two things going on that can move together in tandem or they can move in opposite directions. One is kind of the value of the overall business and improving operations, which would lead you in one direction and then what exactly buyers are expected to acquire and not acquire in connection with the business, the biggest piece of which is cash.

So, for example, as we negotiate with buyers and we determine whether or not cash balances and some other things may or may not be disposed off, that’s where they get classified on the balance sheet. So there was not a significant write-down in the AMI Doduco business in the third quarter.

Michael Gallo - CL King

Thanks a lot.

Operator

(Operator Instructions)

David Stakun

Operator, are there any further questions?

Operator

We do. We have a follow-up question from Sean Hannan from Needham & Company.

Sean Hannan - Needham & Co.

Yes, thank you. Just to follow-up on some of that labor questions from earlier. What is roughly your labor base in Asia today and what in your planning scenarios do you see over the course of the next three to six months?

Jim Papada

Well, we believe that, we will be fully staffed by the end of the fourth quarter. We have a very shall we say, a full and complete staffing plan that we’ve been using for the past several months, but frankly, we would have hoped that we would have been completely staffed up by now, but that didn’t come to pass for many of the reasons that we just spoke about and some others as well, but our plan is to be completely staffed up by the end of the fourth quarter. I think, I believe we need like another 800 to 1000 people. It’s not a huge number.

Sean Hannan - Needham & Co.

That’s actually very helpful. Okay. Then just in terms of the demand in the September quarter, Jamie, you actually had a couple of comments I think that, got to some of this. I was looking to see if there might be a way to provide a little bit of commentary on the linearity that you saw in your different segments?

Jim Papada

When you say linearity, what do you mean?

Sean Hannan - Needham & Co.

Well, were certain, which segments exhibited some steadiness, a continuous slow steady ramp,[Author ID1: at Tue Nov 10 18:08:00 2009

] what was back ends weighted, what was volatile?

Jim Papada

It’s difficult to determine volatility in a quarter or two. As I mentioned, the wireline business and particularly the networking business that we’ve been discussing was quite strong. The power business was quite strong. The sort of normal telecom business was,[Author ID1: at Tue Nov 10 18:08:00 2009

] steadily improving, but without the strength of the other two. The antenna business was steady.

I guess sort of our speakers were pretty strong, but again, you’re talking about strong or steady versus a quarter or two ago where you’re not exactly measuring, again, some stellar performance. If you measure anything against even a year ago, you’re looking at things which are down by huge double digit numbers.

Drew Moyer

I think, Sean, if you’re talking about this quarter or two, everything is pretty much linear. It’s just a matter of the slope of the line. So some of the things that Jim is referring to in network and power management, they just had the steepest slopes.

Jim Papada

Okay.

Drew Moyer

It is relatively linear across the board.

Jim Papada

I think look, given where we were, just five or so months ago, we’re pretty happy, because if you would talk to us in the middle of February or beginning of March and said, could we even predict being where we are today? We would have said, we don’t see how that’s ever going to happen. That was in the deepest, darkest phase of economic hell as I put it.

So certainly things have moved along very much for the better, but we have to always keep, I think, in context that better means that compared to the lowest numbers that we’ve seen in years and years.

Sean Hannan - Needham & Co.

Okay. That’s fair. Can I ask a question on the Sonion business, there is, I believe, a large smart phone customer of yours, where you provide a lot of speaker modules, but have had difficulty penetrating on the antenna side. Given the context of what you’re seeing with the legacy antenna customer, what is the opportunity with that Sonion customer and being able to crossover [Author ID1: at Tue Nov 10 18:10:00 2009

]cross sell [Author ID1: at Tue Nov 10 18:10:00 2009

]now or does that strategy change or what should we think about that?

Jim Papada

Well, that particular customer, I think I know who you are talking about, I believe designed its own antennas and the antenna is not exactly the high point of that phone. So we’re always looking for ways to penetrate with more products or with more technology.

Remember, I mentioned to you earlier that, we had invested in new antenna technology, which will be arriving sometime in the first quarter of next year enabling us to produce on a fairly significant scale three-dimensional antennas and there are many that believe three-dimensional antennas is for[Author ID1: at Tue Nov 10 18:11:00 2009

]are[Author ID1: at Tue Nov 10 18:11:00 2009

] sort of the future of handset type antennas, so we will see where those kind of things take us.

Or as I mentioned earlier, our goal is to move aggressively forward with OEMs, where we have relationships, but have not traditionally had significant pieces of business and has [Author ID1: at Tue Nov 10 18:11:00 2009

][Author ID1: at Tue Nov 10 18:11:00 2009

]

really prove to those guys we should be their Number One supplier both from manufacturing and technology point of view.

We’re moving ahead as though everything that the OEM that is protecting this transition that we spoke about will be successful and we hope they are and God bless them and, because I think this is providing us with a very good impetus for doing something a little different ourselves.

Sean Hannan - Needham & Co.

Terrific. Thanks very much.

Drew Moyer

You’re welcome.

Operator

Our next question comes from Joe Wittine from Longbow Research.

Joe Wittine - Longbow Research

Great, thanks. Just curious, what’s the implied DNA [Author ID1: at Tue Nov 10 18:12:00 2009

]D&A [Author ID1: at Tue Nov 10 18:12:00 2009

]in the EBITDA guidance for the fourth quarter? Will it come down a little bit given the write offs to you guys?

Drew Moyer

No, it really shouldn’t, Joe. It should be comparable, because for EBITDA purposes, we’ve removed the discontinued operations. So, we expect to continue to run 4 million, 4.5 million a quarter of DNA.

Joe Wittine - Longbow Research

Okay, that’s helpful. Then the follow-up, then, is if my math is correct, if I look at the midpoint of your guidance, it almost looks like for each dollar in top line you’re going to be adding a dollar to the COGS line? Is that right and is that just reflected to like you said earlier, high acquisition and retention costs in China that are a near term headwind?

Jim Papada

I think it’s the latter.

Joe Wittine - Longbow Research

Okay, so and then this is the follow-up on top of that, is there still a line of sight to, I think well the last call we said, we maybe we can get to 8% to 10% margin is[Author ID1: at Tue Nov 10 18:13:00 2009

]’s[Author ID1: at Tue Nov 10 18:13:00 2009

] on great higher sales. I think $125 million. Is that still in sight or is that pushed out a little bit more right now?

Jim Papada

No, we had a $125 million a quarter in sales. We would have that kind of operating profit[Author ID1: at Tue Nov 10 18:13:00 2009

]leverage[Author ID1: at Tue Nov 10 18:13:00 2009

].

Joe Wittine - Longbow Research

Okay and then just last one if I could and that’s it for me. Jim’s retirement date is coming up here. Is there any quick update?

Jim Papada

Are you having a party for me? Are you guys planning a party for me? You haven’t told me about?

Joe Wittine - Longbow Research

Nothing like that, just curious if there’s an update on the succession plan as that day approaches? Thank you.

Jim Papada

No. As we mentioned in the release that we put out the board has retained a search firm, which is diligently searching and these things take some time, but we fully expect that sometime between the first to the year and end of the first quarter. My successor will arrive and a transition period will occur and I will be gone.

Joe Wittine - Longbow Research

You guys can ask questions of someone else then. Maybe I’ll call and ask questions.

David Stakun

Well, speaking of gone, if there are no further questions, I will ask our operator to conclude this evening’s call. Thank you everyone for joining and have a good evening.

Operator

Thank you all for participating in the Technitrol Incorporated results conference call. To access the playback of this conference you may dial, 412-317-0088 and enter the number 374010 followed by the pound key. Press 1 to play the recorded conference. This concludes today’s event.

[Author ID1: at Tue Nov 10 18:15:00 2009

]

[Author ID0: at Thu Nov 30 00:00:00 1899

]

[Author ID0: at Thu Nov 30 00:00:00 1899

]

[Author ID1: at Tue Nov 10 18:15:00 2009

]

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!