May 17, 2000
POWER ONE INC (PWER)
Quarterly Report (SEC form 10-Q)
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL. In January 1999, we broadened our portfolio of DC/DC products by acquiring International Power Devices, Inc., or IPD, for $32 million, including certain capitalized lease obligations and other indebtedness of IPD. In February 2000, we acquired HC Power, Inc., or HCP, in a stock-for-stock transaction, in which the former shareholders of HCP received a total of 2,121,207 shares of our common stock for all shares of common stock of HCP outstanding on the effective date of the merger. HCP is based in Irvine, CA and is a leading supplier of power systems for telecommunications and Internet service providers and OEM equipment manufacturers. The acquisition of IPD was accounted for using the purchase method of accounting, whereas, the acquisition of HCP was accounted for as a pooling of interests. All prior periods have been restated to give retroactive effect to the acquisition of HCP. As such, all references to operating data for the three months ended March 31, 2000, include three months of IPD and HCP. All references to operating data for the three months ended March 31, 1999 include three months of HCP and two months of IPD.
NET SALES. Net sales increased $38.1 million, or 97.9%, to $77.0 million for the three months ended March 31, 2000 from $38.9 million for the three months ended March 31, 1999. The increase in net sales resulted primarily from strong growth in unit shipments of our high-density DC/DC products to the communications market, strong growth in our Telecom Systems Division (formerly HC Power), and strong sales of our high power product line into the ATE/semiconductor test equipment and industrial markets. The increase in net sales was attributable to increases across all product lines. The main contributors to the $38.1 million increase in net sales were DC/DC power supplies which contributed $17.3 million, telecom power systems and high-range power supplies, which each contributed $6.2 million, low-range power supplies, which contributed $3.4 million, custom power supplies, which contributed $2.6 million and all other product lines combined, which contributed $2.4 million. Quarter-over-quarter, a significant portion of the sales growth in this year's first quarter is also due to the stronger demand for our high power product line in the ATE/semiconductor test equipment market which was still recovering from the industry slump in 1998 during last year's first quarter.
Net sales to OEMs in the first quarter of 2000 were $59.6 million, or 77.4% of net sales, up from $30.7 million, or 79.0% of net sales, for the comparable period in 1999. Cisco was the only customer to exceed 10% of net sales in the first quarter of 2000. Net sales through distributors were $17.4 million, or 22.6% of net sales, in the first quarter of 2000, up from $8.2 million, or 21.0% of net sales, in the same period in 1999.
The acquisitions of IPD and HCP have significantly broadened the Company's customer base by increasing net sales to key OEMs and adding new OEMs in the communications market. Sales by markets for the three months ended March 31, 2000 and 1999 were:
2000 1999
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Communications............................................. 55.3% 37.6%
Industrial................................................. 16.3% 20.4%
ATE/Semiconductor test equipment........................... 11.4% 3.5%
Transportation............................................. 4.6% 9.3%
Medical.................................................... 3.7% 9.3%
Computer, Retail and Other................................. 8.7% 19.9%
----- -----
Total.................................................... 100.0% 100.0%
The Company's combined backlog on March 31, 2000 was $108.3 million, an increase of 61.8% and 138.8% compared to backlog of $66.9 million on December 31, 1999 and $45.3 million on March 31, 1999, respectively. The overall bookings trend remained very strong in the first quarter of this year, driven primarily by strong order flow in our high-density DC-DC business, as well as robust growth from the ATE/semiconductor test equipment market.
GROSS PROFIT. Gross profit increased $17.4 million, or 119.0%, to $32.0 million for the three months ended March 31, 2000 from $14.6 million for the three months ended March 31, 1999. As a
percent of net sales, gross profit increased to 41.6% for the first three months of 2000 from 37.6% for the same period in 1999. The increase in gross profit margin primarily resulted from the inventory write-up related purchase accounting adjustments due to the IPD acquisition which negatively impacted the prior year period. Excluding the non-recurring adjustments related to our IPD acquisition in 1999, gross profit margin would have been 39.5% for the first quarter of 1999. On this basis, the improved 2.1% profit margin in the first quarter of 2000 versus the same period last year is primarily due to the increase in net sales which allowed us to better leverage our fixed manufacturing expenses, as well as the transfer of high-density DC-DC product manufacturing from our Boston facility to our low cost manufacturing facility in Mexico.
SELLING EXPENSE. Selling expense increased $1.3 million, or 25.2%, to $6.6 million for the three months ended March 31, 2000 from $5.3 million for the comparable period in 1999. As a percent of net sales, selling expense decreased to 8.6% for the first three months of 2000 from 13.6% for the comparable period in 1999. The increase of $1.3 million in the first quarter of 2000 was primarily due to higher employee costs and an increase in sales commissions due to the increase in sales volume.
GENERAL AND ADMINISTRATIVE EXPENSE. Administrative expense increased $14.3 million, or 477.6%, to $17.3 million for the three months ended March 31, 2000 from $3.0 million for the three months ended March 31, 1999. As a percent of net sales, administrative expense increased to 22.5% for the first three months of 2000 from 7.7% for the comparable period in 1999. The increase of $14.3 million was primarily attributable to an $8.7 million stock compensation charge due to HCP stock bonus agreements that vested on the date of acquisition, $2.4 million in acquisition costs, with the remainder of the increase due to higher employee costs and depreciation on our Oracle ERP system and other capital expenditures.
ENGINEERING EXPENSE. Engineering expense increased $6.0 million, or 176.9%, to $9.4 million for the three months ended March 31, 2000 from $3.4 million for the three months ended March 31, 1999. As a percent of net sales, engineering expense increased to 12.2% for the first three months of 2000 from 8.7% for the comparable period in 1999. The increase of $6.0 million was primarily due to a $4.6 million stock compensation charge due to HCP stock bonus agreements that vested on the date of acquisition, with the remainder of the increase due to higher employee costs which are directly attributable to our commitment to make strategic engineering investments in support of our future growth.
QUALITY ASSURANCE EXPENSE. Quality Assurance expense increased $0.4 million, or 51.3%, to $1.2 million for the three months ended March 31, 2000 from $0.8 million for the three months ended March 31, 1999. As a percent of net sales, quality assurance expense decreased slightly to 1.6% for the first three months of 2000 from 2.1% for the comparable period in 1999. The increase of $0.4 million was primarily due to higher employee costs.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles decreased $0.9 million, or 40.4%, to $1.3 million for the three months ended March 31, 2000 from $2.2 million for the same period in 1999. The majority of the decrease is attributable to a $1.0 million charge taken in the first quarter of 1999 to write off the unamortized balance of the intangible asset value of a technology and license agreement related to substantially similar product technology acquired as a result of the IPD acquisition. This decrease was partially offset by an additional month of amortization of intangibles recorded in the first quarter of 2000 compared to the same period in 1999 related to the intangibles initially recorded upon the acquisition of IPD on January 29, 1999.
IN-PROCESS RESEARCH AND DEVELOPMENT. As a result of the IPD acquisition, the Company recorded a one time charge of $3.3 million in the first quarter of 1999 for purchased in-process technology that had not reached technological feasibility and had no alternative future use.
LOSS FROM OPERATIONS. As a result of the items above, loss from operations increased $0.4 million, or 12.5%, to $3.8 million for the three months ended March 31, 2000 from $3.4 million for the
comparable period in 1999. Excluding non-recurring items totaling approximately $15.9 million related to the HCP acquisition consisting of acquisition costs of $2.4 million, stock compensation charges of $13.3 million and payroll related taxes of $0.2 million, income from operations would have been $12.1 million, or 15.8% of net sales in the first quarter of 2000. Excluding non-recurring items totaling approximately $5.1 million related to the IPD acquisition consisting of an inventory fair value write-up of $0.8 million, an in-process research and development charge of $3.3 million and a write-off of $1.0 million for a technology and license agreement, income from operations would have been $1.7 million, or 4.4% of net sales in the first quarter of 1999.
INTEREST INCOME. Interest income increased $711,000 to $748,000 for the three months ended March 31, 2000 from $37,000 for the three months ended March 31, 1999. The increase is primarily due to interest earned on proceeds from the sale of our stock during a secondary offering in September and October 1999 which were invested in short-term, interest bearing financial instruments.
INTEREST EXPENSE. Interest expense decreased $412,000, or 56.9%, to $312,000 for the three months ended March 31, 2000 from $724,000 for the comparable period in 1999. The decrease is primarily due to the decrease in our debt balance due to repayments using the net proceeds from the sale of our stock in September and October 1999. Interest expense in the first quarter of 1999 related to debt incurred in connection with the acquisition of Melcher in the third quarter of 1998 and IPD in the first quarter of 1999.
OTHER INCOME, NET. Other income, net, decreased $217,000, or 61.6%, to $135,000 for the three months ended March 31, 2000 from $352,000 for the three months ended March 31, 1999. Other income decreased primarily due to net gains on sales of fixed assets and higher net gains recorded on foreign currency transactions in the first quarter of 1999.
INCOME TAXES. The provision for income taxes was a $1.7 million benefit for the three months ended March 31, 2000 compared to a $183,000 income tax benefit for the same period in 1999. Included in the income tax benefit for the first quarter of 2000 was a non-recurring benefit of $366,000 related to net deferred tax assets recorded upon HCP's conversion from an S-corporation to a C- corporation. The recorded loss for the first quarter of 1999 did not generate a significant income tax benefit primarily due to the $3.3 million charge for in process research and development and $304,000 amortization of goodwill related to the IPD acquisition, both of which were nondeductible for tax purposes. Excluding non-recurring items, the effective tax rate would have been approximately 32.6% in the first quarter of 2000 compared to 39.3% in the first quarter of 1999. The lower tax rate in the first quarter of 2000 is primarily the result of the distribution of profit among our various subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents balance decreased $16.2 million, or 25.4% from $63.8 million at December 31, 1999 to $47.6 million at March 31, 2000. Our primary source of cash in the first quarter of 2000 consisted of borrowings from our bank credit facilities of $6.1 million. The primary uses of cash in the first quarter of 2000 consisted of $9.0 million for repayment of borrowings from our bank credit facilities, $3.8 million decrease in our bank overdrafts, $1.4 million for the repayment of long-term debt, $3.4 million for the acquisition of property and equipment and $2.6 million for operating activities.
Cash used in operating activities in the first quarter of 2000 was $2.6 million and was primarily attributable to cash earnings from operations of $15.6 million (net loss plus depreciation, and stock compensation) offset by $18.2 million used for working capital. The $18.2 million use for working capital was primarily due to an increase in accounts receivable and inventories of $8.9 million and $6.6 million, respectively, and a net decrease in accounts payable and accrued expenses of $2.1 million.
The $3.4 million to acquire property and equipment included approximately $0.5 million for hardware, software and implementation support related to our Oracle ERP system conversion at our
Caribbean facility, $1.7 million for manufacturing equipment and the balance for additional property, plant and capital equipment expenditures consistent with supporting our growth plans.
On May 10, 2000, we entered into a Revolving Loan Agreement with Union Bank of California, N.A., as administrative agent and lead arranger, which provides us with a revolving line of credit of $125 million. The line of credit bears interest on amounts outstanding payable quarterly based on our leverage ratio and one of the following rates as selected by us: LIBOR plus 1.25% to 2.25%, or the bank's base rate plus 0% to 1.00%. The credit agreement (a) provides for restrictions on additional borrowings, leases and capital expenditures; (b) prohibits us, without prior approval, from paying dividends, liquidating, merging, consolidating or selling our assets or business; and (c) requires us to maintain a specified net worth, maximum leverage ratio and minimum fixed charge coverage ratio. Borrowings under this line of credit are collateralized by the capital stock of each of our domestic subsidiaries and 65% of the capital stock of each of our foreign subsidiaries.
As a result of the Revolving Loan Agreement with Union Bank of California, N.A., we plan to repay all outstanding amounts under our $65 million revolving line of credit with Bank of America, N.A. and terminate that agreement. At March 31, 2000, amounts outstanding under our line of credit with Bank of America, N.A. were $3.9 million, all of which was borrowed by Melcher. Borrowings under this line of credit are collateralized by substantially all of our assets.
As a result of the Melcher acquisition, we have various credit facilities with banks in Switzerland and Germany which can be drawn upon in the form of term loans. The aggregate credit limit for all such credit facilities is approximately $9.4 million. Melcher's credit facilities in Switzerland bear interest on amounts outstanding payable at various time intervals and market rates based on Swiss LIBOR plus a margin ranging from 1.25% to 2.00%. Some of Melcher's credit agreements require Melcher to maintain certain financial covenants and to provide certain financial reports to the lenders, none of which materially restricts Melcher. At March 31, 2000, short-term (including current portion of long-term debt) and long-term amounts outstanding under Melcher's credit facilities were $3.3 million and $3.0 million, respectively.
In the first quarter of 2000 we repaid the outstanding balance on our $8 million revolving loan and $1 million equipment line of credit and cancelled the agreements. Total principal amounts repaid were $6.2 million and $0.3 million, respectively.
At March 31, 2000, short-term (including current portion of long-term debt) and long-term amounts outstanding under all credit agreements with banks were $7.2 million and $3.0 million, respectively.
We currently anticipate that our total capital expenditures for 2000 will be approximately $35 million, of which approximately $2 million represents costs related to the implementation of our Oracle ERP system at Power-Electronics, Inc., as well as continued enhancements and upgrades at our Camarillo and Mexico locations, approximately $15 million represents investments in surface-mount technology automation and approximately $12 million represents investments in manufacturing improvements. The amount of these anticipated capital expenditures will frequently change during the year based on changes in expected revenues, our financial condition and general economic conditions.
In addition, we paid $13 million to IPD's former stockholders in the second quarter of 2000, since IPD attained certain defined operational performance objectives in the 13 month period ended March 31, 2000.
Based on current plans and business conditions, we believe our existing working capital and borrowing capacity, coupled with the funds generated from our operations, will be sufficient to fund our anticipated working capital, capital expenditures and debt payment requirements for the next twelve months. However, if we make a large acquisition, it may be necessary to raise debt or equity in the private or public securities markets.
ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in interest rates and changes in foreign currency exchange rates. Our exposure to interest rate risk results from the financial debt instruments which arise from transactions entered into during the normal course of business. We may enter into derivative financial instrument transactions, such as swaps, in order to manage or reduce our exposure to interest rate changes related to our portfolio of borrowings. Under no circumstances do we enter into derivative or other financial instrument transactions for speculative purposes.
DEBT. We are exposed to cash flow risk due to changes in market interest rates related to our outstanding debt. For example, in Europe our credit facilities bear interest on borrowings outstanding at various time intervals and market rates based on Swiss LIBOR, an offshore rate that is similar to the London Interbank Offered Rate ("LIBOR"), plus a margin ranging from 1.25% to 2.00%. Our principal risk with respect to our long-term debt is to changes in these market rates.
The table below presents principal cash flows and related weighted average interest rates for our credit facilities and long-term debt obligations at March 31, 2000 by expected maturity dates. The information is presented in U.S. dollar equivalents, our reporting currency, and parenthetically in Swiss francs, where applicable. Additionally, the U.S. dollar equivalent carrying value of Swiss franc denominated debt is sensitive to foreign currency exchange rates. However, a 10% change in the U.S. dollar exchange rate against the Swiss franc would not have a significant effect on our future earnings.
EXPECTED MATURITY DATE
----------------------------------------------------------------- FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
-------- -------- -------- -------- -------- ---------- -------- --------
(AMOUNTS IN THOUSANDS EXCEPT FOR PERCENTAGES)
Credit facility:
Variable Rate (CHF 6,500)........ $3,920 $3,920 $3,920
Average Interest Rate.......... 3.7% 3.7%
Fixed Rate (CHF 1,000)........... $ 603 $ 603 $ 603
Average Interest Rate.......... 3.5% 3.5%
Long-term Debt:
Fixed Rate (CHF 9,500)........... $2,714 2,110 905 -- -- -- $5,729 $5,729
Average Interest Rate.......... 3.7% 3.8% 4.4% 3.8%
FOREIGN CURRENCY. A significant portion of our business operations are conducted in various countries in Europe. As a result, we have a certain degree of market risk with respect to our cash flows due to changes in foreign currency exchange rates when transactions are denominated in currencies other than our functional currency. Historically, we have not actively engaged in substantial exchange rate hedging activities, and at March 31, 2000, we had not entered into any significant foreign exchange contracts.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains statements which, to the extent that they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934. The words "expect," "believe," "anticipate" and similar expressions are intended to identify forward-looking statements. Such forward-looking information involves important risks and uncertainties that could materially alter results in the future from those expressed in any forward-looking statements made by, or on behalf of, the Company. These risks and uncertainties include, but are not limited to, the Company's ability to meet expected revenues and maintain its financial condition which could be affected by any of the following: general domestic and international economic conditions including interest rate and currency exchange rate fluctuations, electronics industry market conditions and growth rates, acquisitions, the cyclical nature of the Company's business, government and regulatory policies, technological developments and changes in the competitive environment in which the Company operates. Persons reading this Form 10-Q are cautioned that such forward-looking statements are only predictions and that actual events or results may differ materially. In evaluating such statements, readers should specifically consider the various factors which could cause actual events or results to differ materially from those indicated by such forward-looking statements.
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Recent filings: Apr 03, 2000 (Annual Rpt) | May 17, 2000 (Qtrly Rpt) | Aug 16, 2000 (Qtrly Rpt) | Nov 06, 2000 (form8-K) | Nov 15, 2000 (Qtrly Rpt) | Mar 26, 2001 (Annual Rpt)
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