<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 0-29454
------------------------
POWER-ONE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0420182
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
740 CALLE PLANO, CAMARILLO, CA 93012
(Address of principle executive offices) (Zip code)
Registrant's telephone number, including area code (805) 987-8741
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
------------------------
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 a shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of November 6th there were outstanding 17,087,535 shares of common stock,
$.001 par value.
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<PAGE>
POWER-ONE, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets--
September 30, 1998 and December 31, 1997........................ 3
Consolidated Statements of Operations--
for the Three Months and the Nine Months ended September 30,
1998 and 1997................................................... 4
Consolidated Statements of Cash Flows--
for the Nine Months Ended September 30, 1998 and 1997........... 5
Notes to Consolidated Financial Statements........................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 10
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................. 16
SIGNATURES............................................................... 17
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
POWER-ONE, INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................................................... $ 11,611 $ 32,018
Accounts receivable:
Trade (net of allowance)........................................................ 20,485 13,268
Other........................................................................... 2,186 328
Inventories....................................................................... 32,341 22,369
Refundable income taxes........................................................... 306 2,411
Deferred taxes - current.......................................................... 975 976
Prepaid expenses and other current assets......................................... 1,422 467
------------- ------------
Total current assets.......................................................... 69,326 71,837
PROPERTY & EQUIPMENT................................................................ 32,400 11,898
INTANGIBLE ASSETS, NET.............................................................. 51,431 27,181
OTHER ASSETS........................................................................ 1,832 1,721
------------- ------------
TOTAL ASSETS........................................................................ $ 154,989 $ 112,637
------------- ------------
------------- ------------
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion license obligation................................................ $ 326 $ 326
Accounts payable.................................................................. 6,687 4,465
Accrued payroll and related expenses.............................................. 3,014 652
Other accrued expenses............................................................ 5,045 5,031
Short term debt................................................................... 6,889 --
Other current liabilities......................................................... 3,511 --
------------- ------------
Total current liabilities..................................................... 25,472 10,474
------------- ------------
LONG TERM DEBT...................................................................... 18,196 --
------------- ------------
OTHER LIABILITIES................................................................... 4,122 1,949
------------- ------------
STOCKHOLDERS' EQUITY
Common stock...................................................................... 17 17
Additional capital................................................................ 92,234 92,227
Retained earnings................................................................. 14,377 7,970
Cumulative currency translation................................................... 571 --
------------- ------------
Total stockholders' equity.................................................... 107,199 100,214
------------- ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY............................................ $ 154,989 $ 112,637
------------- ------------
------------- ------------
</TABLE>
3
<PAGE>
POWER-ONE, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NINE MONTHS ENDED
-------------------- --------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES............................................................. $ 23,811 $ 24,852 $ 74,147 $ 65,785
COST OF GOODS SOLD.................................................... 14,960 14,779 44,830 39,127
--------- --------- --------- ---------
GROSS PROFIT.................................................... 8,851 10,073 29,317 26,658
GENERAL AND ADMINISTRATIVE
Selling............................................................. 3,768 2,377 8,248 6,869
Administrative...................................................... 2,097 1,725 5,665 4,659
Engineering......................................................... 1,414 1,042 3,704 2,757
Quality assurance................................................... 567 476 1,664 1,511
Amortization of intangibles......................................... 677 508 1,692 1,522
--------- --------- --------- ---------
Total Expenses.................................................. 8,523 6,128 20,973 17,318
INCOME FROM OPERATIONS................................................ 328 3,945 8,344 9,340
OTHER INCOME (EXPENSE)
Interest expense.................................................... (332) (916) (517) (2,925)
Interest income..................................................... 343 8 1,258 19
Other income (expense), net......................................... (187) (25) (31) 12
--------- --------- --------- ---------
Total other income (expense).................................... (176) (933) 710 (2,894)
INCOME BEFORE TAXES................................................... 152 3,012 9,054 6,446
INCOME TAXES.......................................................... (135) 882 2,645 1,748
--------- --------- --------- ---------
NET INCOME............................................................ 287 2,130 6,409 4,698
--------- --------- --------- ---------
PREFERRED STOCK DIVIDENDS AND ACCRETION............................... -- 424 -- 1,259
--------- --------- --------- ---------
NET INCOME ATTRIBUTABLE TO COMMON SHARES.............................. $ 287 $ 1,706 $ 6,409 $ 3,439
--------- --------- --------- ---------
--------- --------- --------- ---------
BASIC EARNINGS PER COMMON SHARE....................................... $ 0.02 $ 0.17 $ 0.38 $ 0.34
--------- --------- --------- ---------
--------- --------- --------- ---------
DILUTED EARNINGS PER COMMON SHARE..................................... $ 0.02 $ 0.17 $ 0.37 $ 0.33
--------- --------- --------- ---------
--------- --------- --------- ---------
BASIC SHARES OUTSTANDING.............................................. 17,085 10,000 17,068 10,000
--------- --------- --------- ---------
--------- --------- --------- ---------
DILUTED SHARES OUTSTANDING............................................ 17,314 10,270 17,327 10,266
--------- --------- --------- ---------
--------- --------- --------- ---------
PRO FORMA EARNINGS PER SHARE DATA (Note 3):
Basic earnings per common share..................................... $ 0.19 $ 0.42
--------- ---------
--------- ---------
Diluted earnings per common share................................... $ 0.18 $ 0.41
--------- ---------
--------- ---------
</TABLE>
4
<PAGE>
POWER-ONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................ $ 6,409 $ 4,698
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization..................................................... 3,878 3,060
Deferred income taxes............................................................. (286) (111)
Changes in operating assets and liabilities:
Accounts receivable, net........................................................ 1,867 (3,734)
Inventories..................................................................... 7,270 (1,806)
Refundable income taxes......................................................... 2,105 (10)
Prepaid expenses and other current assets....................................... 129 (387)
Accounts payable................................................................ (863) 925
Accrued expenses................................................................ (664) 1,180
Other liabilities............................................................... 26 573
------------- -------------
Net cash provided by operating activities....................................... 19,871 4,388
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment............................................. (8,564) (1,783)
Investment in Melcher, net of cash acquired (Note 4).............................. (40,678) --
Other assets...................................................................... (104) (636)
------------- -------------
Net cash used in investing activities............................................. (49,346) (2,419)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on notes payable to bank................................. 10,000 --
Bank overdraft.................................................................... -- 1,559
Repayments of long-term debt...................................................... -- (2,593)
Repayments of short-term debt..................................................... (1,060) (800)
Proceeds of issuance of long-term debt............................................ 16 --
Payments of capital leases........................................................ (6) --
------------- -------------
Net cash provided by (used in) financing activities............................... 8,950 (1,834)
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............................................. 119 --
------------- -------------
INCREASE (DECREASE) IN CASH......................................................... (20,407) 135
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...................................... 32,018 1,684
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................................ $ 11,611 $ 1,819
------------- -------------
------------- -------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest........................................................................ $ 156 $ 2,410
Income taxes.................................................................... $ 1,156 $ 2,680
</TABLE>
5
<PAGE>
Supplemental schedule of noncash investing activities:
The Company purchased all of the capital stock of Melcher Holding AG
("Melcher") for $43.4 million (See Note 4). In conjunction with the acquisition,
liabilities were assumed as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Fair value of tangible assets acquired................................ $ 44,575
Fair value of goodwill and other identifiable intangible assets....... 25,942
Cash paid for capital stock........................................... (43,421)
--------
Liabilities assumed................................................... $ 27,096
--------
--------
</TABLE>
6
<PAGE>
POWER-ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. In the opinion of management, adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the period ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year. For
further information, refer to the consolidated financial statements and notes
thereto for the year ended December 31, 1997, included in the Company's 1997
Annual Report on Form 10-K.
The Company's reporting period coincides with the 52- to 53-week period
ending on the Sunday closest to December 31 and its fiscal quarters are the 13
and 14 week periods ending on the Sunday nearest to March 31, June 30, September
30 and December 31. For simplicity of presentation, the Company has described
its year-ended December 28, 1997 as December 31 and the three-month and
nine-month periods ended September 27, 1998 and September 28, 1997 as September
30.
NOTE 2--INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Raw materials..................................... $12,858 $11,809
Subassemblies-in-process.......................... 4,370 3,343
Finished goods.................................... 15,113 7,217
------------- ------------
$32,341 $22,369
------------- ------------
------------- ------------
</TABLE>
7
<PAGE>
POWER-ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
NOTE 3--EARNINGS PER SHARE
The following is a reconciliation of the earnings per share data (in
thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------------ -----------------------
AVERAGE PER AVERAGE PER
INCOME SHARES SHARE INCOME SHARES SHARE
------ ------- ----- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Income attributable to common stockholders................................. $287 $1,706
Basic EPS:
Shares outstanding....................................................... 17,085 10,000
------ ------- ----- ------- -----
Basic EPS................................................................ 287 17,085 $0.02 1,706 10,000 $0.17
----- -----
----- -----
Dilutive securities--
Stock options............................................................ 229 270
------ ------- ------ -------
Diluted EPS................................................................ $287 17,314 $0.02 1,706 10,270 $0.17
------ ------- ----- -----
------ ------- ----- -----
Pro Forma--
Assumed conversion:
Preferred stock........................................................ 417 1,254
Obligation to officers................................................. 10 56
------ -------
Pro forma diluted EPS...................................................... 2,133 11,580 $0.18
-----
-----
Dilutive securities--
Stock options............................................................ (265)
-------
Pro forma basic EPS........................................................ $2,133 11,313 $0.19
------ ------- -----
------ ------- -----
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
----------------------- -----------------------
AVERAGE PER AVERAGE PER
INCOME SHARES SHARE INCOME SHARES SHARE
------ ------- ----- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Income attributable to common stockholders................................. $6,409 $3,439
Basic EPS:
Shares outstanding 17,068 10,000
------ ------- ------ -------
Basic EPS................................................................ 6,409 17,068 $0.38 3,439 10,000 $0.34
----- -----
----- -----
Dilutive securities--
Stock options............................................................ 259 266
------ ------- ------ -------
Diluted EPS................................................................ $6,409 17,327 $0.37 3,439 10,266 $0.33
------ ------- ----- -----
------ ------- ----- -----
Pro Forma--
Assumed conversion:
Preferred stock........................................................ 1,239 1,254
Obligation to officers................................................. 30 56
------ -------
Pro forma diluted EPS...................................................... 4,708 11,576 $0.41
-----
-----
Dilutive securities--
Stock options............................................................ (265)
-------
Pro forma basic EPS........................................................ $4,708 11,311 $0.42
------ ------- -----
------ ------- -----
</TABLE>
8
<PAGE>
POWER-ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
NOTE 3--EARNINGS PER SHARE (CONTINUED)
Pro forma earnings per share for 1997 have been determined based on assuming
that the redeemable preferred stock and other liabilities owed to certain
officers were converted into common stock as of January 1, 1997. Accordingly,
the applicable portions of the accrued preferred stock dividends and net
interest costs have been added back to income attributable to common
stockholders in the computation.
NOTE 4--ACQUISITIONS
On August 31, 1998, the Company completed its purchase of Melcher for a
purchase price of $41.8 million. The purchase price was negotiated at arms
length with the Sellers, none of whom had any prior relationship with the
Company. The source of funds for the acquisition was a combination of the
Company's available cash, as well as advances totaling $10 million under its
existing credit facility.
Melcher, a Swiss-based company, is primarily engaged in the design and
manufacture of more than 750 high-reliability DC/DC power conversion products
which it distributes throughout Europe. Melcher has manufacturing operations in
three European locations and sales and application engineering offices in seven
European countries, the United States and Canada.
The acquisition was accounted for using the purchase method of accounting.
The purchase price, including liabilities assumed, was allocated to tangible
assets and intangible assets. The excess of the aggregate purchase price over
the estimated fair market values of the net assets acquired was recognized as
goodwill and other identifiable intangible assets, and is being amortized over
periods ranging from seven to 20 years. The fair market value of Melcher's
assets and liabilities has been included in the Company's balance sheet as of
September 30, 1998. The consolidated statements of operations for the nine
months ended September 30, 1998, include one month of Melcher's operations.
The following unaudited pro forma financial information combines the
consolidated results of operations as if the acquisition of Melcher had occurred
as of the beginning of the periods presented. Pro forma adjustments include only
the effects of events directly attributable to the transaction that are expected
to have a continuing impact and that are factually supportable. The pro forma
amounts contained in the table below include adjustments for inventory fair
market valuation write-up, which increased cost of goods sold expense,
amortization of intangibles, depreciation expense, assumed interest expense,
assumed decrease in interest earnings and deferred taxes.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Net sales....................................................... $ 105,134 $ 98,367
Net income...................................................... $ 5,356 $ (18)
Basic net income per common share............................... $ 0.30 $ (0.02)
Diluted net income per common share............................. $ 0.30 $ (0.02)
</TABLE>
The pro forma financial information does not necessarily reflect the
operating results that would have occurred had the acquisition been consummated
as of the above dates, nor is such information indicative of future operating
results. In addition, the pro forma financial results contain estimates since
the acquired company did not maintain information on a period comparable with
the Company's fiscal year-end.
9
<PAGE>
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL. On August 31, 1998, the Company completed its purchase of Melcher
for a purchase price of $41.8 million. Melcher, a Swiss-based company, is
primarily engaged in the design and manufacture of more than 750
high-reliability DC/DC power conversion products which it distributes throughout
Europe. Melcher has manufacturing operations in three European locations and
sales and application engineering offices in seven European countries, the
United States and Canada. The acquisition was accounted for using the purchase
method of accounting. The purchase price, including liabilities assumed, was
allocated to tangible assets and intangible assets. The fair market value of
Melcher's assets and liabilities has been included in the Company's balance
sheet as of September 30, 1998. For the three months and the nine months ended
September 30, 1998, financial results are consolidated to include the month of
September 1998 for Melcher.
NET SALES. Net sales increased $8.4 million, or 12.7%, to $74.1 million for
the nine months ended September 30, 1998 from $65.8 million for the nine months
ended September 30, 1997. The increase in net sales resulted primarily from a
$5.8 million contribution from Melcher, as well as strong growth in unit
shipments of standard and modified standard power supplies, particularly in
high-range power configurations, but only during the first half of 1998. The
principal contributors to the $8.4 million increase in net sales were DC/DC
power products, which contributed $4.7 million to the increase in net sales
primarily due to the Melcher acquisition and high-range and low-range power
products, which contributed $4.4 million and $3.6 million, respectively. These
increases were offset by declines in custom power products of $2.9 million and
all other product lines of $1.4 million, net.
Sales to OEM's for the nine months ended September 30, 1998 were $44.1
million, or 59% of net sales, up from $38.8 million over the comparable period
in 1997, also representing 59% of net sales. Sales through distributors for the
nine months ended September 30, 1998 were $30.1 million, or 41% of net sales, up
from $27.0 million over the comparable period in 1997, also representing 41% of
net sales. Power-One's OEM customers are in diverse market segments such as
communications, automatic test equipment, medical equipment and industrial. The
acquisition of Melcher has further strengthened and diversified the Company's
sales base by increasing sales to the telecommunications and industrial market
segments and by providing access to new customers in the transportation sector,
where the Company's business volume historically has not been significant. As a
result of the Melcher acquisition, the Company's sales to the communications and
transportation market segments increased $3.2 million and $1.5 million,
respectively.
Net sales for the three months ended September 30, 1998 decreased $1.0
million, or 4.2%, to $23.8 million compared with $24.9 million for the three
months ended September 30, 1997. Net sales excluding Melcher's September's
results decreased $6.9 million, or 27.7%, to $18.0 million. The decrease in
sales for the third quarter was primarily due to a decrease in high-range power
product line shipments related to the slowdown in the ATE/semiconductor test
equipment market segment. Sales to OEM's in the third quarter of 1998 were $14.5
million, or 61% of net sales, up from $13.4 million over the comparable period
in 1997, or 54% of net sales, and up from $13.6 million in the second quarter of
1998, or 57% of net sales. No one customer exceeded 10% of total sales. Sales
through distributors were $9.3 million in the third quarter of 1998, down $2.2
million from $11.5 million over the same period last year, and down from $10.4
million in the second quarter of 1998. As a percent of net sales, sales through
distributors was 39%, down from 46% last year and down from 43% in the second
quarter of 1998.
10
<PAGE>
Sales by market segment for the three months ended September 30, 1998 were:
<TABLE>
<CAPTION>
1998
-----
<S> <C>
Communications........................................................... 25.5%
Industrial............................................................... 24.9%
Medical.................................................................. 13.1%
Computer and retail...................................................... 10.1%
ATE/Semiconductor test equipment......................................... 6.6%
Transportation........................................................... 6.6%
Other.................................................................... 13.2%
</TABLE>
The Company's backlog on September 30, 1998 was $29.1 million which includes
$12.2 million of Melcher's backlog. The $16.9 million of Power-One backlog
without Melcher, compared with $32.2 million on December 31, 1997, and $28.6
million on September 30, 1997.
Beginning in the three month period ended June 30, 1998, demand for products
slowed significantly within the electronics industry. This is the result of a
softening trend in capital equipment markets, which in turn has been negatively
influenced by dampened demand due to weak economic conditions in Asia, as well
as an overall slowing in global economic activities. In addition, the current
soft demand for the Company's products is exacerbated by domestic inventory
reduction initiatives at original equipment manufacturers and distributors,
including some of the Company's customers. As a result of these factors, and
excluding the expected positive net sales contribution from the Melcher
acquisition, the Company expects sales for the fourth quarter of 1998 to be
below the comparable period last year and also expects that this softness will
roll over at least into the first quarter of 1999. However, with Melcher, the
Company's management expects to see modest growth in the fourth quarter of 1998
over the same period last year. The Melcher acquisition has already had a
positive impact on the Company's overall business and the addition of Melcher
significantly broadens the Company's European customers who, thus far, have been
only slightly affected by the recession in certain Asian economies. The Company
expects that the result will be further business diversification, particularly
in data communications and telecommunications, and additional stability during a
challenging economic cycle.
During this soft business climate management is taking steps to position
itself for increased growth in subsequent quarters with current initiatives
including actively pursuing new business synergies with Melcher in the areas of
sales, cost reductions and technology; aggressively pursuing acquisitions; and
providing for additional investment in research and development. Additionally,
the Company's initiative to further upgrade its core business systems is
currently underway with the implementation of a new Enterprise Resource Planning
("ERP") system acquired from Oracle Corporation. Although this fully integrated
ERP system will be Y2K certified, the key reasons for implementing the new
system are to further enhance the Company's technical infrastructure by
providing to management the tools available in a new generation of systems and
software to speed information retrieval; to position the Company for business
growth; to facilitate business integration of acquired companies; and to provide
a clearer audit trail for the source of information.
GROSS PROFIT. Gross profit increased $2.7 million, or 10.0%, to $29.3
million for the nine months ended September 30, 1998 from $26.7 million for the
nine months ended September 30, 1997. As a percent of net sales, gross profit
decreased to 39.5% for the first nine months of 1998 from 40.5% for the same
period in 1997. Gross profit for the three months ended September 30, 1998
decreased $1.2 million, or 12.1%, to $8.9 million from $10.1 million for the
same period last year. As a percent of net sales, gross profit decreased to
37.2% for the third quarter of 1998 from 40.5% for the third quarter of 1997.
The decline in gross profit margin, for both the year-to-date and quarterly
comparisons, primarily resulted from the inventory write-up related purchase
accounting adjustments due to the Melcher acquisition. Excluding the Melcher
related inventory fair market value purchase write-up adjustments, gross profit
margin would have been 41.1% for the first nine months of 1998 and 42.2% for the
third quarter of 1998. Excluding the
11
<PAGE>
Melcher acquisition, gross profit margin would have been 40.9% for the first
nine months of 1998 and 41.6% for the third quarter of 1998.
SELLING EXPENSE. Selling expense increased $1.4 million, or 20.1%, to $8.2
million for the nine months ended September 30, 1998 from $6.9 million for the
comparable period in 1997. As a percent of net sales, selling expense increased
to 11.1% for the first nine months of 1998 from 10.4% for the comparable period
in 1997. The increase of $1.4 million in the first nine months of 1998 was
primarily due to September's selling expense of $1.2 million related to the
Melcher acquisition and higher employee costs, increased outside sales
commissions and other variable selling costs aggregating $200,000, which were
incurred to support the increase in sales volume in the first half of 1998.
Selling expense for the three months ended September 30, 1998 increased $1.4
million, or 58.5%, to $3.8 million from $2.4 million for the three months ended
September 30, 1997. The increase in third quarter selling expense was primarily
due to $1.2 million of selling expense related to Melcher. As a percent of net
sales, selling expense increased to 15.8% for the third quarter of 1998 from
9.6% for the same period in 1997.
ADMINISTRATIVE EXPENSE. Administrative expense increased $1.0 million, or
21.6%, to $5.7 million for the nine months ended September 30, 1998 from $4.7
million for the nine months ended September 30, 1997. As a percent of net sales,
administrative expense increased to 7.6% for the first nine months of 1998 from
7.1% for the comparable period in 1997. The increase of $1.0 million was
primarily attributable Melcher's administrative expense of $216,000 in
September, public company expenses of $160,000, costs related to pursuing other
acquisitions of $154,000, higher depreciation expense of $113,000, and other
operating costs aggregating $357,000, due to the growth in business volume,
primarily in the first half of 1998.
Administrative expense for the three months ended September 30, 1998
increased $372,000, or 21.6%, to $2.1 million from $1.7 million for the three
months ended September 30, 1997. The increase is primarily due to the additional
administrative expense of $216,000 related to Melcher, higher depreciation
expense of $113,000, and higher other operating costs aggregating $333,000,
which were partially offset by a decrease in employee performance bonuses of
$290,000. As a percent of net sales, administrative expense increased to 8.8%
for the third quarter of 1998 from 6.9% for the same period in 1997.
ENGINEERING EXPENSE. Engineering expense increased $947,000, or 34.3%, to
$3.7 million for the nine months ended September 30, 1998 from $2.8 million for
the nine months ended September 30, 1997. As a percent of net sales, engineering
expense increased to 5.0% for the first nine months of 1998 from 4.2% for the
comparable period in 1997. Engineering expense for the three months ended
September 30, 1998 increased $372,000, or 35.7%, to $1.4 million from $1.0
million for the three months ended September 30, 1997. As a percent of net
sales, engineering expense increased to 5.9% for the third quarter of 1998 from
4.2% for the same period in 1997. These increases were mainly attributable to
the Company's initiative to increase investment in research and development
resources in the first half of 1998, and the addition of Melcher.
QUALITY ASSURANCE EXPENSE. Quality Assurance expense increased $153,000, or
10.1%, to $1.7 million for the nine months ended September 30, 1998 from $1.5
million for the nine months ended September 30, 1997. As a percent of net sales,
quality assurance expense decreased to 2.2% for the first nine months of 1998
from 2.3% for the comparable period in 1997. Quality assurance expense for the
three months ended September 30, 1998 increased $91,000, or 19.1%, to $567,000
from $476,000 for the three months ended September 30, 1997. As a percent of net
sales, quality assurance expense increased to 2.4% for the third quarter of 1998
from 1.9% for the same period in 1997. These increases were primarily due to
higher quality assurance expense related to the Melcher acquisition and
increased employee costs attributable to the additional demand for quality
assurance resources created by the growth in business volume in the first half
of 1998.
12
<PAGE>
AMORTIZATION OF INTANGIBLES. Amortization of intangibles expense increased
$170,000, or 11.2%, to $1.7 million for the nine months ended September 30, 1998
from $1.5 million for the same period in 1997. For the three months ended
September 30, 1998, amortization of intangibles expense increased $169,000, or
33.3%, to $677,000 from $508,000 for the comparable period last year. These
increases were entirely attributable to the Melcher acquisition.
INCOME FROM OPERATIONS. As a result of the items above, income from
operations decreased $996,000, or 10.7%, to $8.3 million for the nine months
ended September 30, 1998 from $9.3 million for the comparable period in 1997. As
a percent of net sales, income from operations decreased to 11.3% for the first
nine months of 1998 from 14.2% for the same period in 1997. For the three months
ended September 30, 1998, income from operations decreased $3.6 million, or
91.7%, to $328,000 from $3.9 million for the comparable period in 1997.
INTEREST EXPENSE. Interest expense decreased $2.4 million, or 82.3%, to
$517,000 for the nine months ended September 30, 1998 from $2.9 million for the
comparable period in 1997. For the three months ended September 30, 1998,
interest expense decreased $584,000 to $332,000 from $916,000 for the same
period last year. These decreases were primarily the result of the repayment of
all bank borrowings under the Company's existing bank credit facility in the
fourth quarter of 1997, with the net proceeds from the Company's initial public
offering completed last year which were offset by borrowings in 1998.
INTEREST INCOME. Interest income increased $1.3 million, to $1.3 million
for the nine months ended September 30, 1998 from $19,000 for the nine months
ended September 30, 1997. Interest income for the three months ended September
30, 1998 increased $335,000 to $343,000 from $8,000 in the same period last
year. These increases are attributable to the interest income derived from
investment of a portion of the net proceeds from the Company's initial public
offering in short-term, interest bearing investment-grade financial instruments.
OTHER EXPENSE, NET. Other expense, net, increased $43,000, to $31,000 for
the nine months ended September 30, 1998 from other income, net, of $12,000 for
the nine months ended September 30, 1997. Other expense for the third quarter of
1998 increased $162,000 to $187,000 from $25,000 in the comparable period last
year. The majority of this increase, or $106,000, is related to Melcher.
INCOME TAXES. The provision for income taxes increased to $2.6 million for
the nine months ended September 30, 1998 from $1.7 million for the comparable
period in 1997. The increase in income taxes reflects an increase in the
effective tax rate to 29.2% for the first nine months of 1998 from 27.1% for the
same period in 1997. This increase in the effective tax rate reflects the higher
percentage of the Company's operating income that was generated from increased
sales of high-range power products, primarily in the first half of 1998.
High-range power products are primarily assembled and configured in the U.S. and
Mexico, which have higher tax rates than the Company's Puerto Rico operations.
The income tax provision for the three months ended September 30, 1998
decreased to a negative $135,000 from $882,000 for the same period in 1997. This
decrease is due to a $333,000 reduction in tax provision related to purchase
accounting adjustments for Melcher, with the balance attributable to a tax
credit related to a pre-tax loss incurred by Power-One's U.S. operations in the
third quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company's balance of cash and cash equivalents
was $11.6 million compared to $32.0 million at December 31, 1997, a decrease of
$20.4 million, or 63.8%. Net cash provided by operating activities increased
$15.5 million to $19.9 million for the nine months ended September 30, 1998,
from $4.4 million for the nine months ended September 30, 1997. The increase to
$19.9 million for the first nine months of 1998 was primarily due to higher net
income, a decrease of $1.9 million in accounts receivable, a decrease of $7.3
million in inventories and a $2.1 million decrease in refundable income taxes,
13
<PAGE>
which were partially offset by a $863,000 decrease in accounts payable and a
$664,000 decrease in accrued expenses.
The decrease in accounts receivable is primarily attributable to a greater
focus on improved collection efforts. The decrease in inventory at September 30,
1998, is primarily due to the Company's initiative to reduce inventory balances
and improve inventory turnover. The decrease in accounts payable is due to the
corresponding decrease in inventory along with additional discount terms offered
by vendors. The decrease in accrued expense is primarily due to reduced
management bonus accruals.
Net cash used in investing activities increased $46.9 million to $49.3
million for the nine months ended September 30, 1998, from $2.4 million for the
nine months ended September 30, 1997. The increase to $49.3 million for the
first nine months of 1998 is primarily due to the acquisition of Melcher for
$40.7 million, which is net of $2.7 million cash acquired. Also contributing to
the increase were cash expenditures of $3.5 million for the new manufacturing
facility in Mexico, as well as purchases of property, plant and capital
equipment consistent with supporting business growth targets. Depreciation and
amortization was $3.9 million for the nine months ended September 30, 1998,
compared with $3.1 million for the nine months ended September 30, 1997. The
Company anticipates that its total capital expenditures for 1998 will be
approximately $11.3 million, of which approximately $5.3 million represents the
cost of the new manufacturing facility in Mexico and $1.5 million the Oracle ERP
system.
Net cash provided by financing activities increased $7.1 million to $9.0
million for the nine months ended September 30, 1998, from a use of $1.8 million
for the nine months ended September 30, 1997. The increase to $9.0 million for
the first nine months of 1998 is primarily due to proceeds from borrowings of
$10.0 million from the Company's revolving line of credit related to the Melcher
acquisition.
The Company's revolving line of credit in the U.S. bears interest on amounts
outstanding payable quarterly based on the Company's leverage ratio and one of
the following rates as selected by the Company: LIBOR plus 1.0% to 2.25%, or the
bank's base rate plus 0% to 1.25%. The Company's revolving lines of credit in
Switzerland bear interest on amounts outstanding payable at various time
intervals and market rates based on Swiss LIBOR plus a premium ranging from
1.25% to 2.00%. As of September 30, 1998, $24.7 million was outstanding under
the various credit agreements, and the Company was in compliance with all debt
covenants. Borrowings are collateralized by substantially all of the Company's
assets.
Based on current plans and business conditions, the Company believes its
existing working capital and borrowing capacity, coupled with the funds
generated from the Company's operations, will be sufficient to fund its
anticipated working capital, capital expenditures and outstanding lease
commitments for the foreseeable future. However, if the Company makes a large
acquisition, it may be necessary to raise debt or equity in the private or
public securities markets.
YEAR 2000 ISSUE
What is now commonly known as "The Year 2000 Issue" ("Y2K") is primarily the
result of computer systems and software programs being coded to accept two digit
entries rather than four to define the applicable year. These computer systems
and programs were designed and developed without consideration of the upcoming
change in the century. For example, the year "00" may be recognized as 1900
instead of 2000 and, if not corrected, many computer applications could fail or
create erroneous results.
The Y2K issue creates risk for the Company from unforeseen problems with its
own computer systems and software and from third party suppliers and customers
with whom the Company deals on financial transactions. To address these risks,
the Company established a task force in early 1998. The task force is currently
performing a comprehensive review and is taking actions to ensure the internal
readiness of its computer systems and software, its technical infrastructure, as
well as embedded systems commonly found in manufacturing equipment such as
microcontrollers. The review also includes assessments of the Company's products
and the readiness of its key suppliers, subcontractors and customers to handle
dates
14
<PAGE>
beginning with the year 2000. Based on assessments to date, the Company believes
that its products are not date sensitive and that the likelihood of a material
adverse impact on customers is remote.
Although the Company's existing ERP system is not Y2K compliant, the new
Oracle ERP system currently being implemented will remedy this issue as it is
Y2K certified. The Oracle ERP system is planned to be in place by the start of
the second quarter of 1999. In addition, should the Company's implementation of
the Oracle ERP system be delayed, the Company has implemented a phased plan to
further reduce business risk by modifying its existing system to be Y2K
compliant. Phase one of this plan is currently underway and addresses databases
in its existing ERP system related to future, date-sensitive financial
information and reports; phase two of the contingency plan will be activated in
the second quarter of 1999 should the implementation timetable of the Oracle ERP
system be delayed, with remediation and testing efforts scheduled for completion
by the end of the third quarter of 1999.
Additionally, the Company has identified other software applications used by
the Company and is modifying or replacing them in order to be Y2K compliant.
Most of the Company's assessment efforts have been completed at this time and
remediation and testing actions are either underway or in the planning stages
and are on schedule.
The overall costs to complete the Company's Y2K project are not expected to
be material. The Company is on schedule to complete assessment, modifications
and testing of its computer systems and software in 1998. The project is
expected to be significantly completed by the end of the first half of 1999,
which is prior to any anticipated impact on its operating systems.
The Company may not be able to identify all Y2K problems before they occur
or to successfully remedy any problems that it discovers. While the Company does
not believe that Y2K related expenditures will have a material adverse effect on
its business, if the necessary implementations and modifications are not made on
a timely basis, the Y2K issue could have a material adverse effect on the
Company's business, results of operations, cash flows or financial condition.
Although the Company is in the process of receiving Y2K updates from key
suppliers, subcontractors and customers and is currently assessing the risk that
failure of their systems to be Y2K compliant may have a material adverse impact
on the Company's business, there can be no assurance that their remediation
efforts will lead to a successful functioning of their information systems and
software and could result in a material adverse impact on the Company's
operations and financial results. The Company is developing contingency plans to
minimize potential disruptions to its business operations.
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," "estimate," 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
ability of the Company to: (a) successfully identify and implement its various
action plans related to obtaining synergies in sales, cost reductions and
technology with respect to its recent acquisition of Melcher; (b) to
successfully implement its Year 2000 corrective action plan; and (c) maintain
existing and form new relationships with customers. Other risks and
uncertainties include uncertainties relating to 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.
15
<PAGE>
PART II--OTHER INFORMATION
ITEMS 1 through 5--Not applicable
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27--Financial Data Schedule
(b) REPORTS ON FORM 8-K
On August 31, 1998, the Company filed a report on Form 8-K which reported
the acquisition of all of the outstanding capital stock and certain convertible
loans of Melcher Holding AG.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
Dated: November 9, 1998 POWER-ONE, INC.
By: /s/ STEVEN J. GOLDMAN
-----------------------------------------
Steven J. Goldman
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE
OFFICER AND PRESIDENT
By: /s/ EDDIE K. SCHNOPP
-----------------------------------------
Eddie K. Schnopp
VICE PRESIDENT, FINANCE AND LOGISTICS,
CHIEF FINANCIAL OFFICER AND SECRETARY
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND CONSOLIDATED BALANCE SHEET AS
OF SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 11,611
<SECURITIES> 0
<RECEIVABLES> 22,181
<ALLOWANCES> 1,696
<INVENTORY> 32,341
<CURRENT-ASSETS> 69,326
<PP&E> 39,805
<DEPRECIATION> 7,405
<TOTAL-ASSETS> 154,989
<CURRENT-LIABILITIES> 25,472
<BONDS> 0
18,196
0
<COMMON> 17
<OTHER-SE> 107,182
<TOTAL-LIABILITY-AND-EQUITY> 154,989
<SALES> 74,147
<TOTAL-REVENUES> 74,147
<CGS> 44,830
<TOTAL-COSTS> 44,830
<OTHER-EXPENSES> 20,973
<LOSS-PROVISION> 394
<INTEREST-EXPENSE> 517
<INCOME-PRETAX> 9,054
<INCOME-TAX> 2,645
<INCOME-CONTINUING> 6,409
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,409
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.37
</TABLE>
