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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JULY 2, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-4466
ARTESYN TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
FLORIDA
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(State or other jurisdiction of incorporation or organization)
59-1205269
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(I.R.S. Employer Identification No.)
7900 Glades Road, Suite 500, Boca Raton, Florida 33434
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (561)451-1000
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NOT APPLICABLE
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Former name, address and 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 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
---
The number of shares of Common Stock, $.01 par value, of the Registrant issued
and outstanding as of July 30, 1999, was 37,456,868 shares.
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<PAGE>
ARTESYN TECHNOLOGIES, INC.
INDEX TO FORM 10-Q
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations-
For the Thirteen and Twenty-Six Weeks Ended
July 2, 1999 and July 3, 1998 3
Condensed Consolidated Statements of Financial Condition-
July 2, 1999 and January 1, 1999 4
Condensed Consolidated Statements of Cash Flows - For the
Twenty-Six Weeks Ended July 2, 1999 and July 3, 1998 5
Condensed Consolidated Statement of Shareholders' Equity
and Comprehensive Income- - For the Twenty-Six Weeks
Ended July 2, 1999 6
Notes to Condensed Consolidated Financial
Statements 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
Exhibit No. 27
SIGNATURE
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARTESYN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
JULY 2, JULY 3, JULY 2, JULY 3,
1999 1998 1999 1998
------------ ------------- ----------- --------------
<S> <C> <C> <C> <C>
SALES $ 150,427 $ 121,824 $ 285,543 $ 269,002
COST OF SALES 112,310 89,402 213,885 200,770
------------ ------------- ----------- --------------
GROSS PROFIT 38,117 32,422 71,658 68,232
------------ ------------- ----------- --------------
OPERATING EXPENSES
Selling, general and administrative 12,884 14,399 26,458 28,751
Research and development 9,373 8,285 18,240 17,244
Restructuring charge - - - 7,189
------------ ------------- ----------- --------------
TOTAL OPERATING EXPENSES 22,257 22,684 44,698 53,184
------------ ------------- ----------- --------------
OPERATING INCOME 15,860 9,738 26,960 15,048
OTHER INCOME (EXPENSE):
Interest expense (735) (1,047) (1,425) (2,134)
Interest income 300 664 641 1,344
------------ ------------- ----------- --------------
(435) (383) (784) (790)
------------ ------------- ----------- --------------
INCOME BEFORE INCOME TAXES 15,425 9,355 26,176 14,258
PROVISION FOR INCOME TAXES 5,015 3,180 8,455 4,847
------------ ------------- ----------- --------------
NET INCOME $ 10,410 $ 6,175 $ 17,721 $ 9,411
============ ============= =========== ==============
EARNINGS PER SHARE
Basic $ 0.28 $ 0.16 $ 0.48 $ 0.24
============ ============= =========== ==============
Diluted $ 0.27 $ 0.15 $ 0.45 $ 0.23
============ ============= =========== ==============
COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING
Basic 37,061 38,646 37,271 38,554
Diluted 38,852 41,004 38,952 41,254
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
ARTESYN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands Except Share Data)
(Unaudited)
<TABLE>
<CAPTION>
JULY 2, JANUARY 1,
1999 1999
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 43,380 $ 41,525
Accounts receivable, net 90,088 88,828
Inventories 71,476 62,460
Prepaid expenses and other 4,037 4,832
Deferred income taxes, net 7,685 7,685
--------------- ---------------
Total current assets 216,666 205,330
--------------- ---------------
PROPERTY, PLANT & EQUIPMENT, NET 82,341 75,032
--------------- ---------------
OTHER ASSETS
Goodwill, net 33,741 40,039
Deferred income taxes, net 2,682 2,682
Other assets, net 2,373 2,309
--------------- ---------------
Total other assets 38,796 45,030
--------------- ---------------
$337,803 $325,392
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt and capital leases $ 2,286 $ 2,707
Accounts payable and accrued liabilities 100,085 81,653
--------------- ---------------
Total current liabilities 102,371 84,360
--------------- ---------------
LONG-TERM LIABILITIES
Long-term debt and capital leases 45,417 50,283
Other long-term liabilities 9,561 9,661
--------------- ---------------
Total long-term liabilities 54,978 59,944
--------------- ---------------
Total liabilities 157,349 144,304
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01; 1,000,000 shares authorized;
none issued - -
Common stock, par value $.01; 80,000,000 shares
authorized; 37,233,979 shares issued and outstanding
at July 2, 1999 (37,882,248 shares at January 1, 1999) 372 379
Additional paid-in capital 88,475 85,018
Retained earnings 100,434 99,128
Foreign currency translation adjustment (8,827) (3,437)
--------------- ---------------
Total shareholders' equity 180,454 181,088
--------------- ---------------
$337,803 $325,392
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
ARTESYN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
JULY 2, JULY 3,
1999 1998
---------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $17,721 $ 9,411
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 9,464 8,367
Provision for restructuring charge - 7,189
Other non-cash charges 4,799 2,848
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (5,073) 12,197
Increase in inventories and prepaid expenses (14,781) (2,364)
Increase (decrease) in accounts payable and accrued liabilities 22,773 (14,603)
---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 34,903 23,045
---------- -----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (17,984) (9,671)
(Increase) decrease in other assets 2,873 (420)
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (15,111) (10,091)
---------- -----------
FINANCING ACTIVITIES:
Principal payments on debt and capital leases (19,495) (15,154)
Proceeds from revolving credit loans, net of costs 17,493 -
Repurchases of common stock (19,273) -
Proceeds from exercises of stock options 4,786 2,505
---------- -----------
NET CASH USED IN FINANCING ACTIVITIES (16,489) (12,649)
---------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS (1,448) (290)
---------- -----------
INCREASE IN CASH AND EQUIVALENTS 1,855 15
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 41,525 55,392
---------- -----------
CASH AND EQUIVALENTS, END OF PERIOD $43,380 $55,407
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
ARTESYN TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS'EQUITY AND COMPREHENSIVE INCOME
For the Twenty-Six Weeks Ended July 2, 1999
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY
COMMON STOCK PAID-IN RETAINED TRANSLATION COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT INCOME
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1999 37,882 $ 379 $ 85,018 $ 99,128 $ (3,437)
Issuance of common stock under stock option
plans 603 6 4,780 - -
Tax benefit from exercises of stock options - - 1,522 - -
Repurchases and retirement of common stock (1,251) (13) (2,845) (16,415)
Net income - - - 17,721 - $ 17,721
Other comprehensive income - foreign
currency translation adjustment, net of tax
benefit of $ 2,572 - - - - (5,390) (5,390)
---------
Comprehensive income $ 12,331
--------- --------- --------- --------- --------- =========
BALANCE, JULY 2, 1999 37,234 $ 372 $ 88,475 $ 100,434 $ (8,827)
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
ARTESYN TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 2, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Certain information and footnote disclosures required by U.S.
generally accepted accounting principles for complete audited financial
statements have been condensed or omitted.
In the opinion of management, the accompanying condensed consolidated financial
statements include all adjustments (consisting of normal recurring accruals)
considered necessary to present fairly the financial position, results of
operations and cash flows of Artesyn Technologies, Inc. (the "Company"). The
results of operations for the thirteen and twenty-six weeks ended July 2, 1999
are not necessarily indicative of the results that may be expected for the
entire fiscal year 1999. For further information, these Condensed Consolidated
Financial Statements should be read in conjunction with the financial statements
and notes thereto included in the Company's 1998 Annual Report to Shareholders
on Form 10-K and Form 10-Q for the thirteen week period ended April 2, 1999.
Certain prior year amounts have been reclassified to conform with current year's
presentation.
2. INVENTORIES
The components of inventory are as follows ($000s):
JULY 2, JANUARY 1,
1999 1999
----------- -----------
Raw materials $37,265 $30,737
Work in process 11,679 10,097
Finished goods 22,532 21,626
----------- -----------
$71,476 $62,460
=========== ===========
3. PROPERTY, PLANT & EQUIPMENT, NET
Related accumulated depreciation was $74,512,000 and $69,779,000 at July 2, 1999
and January 1, 1999, respectively.
7
<PAGE>
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The components of accounts payable and accrued liabilities are ($000s):
JULY 2, JANUARY 1,
1999 1999
------------ -------------
Accounts payable $51,046 $42,025
Accrued liabilities:
Compensation and benefits 14,866 13,543
Income taxes payable 13,467 8,296
Warranty reserve 4,644 4,897
Restructuring reserve 1,747 2,795
Other 14,315 10,097
------------ -------------
$100,085 $81,653
============ =============
5. RESTRUCTURING CHARGE
During the first quarter of fiscal year 1998, the Company recorded a $9.6
million pre-tax charge in connection with the Company's restructuring plan
following its merger with Zytec Corporation ("Zytec"). This amount was allocated
in the accompanying Consolidated Statements of Operations as follows: $7.2
million to Restructuring Charge and $2.4 million to Cost of Sales, the latter of
which related principally to inventory write-offs of duplicate product
development programs which were underway at the Company and Zytec prior to the
merger. The following table summarizes activity for the first half of fiscal
year 1999 and the remaining restructuring reserve balance of approximately $1.7
million, which is included in accrued liabilities as of July 2, 1999 ($000s):
EMPLOYEE
TERMINATION FACILITY
BENEFITS CLOSURES
--------------- ------------
Reserve balance at January 1, 1999 $1,150 $1,645
Cash payments (459) (589)
--------------- ------------
Reserve balance at July 2, 1999 $ 691 $1,056
=============== ============
As of July 2, 1999, the remaining employee termination benefits represent
severance pay and fringe benefits associated with the elimination of 68
positions.
The provision for the facility closures includes leasehold termination payments,
service contracts obligations, and other exit costs associated with facilities
closed in Europe as further described in the financial statements and notes
included in the Company's 1998 Annual Report to Shareholders on Form 10-K.
With the exception of certain lease-related cash requirements (which are payable
through the first quarter of 2001), the remaining anticipated cash payments of
approximately $1.7 million are expected to be paid during the remainder of
fiscal year 1999.
8
<PAGE>
6. INCOME TAXES
The provision for income taxes reflects federal, state, and foreign taxes. The
effective income tax rate on pretax earnings differs from that computed at the
United States federal statutory rate for the following reasons:
TWENTY-SIX WEEKS ENDED
JULY 2, JULY 3,
1999 1998
---------- -----------
Provision computed at United States federal
statutory rate 35.0% 35.0%
Effect of state income taxes 3.2 2.7
Amortization of goodwill 0.3 0.3
Foreign tax effects (6.4) (1.5)
Change in the valuation allowance - (3.0)
Other 0.2 0.5
---------- ----------
Effective tax rate 32.3% 34.0%
========== ===========
7. COMPREHENSIVE INCOME
The components of the Company's comprehensive income are as follows ($000s):
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
JULY 2, JULY 3, JULY 2, JULY 3,
1999 1998 1999 1998
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net income $ 10,410 $ 6,175 $ 17,721 $ 9,411
Foreign currency translation adjustment (3,557) 1,414 (7,962) (657)
Tax (provision) benefit 1,149 (481) 2,572 223
----------- ------------ ------------ -----------
(2,408) 933 (5,390) (434)
----------- ------------ ------------ -----------
Comprehensive income $ 8,002 $ 7,108 $ 12,331 $ 8,977
=========== ============ ============ ===========
</TABLE>
9
<PAGE>
8. EARNINGS PER SHARE
The following data show the amounts used in computing earnings per share ("EPS")
and the effects on income and the weighted-average number of shares of potential
dilutive common stock. The reconciliation of the numerator and denominator of
the EPS calculation is presented below (000s except per share data):
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
JULY 2, JULY 3, JULY 2, JULY 3,
1999 1998 1999 1998
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
BASIC EPS
Net income $ 10,410 $ 6,175 $ 17,721 $ 9,411
----------- ------------ ----------- -----------
Weighted average shares 37,061 38,646 37,271 38,554
----------- ------------ ----------- -----------
Per share - Basic $ 0.28 $ 0.16 $ 0.48 $ 0.24
=========== ============ =========== ===========
DILUTED EPS
Net income $ 10,410 $ 6,175 $ 17,721 $ 9,411
----------- ------------ ----------- -----------
Weighted average shares 37,061 38,646 37,271 38,554
Effect of dilutive items - Stock options 1,791 2,358 1,681 2,700
----------- ------------ ----------- -----------
38,852 41,004 38,952 41,254
----------- ------------ ----------- -----------
Per share- Diluted $ 0.27 $ 0.15 $ 0.45 $ 0.23
=========== ============ =========== ===========
Antidilutive weighted options 701 736 1,279 351
=========== ============ =========== ===========
</TABLE>
The above antidilutive weighted options to purchase shares of common stock were
not included in computing diluted earnings per share because their inclusion
would be antidilutive for the respective periods.
9. SHAREHOLDERS' EQUITY
As part of the previously announced three-year up to 4.0 million share
repurchase program implemented in 1998, the Company repurchased 1,251,200 shares
of its common stock for a total of $19.3 million, during the first half of
fiscal 1999. To date, the Company has repurchased 2,462,700 of the approved 4.0
million shares for a total of approximately $38.6 million. All of such purchases
were funded with cash from operations. The excess of the cost of shares
repurchased over par value was allocated to additional paid-in capital based on
the pro rata share amount of additional paid-in capital for all outstanding
shares with the difference charged to retained earnings.
10
<PAGE>
10. DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments, including foreign
currency purchased option contracts and forward contracts, to reduce financial
market risks. These instruments are principally used to hedge foreign currency
market exposures of underlying assets and liabilities. The Company does not use
derivative financial instruments for speculative or trading purposes. The
Company's accounting policies for these instruments are based on the Company's
designation of such instruments as hedging transactions. The criteria the
Company uses for designating an instrument as a hedge include the instrument's
effectiveness in risk reduction and a one-to-one matching of derivative
instruments to underlying transactions. Gains and losses on currency forward
contracts that are designated and effective as hedges of anticipated
transactions, for which a firm commitment has been attained, are deferred and
recognized in income in the same period that the underlying transactions are
settled. Gains and losses on currency forward contracts that are designated and
effective as hedges of existing transactions are recognized in income in the
same period as losses and gains on the underlying transactions are recognized
and generally offset. Gains and losses on any instruments not meeting the above
criteria are recognized in income in the current period. The risk of loss
associated with purchased options is limited to premium amounts paid for the
option contracts. The risk of loss associated with forward contract is equal to
the exchange rate differential from the time the contract is entered into until
the time it is settled.
The Company transacts business in various foreign currencies, primarily Deutsche
Marks, Japanese Yen and other European currencies. The Company has established
balance sheet hedging programs to protect against reductions in value and
volatility of future cash flows caused by changes in foreign exchange rates. At
July 2, 1999, the Company's outstanding notional amounts for currency forward
contracts and purchased option contracts were approximately $16.7 million and
$28.0 million, respectively, maturing in three to six months. At January 1,
1999, the Company's outstanding notional amount for currency forward contracts
was approximately $12.8 million. The amount of any gain or loss on these
contracts during the period ended July 2, 1999 was not material. Deferred gains
or losses attributable to the foreign currency instruments are not material.
11
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales for the second quarter of fiscal year 1999 increased 24% to $150.4 million
from $121.8 million reported for the comparable year-ago quarter. For the first
six months of 1999, sales totaled $285.5 million, up 6% from $269.0 million for
the comparable period in 1998. Sales in 1999 have increased principally as a
result of higher than anticipated shipments to major Original Equipment
Manufacturer ("OEM") customers in the networking and computing market sectors.
While this increased demand is from a few major customers, the Company believes
the increase in demand experienced in the past two quarters versus the
comparable period in the prior year provides an overall encouraging growth
indicator in the Company's markets.
The increased sales volume contributed to a higher gross margin in the second
quarter of 1999, which improved to 25.3% from the 24.8% reported in the first
quarter of 1999. This improvement was also attributable to continued savings
achieved through material cost reductions and plant rationalizations. However,
gross margin for the second quarter of 1999 was lower than the 26.6% reported
for the second quarter of 1998 primarily as a result of an increase in
high-volume but lower-margin OEM sales to the computing market.
The current year-to-date gross margin of 25.1% was lower than the 26.3% reported
for the six-month period in 1998 (excluding the $2.4 million charge for
write-off of inventory in 1998 in connection with the Company's 1998
merger-related restructuring plan) as savings from cost of materials and plant
rationalizations were more than offset by new product start-up costs. Gross
margins were also adversely impacted by the shift in sales mix to the Company's
high-volume but lower-margin OEM customers compared to the same period last
year. The Company expects its gross margins to modestly increase for the
remainder of 1999 due to more favorable sales and product mix and improved cost
of purchased materials.
Selling, general and administrative expenses decreased to $12.9 million and
$26.5 million for the thirteen and twenty-six weeks ended July 2, 1999,
respectively, compared to $14.4 million and $28.8 million for the comparable
prior year periods. The decrease primarily reflects efficiencies gained from the
Company's merger with Zytec Corporation ("Zytec") partially offset by expenses
associated with Year 2000 compliance and the implementation of the Company's
Enterprise Resource Planning (ERP) information system.
The Company continued its long-term commitment to new products by investing $9.4
million, or 6.2% of sales, in research and development activities during the
second quarter of 1999, compared to $8.3 million, or 6.8% of sales, in the
comparable year ago quarter. The Company believes that the timely introduction
of new technology and products is an important component of its competitive
strategy and anticipates future research and development spending will not
significantly differ from its historical trend as a percentage of sales of
approximately 6-8%.
Net income for the second quarter of 1999 was $10.4 million, or $0.27 per
diluted share, which is an improvement of 69% from $6.2 million, or $0.15 per
diluted share, reported for the comparable year-ago quarter. For the first six
months of 1999, net income was $17.7 million, or $0.45 per diluted share,
compared to $9.4 million, or $0.23 per diluted share, reported for the
comparable year-ago period, which included a one-time $9.6 million pre-tax
restructuring and inventory charge taken in the first quarter of 1998 as a
result of the merger with Zytec.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At July 2, 1999, the Company's cash and equivalents increased to $43.4 million
from $41.5 million on January 1, 1999 primarily due to income for the period and
favorable working capital changes, including higher payables and accrued
expenses, partially offset by $19.3 million spent for repurchases of the
Company's common stock and $18.0 million for capital expenditures during the
first half of 1999. These activities were funded with cash on hand, cash from
operations and $4.8 million proceeds from exercises of stock options.
Accounts receivable increased to $90.1 million at July 2, 1999 from $88.8
million at January 1, 1999 due to higher sales volume in the first half of 1999
compared to the fourth quarter of 1998 partially offset by significant
collection efforts.
The increase in inventory levels from $62.5 million at January 1, 1999 to $71.5
million at July 2, 1999 was primarily attributable to production planning to
meet manufacturing lead times, expansion of inventory depots to better service
customers, and anticipated demand for new product introductions.
Capital expenditures for the first half of 1999 totaled $18.0 million primarily
for the continued maintenance of facilities and equipment in support of the
Company's current operating activities including $5.9 million related to the
implementation of a new enterprise-wide ERP computer system. Such capital
expenditures were financed with cash on hand and cash generated from operations.
The Company's current overall commitment to fully implement the ERP system is
approximately $25 million, which the Company anticipates incurring over a
three-year period, of which approximately $22 million is expected to be
capitalized and amortized and approximately $3 million is expected to be
expensed as incurred. ERP costs incurred from inception to date totaled
approximately $14.9 million, of which $14.4 million has been capitalized and
$500,000 was expensed.
At July 2, 1999, accounts payable increased $9.0 million, or 21%, from January
1, 1999 due to increases in capital expenditures and material purchased as a
result of the higher sales volume. Cash provided by operating activities
increased to $34.9 million for the twenty-six weeks ended July 2, 1999 from
$23.0 million for the twenty-six weeks ended July 3, 1998. The increase was
primarily due to favorable working capital changes including an increase in
accounts payable and accrued liabilities.
Net cash used in financing activities of $16.5 million for the twenty-six weeks
ended July 2, 1999 reflects mainly the repurchase and retirement of 1,251,200
shares of the Company's common stock for $19.3 million, partially offset by $4.8
million in proceeds from stock option exercises. Net cash used in financing
activities of $12.6 million for the twenty-six weeks ended July 3, 1998 reflects
principally long-term debt and capital lease principal repayments, including
$2.2 million on the Company's seven-year term loan, $3.2 million on its 6.9%
mortgage note, and approximately $7.6 million on the Company's Austrian
subsidiary's revolving loans and notes payable partially offset by proceeds from
stock option exercises.
13
<PAGE>
Effective December 31, 1998, the Company entered into a revolving credit
agreement with a syndicate of banks which provides a new three-year,
multi-currency $200 million credit facility. The new revolving facility, which
expires on December 31, 2001, replaced the Company's previous $20 million credit
line. The agreement provides for various interest rate options on the facility
based on London Interbank Offering Rates plus .625% and includes a fee of .20%
on the unused balance, both payable quarterly. The agreement contains certain
negative covenants, which are typical of an agreement of this size and nature,
that, among other things, require the Company to maintain certain financial
ratios and limit the purchase, transfer or distribution of the Company's assets.
Borrowings were used for the repayment of the Company's $46.4 million of term
loans outstanding on January 1, 1999 and for other general corporate purposes.
On January 8, 1999, the existing term loans were repaid from borrowings under
the new revolving credit facility. Any amounts outstanding under the facility
are due on December 31, 2001. As of July 2, 1999, the Company was in compliance
in all material respects with the agreement's covenants.
Based on current plans and business conditions, the Company believes that its
cash and equivalents on hand, its available credit facility, cash generated from
operations, and other financing activities are expected to be adequate to meet
capital expenditures, working capital requirements, debt and capital lease
obligations and operating lease commitments through 1999.
YEAR 2000 INITIATIVES AND EFFECTS
The Company has an internal Year 2000 project team to evaluate its internal
facilities, engineering and manufacturing processes, and business information
systems with respect to Year 2000 readiness and compliance. Included in this
evaluation are the Company's products and systems and potential impact of the
Company's significant suppliers and customers. The Company is in the process of
communicating with its significant suppliers to determine the extent to which
the Company might be vulnerable to those third parties' failures to remedy their
Year 2000 issues. The Company does not believe that it has material exposure
related to the Year 2000 issue for the products it has sold.
There are five phases that describe the Company's process in becoming Year 2000
compliant. Phase 1, the awareness phase, encompasses developing a budget and
project plan. Phase 2, the assessment phase, identifies mission-critical systems
to check for compliance. Phase 3, the remediation phase, includes the actual
corrective activities for non-compliant systems and processes. The inventory,
risk assessment, project and contingency planning activities are complete. The
Company is currently involved in phase 3 remediation activities. The remaining
two phases, validation and implementation are ongoing based on contingency and
remediation planning.Compliance for critical systems is scheduled for
completion in September of 1999.
The Company completed the replacement of its legacy MRP computer systems to a
new ERP system throughout North America in July of 1999. Year 2000 compliant MRP
upgrades for the Company's Asia-Pacific locations were completed in July of
1999. European locations are scheduled for a MRP maintenance upgrade in August
of 1999, after which they will be Year 2000 compliant. The cost to upgrade these
systems has not been, and is not expected to be, material. The implementation of
the new ERP system for the Company's European and Asia-Pacific locations is
scheduled for completion by mid-year 2000. The implementation and installation
of the new ERP system was a planned system change following the merger with
Zytec to integrate the merged companies, and such implementation is not deemed
undertaken solely for the Company to become Year 2000 compliant.
The Company's current product set is Year 2000 compliant. Some products from the
Communications Products division have Year 2000 product dependencies that are
described on the Company's Year 2000 internet web site (www.artesyn.com).
The total estimated costs, excluding the implementation of the ERP systems, for
achieving Year 2000 compliance is currently estimated at $3.0 million, of which
approximately $700,000 has been incurred in 1998 and approximately $600,000 in
the first half of 1999. Of the total estimated amount, approximately $2.0
million is expected to be capitalized and approximately $1.0 million is expected
to be expensed as incurred. The total estimated cost to implement the new ERP
systems is approximately $25 million to be incurred over a three-year period of
which approximately $22 million is expected to be capitalized and amortized and
approximately $3 million is expected to be expensed as incurred. ERP system
costs incurred in 1998 totaled approximately $7.9 million, of which $7.7 million
was capitalized and $200,000 was expensed. ERP system costs incurred for the
first half of 1999 totaled approximately $7.0 million, of which $6.7 million was
capitalized and $300,000 was expensed. The Company expects these expenditures to
be financed through operating cash flows or borrowings, at the Company's
discretion.
The Company believes that its Year 2000 plan is sufficient and that the Year
2000 issue will not pose significant operational problems. The primary potential
Year 2000 risks at this time are supplier and/or customer non-compliance. The
risk posed by suppliers to the Company is an interruption of material flow,
which would impact shipments and resultant revenue. The risk posed by customers
is a cancellation or delay in orders of products by customers who are not Year
2000 ready or whose costs to remedy Year 2000 issues are so significant that
they cancel or delay orders. The Company believes that supplier risks are
mitigated by active supplier monitoring for Year 2000 compliance and detailed
contingency plans, including alternative sourcing strategies and/or safety
stock.
The Company has not been required to, and does not anticipate, deferring any
projects as a result of its Year 2000 preparation.
The estimates and conclusions set forth herein regarding Year 2000 compliance
contain forward-looking statements and are based on management's estimates of
future events and information provided by third parties. There can be no
assurance that such estimates and information will prove to be accurate. Risks
to completing the Year 2000 project include the availability of resources, the
Company's ability to discover and correct potential Year 2000 problems and the
ability of suppliers, customers and other third parties to bring their systems
into Year 2000 compliance.
15
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes and foreign
currency fluctuations. In the normal course of business, the Company employs
established policies and procedures to manage its exposure to changes in
interest rates and fluctuations in the value of foreign currencies using a
variety of derivative financial instruments. The Company attempts to manage the
interest rate risk on its variable rate debt instruments through use of interest
rate swaps pursuant to which the Company exchanges its floating rate interest
obligations for fixed rates. The fixing of the interest rates offsets
substantially all of the Company's exposure to the uncertainty of floating
interest rates during the term of the loans.
The Company has significant assets and operations in Europe and Asia and, as a
result, its financial performance could be affected by significant fluctuations
in foreign exchange rates. To mitigate potential adverse trends, the Company's
operating strategy takes into account changes in exchange rates over time.
Accordingly, the Company enters into various forward contracts that change in
value as foreign exchange rates change to help protect the value of its existing
foreign currency assets, liabilities, commitments and anticipated foreign
currency revenues. The principal currencies hedged are the Japanese yen, the
Deutsche mark, and the Euro.
It is the Company's policy to enter into foreign currency and interest rate
transactions only to the extent considered necessary to meet its objectives as
stated above. The Company does not enter into foreign currency or interest rate
transactions for speculative purposes. The amount of any gain or loss on these
contracts has not been material in the past and was not material for the period
ended July 2, 1999.
FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-Q constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 and
are based on the Company's current expectations with respect to future sales,
gross margins, operating efficiencies, research and development expenditures,
growth and working capital needs. Such statements involve risks and
uncertainties which may cause actual results to differ materially from those set
forth in these forward-looking statements. Factors that might affect such
forward-looking statements include, among others, general economic conditions,
growth and changes in the power supply and communications industries, changes in
customer mix, competitive factors and pricing pressures, changes in product mix,
the uncertainty in the development and acceptance of new products, ability to
attract and retain customers including new OEM communications customers, ability
to attract and retain personnel, inventory risks due to shifts in market demand,
changes in absorption of manufacturing overhead, domestic and foreign regulatory
approvals and other risks described in the Company's various reports filed with
the Securities and Exchange Commission.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Shareholders on May 6, 1999.
(c) The following matters were voted upon at the Annual Meeting of
Shareholders:
1. The election of the nominees for Directors who will serve for a term to
expire at the Annual Meeting of Shareholders to be held in 2000 was voted
on by the shareholders. The nominees, all of whom were elected, were:
Edward S. Croft, III, Fred C. Lee, Lawrence J. Matthews, Joseph M.
O'Donnell, Stephen A. Ollendorff, Phillip A. O'Reilly, Bert Sager, A.
Eugene Sapp, Jr., Ronald D. Schmidt, Lewis Solomon and John M. Steel. The
Inspectors of Election certified the following vote tabulations:
FOR WITHHELD
--- --------
Edward S. Croft, III 28,802,582 237,307
Fred C. Lee 28,929,642 110,247
Lawrence J. Matthews 28,717,233 322,656
Joseph M. O'Donnell 28,686,864 353,025
Stephen A. Ollendorff 28,799,573 240,316
Phillip A. O'Reilly 28,755,605 284,284
Bert Sager 28,636,986 402,903
Eugene Sapp, Jr. 26,994,312 2,045,577
Ronald D. Schmidt 28,810,149 229,740
Lewis Solomon 28,928,786 111,103
John M. Steel 28,855,299 184,590
2. A proposal to amend the 1990 Outside Director Stock Option Plan to
increase the authorized shares of Common Stock available for grant from
500,000 to 1,000,000 was approved by the shareholders. The Inspectors of
Election certified the following vote tabulations:
FOR AGAINST ABSTAIN
--- ------- -------
24,460,437 3,745,642 833,810
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit No. 27 -- Financial Data Schedule.
(B) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the thirteen-week period
ended July 2, 1999.
17
<PAGE>
SIGNATURE
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.
ARTESYN TECHNOLOGIES, INC.
--------------------------
(Registrant)
DATE: August 9, 1999 BY: RICHARD J. THOMPSON
-------------------
Richard J. Thompson
Vice President Finance
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUL-02-1999
<CASH> 43,380
<SECURITIES> 0
<RECEIVABLES> 91,982
<ALLOWANCES> 1,894
<INVENTORY> 71,476
<CURRENT-ASSETS> 216,666
<PP&E> 156,853
<DEPRECIATION> 74,512
<TOTAL-ASSETS> 337,803
<CURRENT-LIABILITIES> 102,371
<BONDS> 45,417
0
0
<COMMON> 88,847
<OTHER-SE> 91,607
<TOTAL-LIABILITY-AND-EQUITY> 337,803
<SALES> 285,543
<TOTAL-REVENUES> 285,543
<CGS> 213,885
<TOTAL-COSTS> 213,885
<OTHER-EXPENSES> 44,698
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,425
<INCOME-PRETAX> 26,176
<INCOME-TAX> 8,455
<INCOME-CONTINUING> 17,721
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,721
<EPS-BASIC> 0.48
<EPS-DILUTED> 0.45
</TABLE>
