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DPW > SEC Filings for DPW > Form 10-Q on 20-Nov-2012All Recent SEC Filings

Show all filings for DIGITAL POWER CORP

Form 10-Q for DIGITAL POWER CORP


20-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on our expectations, beliefs, forecasts, intentions and future strategies and are signified by the words "expects," "anticipates," "intends," "believes" or similar language. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business and other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under "Part II, Item 1A. Risk Factors" and elsewhere in this report. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. All forward-looking statements included in this quarterly report are based on information available to us on the date of this report and speak only as of the date hereof. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

In this quarterly report, the "Company," "Digital Power," "we," "us" and "our" refer to Digital Power Corporation, a California corporation, and our wholly-owned subsidiary, Digital Power Limited.

GENERAL

Digital Power Corporation is a solution-driven organization that designs, develops, manufactures and sells high-grade customized and flexible power system solutions for the most demanding applications in the medical, military, telecom and industrial markets. We are highly focused on high-grade and custom product designs for the commercial, medical and military/defense markets, where customers demand high density, high efficiency and ruggedized products to meet the harshest and/or military mission critical operating conditions. We are a California corporation originally formed in 1969, and our common stock trades on the NYSE Amex under the symbol "DPW". Our corporate headquarters are located in the heart of the Silicon Valley.

We also have a wholly-owned subsidiary, Digital Power Limited ("DPL"), which operates under the brand name of "Gresham Power Electronics" ("Gresham"). DPL is located in Salisbury, England, and it designs, manufactures and sells power products and system solutions mainly for the European marketplace, including power conversion, power distribution equipment, DC/AC (Direct Current/Active Current) inverters and UPS (Uninterruptible Power Supply) products. DPL's defense business specializes in power conversion and distribution equipment for Naval applications.

We believe that we are one of the first companies in the power solutions industry to introduce a product strategy based on the premise that products developed with an extremely flexible architecture enable rapid modifications to meet unique customer requirements for non-standard output voltages. The development and implementation of this strategy has resulted in broad acceptance in the telecom/industrial, and increasingly in the medical market, segments for our new line of high density and high efficiency power products. These products set an industry standard for providing high-power output in package sizes that are among the smallest available for such commercial products.

We market and sell our products to many diverse market segments, including the telecom, industrial, medical and military/defense industries. Our products serve a global market, with an emphasis on North America, Europe and the Far East. We offer a broad product variety, including a full custom product design and production, unique high-speed switching power front-end, modified-standard and value added products of Open-Frame, Compact PCI, Micro TCA, ATCA Front-End, PoE (Power over Ethernet), Inverter, UPS, and complete custom power product solutions for commercial and military marketplaces, providing power output from 50 watts to 72,000 watts.

In an effort to provide short lead-times, high quality products and competitive pricing to support our markets, we have entered into production agreements with several contract manufacturers located in Asia, primarily China. These agreements allow us to better control production costs and ensure high quality products deliverable in a timely manner to meet market demand. However, we use domestic manufacturers to manufacture prototypes, "short production run" and our military products.


We intend to remain an innovative leader in the development of cutting-edge custom power solutions and rich features products to meet any customer needs and requirements, rugged power systems to meet harsh and extreme operation environmental requirements, and high performance, high efficiency, high-density and modular power systems. We are focusing today on developing even more high-grade custom power system solutions for numerous customers in a broadly diversified range of markets and challenging environments. Each product development is based on best of class performance criteria, including unique, advanced feature sets and a special layout to meet our customers' unique operating conditions where efficiency, size and time to market are key to their success. We are taking initiatives to develop and sell high efficiency "green power" solutions.

RESULTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012, COMPARED TO SEPTEMBER 30, 2011

Revenues

Our revenues decreased by $1.3 million, or 44%, to $1.7 million for the three months ended September 30, 2012, from $3.0 million for the three months ended September 30, 2011. The decrease in revenues was mainly due to decrease in shipment of our custom products to the commercial markets and shipments to the military markets.

Revenues from our U.S. operations decreased by $565,000 or 32.8% to $1.2 million for the three months ended September 30, 2012, from $1.7 million for the three months ended September 30, 2011. Revenues from our European operations decreased by $780,000 or 59.9% to $522,000 from $1.3 million in three months ended September 30, 2012. The decrease in revenues in our U.S. operations was attributable to decreased sales of custom products to the commercial market while the decrease in the revenues from European operations was primarily due to decreased sales to military market.

For the nine months ended September 30, 2012, our revenues decreased by 25.2% to $6.8 million from $9.2 million for the nine months ended September 30, 2011. The decrease in the revenues was attributable to end of life of certain military products of our European operations and lower demand due in the domestic operations.

For the nine months ended September 30, 2012, revenues from our U.S. operations decreased by $1.0 million or 20.5% to $4.0 million from $5.0 for the nine months ended September 30, 2011. Revenues from our European operations decreased by $1.3 million or 30.9% to $2.9 million from $4.1 million.

Gross Margins

Gross margins decreased to 38.2% for the three months ended September 30, 2012, compared to 40.8% for the three months ended September 30, 2011. Gross margins for the nine months ended September 30, 2012 increased to 41.5% compared to the gross margins of 39.0% for the nine months ended September 30, 2011. The decrease in the margin for the three months ended September 30, 2012 as compared to the same period in 2011 was due to lower sales. The increase in gross margins for the nine months ended September 30, 2012 was mainly due to lower pricing offered by suppliers and improved product mix.


Engineering and Product Development

Engineering and product development expenses were $191,000 for the three months ended September 30, 2012, compared to $186,000 for the three months ended September 30, 2011. Engineering and product development expenses were $513,000 for the nine months ended September 30, 2012 as compared to $388,000, for the nine months ended June 30, 2011. The overall increase in our engineering and product development expenses was mainly due to increased spending on consulting costs related to additional custom products.

Selling and Marketing

Selling and marketing expenses were $270,000 for the three months ended September 30, 2012 as compared to $250,000 for the three months ended September 30, 2011. Selling and marketing expenses were $760,000 for the nine months ended September 30, 2012 as compared to $514,000 for the nine months ended September 30, 2011. The increase in the absolute dollars of selling and marketing expenses was primarily due to higher expense in marketing headcount.

General and Administrative

General and administrative expenses were $424,000 for the three months ended September 30, 2012 as compared to $303,000 for the three months ended September 30, 2011. General and administrative expenses were $1.2 million for the nine months ended September 30, 2012 as compared to $882,000 for the nine months ended September 30, 2011. The increase in general and administrative expenses during the three and nine months ended September 30, 2012 was mainly due higher legal and consulting fees.

Financial Income (Expense)

Financial expense was $216,000 for the three months ended September 30, 2012 compared to financial income of $14,000 for the three months ended September 30, 2011. Financial expense was $238,000 for the nine months ended September 30, 2012 compared to financial expense of $13,000 for the nine months ended September 30, 2011. The change in financial results was primarily due to impairment of investment in Telkoor stock which is recorded on fair value.

LIQUIDITY AND CAPITAL RESOURCES

On September 30, 2012, we had cash and cash equivalents of $1.9 million and working capital of $4.4 million. This compared with cash and cash equivalents of $1.8 million and working capital of $3.8 million at December 31, 2011. The increase in cash and cash equivalents and working capital was due mainly to net cash provided by operating activities of $170,000.


Net cash used in investing activities was $81,000 for the nine months ended September 30, 2012 compared to $1,034,000 for the nine months ended September 30, 2011. The net usage of cash for investing activities in 2011 was due mainly to a purchase of available for sale securities of Telkoor.

Net cash provided by financing activities was $33,000 for the nine months ended September 30, 2011 due to a employees' options exercised. There were no cash flows from financing activities for the nine months ended September 30, 2012.

We believe we have adequate resources at this time to continue our operational and promotional efforts to increase sales and support our current operation. However, if we do not increase our sales, we may have to raise money through debt or equity, which may dilute shareholders' equity.

CRITICAL ACCOUNTING POLICIES

In our Annual Report on Form 10-K for the year ended December 31, 2011, we identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements. The basis for developing the estimates and assumptions within our critical accounting policies is based on historical information and known current trends and factors. The estimates and assumptions are evaluated on an ongoing basis and actual results have been within our expectations. We have not changed these policies from those previously disclosed in our Annual Report.

The Company reclassified its investment in Telkoor's shares from Available-For -Sale investment into an investment recorded at cost based on the estimated fair value in the reclassification date. Unrealized losses that are considered other than temporary are recognized as finance expenses in the income statement. In the earlier periods, this investment was recorded at market value and all differences in the market value were recognized through other comprehensive income.

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