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PWER > SEC Filings for PWER > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for POWER ONE INC


10-May-2013

Quarterly Report


Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations

The following management's discussion and analysis of financial condition and results of operations should be read in conjunction with our management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 30, 2012 filed with the SEC on February 28, 2013 as amended by our Amendment No. 1 to Annual Report on Form 10-K/A filed April 29, 2013, and all of our other filings, including Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, filed with the SEC after such date and through the date of this report.

This Quarterly Report on Form 10-Q may contain certain statements that we believe are, or may be considered to be, "forward-looking statements" within the meaning of various provisions of the Securities Act of 1933 and of the Securities Exchange Act of 1934. These forward-looking statements generally can be identified by the use of statements that include phrases such as we "expect," "anticipate," "plan," "intend," "continue," "may," "can," "believe" or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals also are forward-looking statements. All of these forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from historical results or from those expressed or implied by the relevant forward-looking statement. We discuss these risks and uncertainties in detail in Part I Item 1A of our 2012 Form 10-K for the year ended December 30, 2012 filed with the SEC on February 28, 2013 as amended by our Amendment No. 1 to Annual Report on Form 10-K/A filed April 29, 2013 together with further risks discussed in Part II Item-1A Risk Factors of this Form 10-Q.

Introduction

Overview

We are organized into two strategic business units ("SBUs"): Renewable Energy Solutions and Power Solutions. The SBUs focus on both the products and services we provide and the customers and end markets that we serve. We are focused on improving our operational and financial performance. Our top objectives are to gain additional market share, execute our operational strategy, and increase profitability and cash flows.

Our strategy is to gain market share by entering new markets and by providing our customers with innovative products and additional product offerings. Our new product introductions increase power density and provide our customers with a greater range of options to meet their diverse power conversion needs. These new product offerings range from a line of liquid-cooled inverters which serve the demands of the utility market, particularly in North America, to microinverters which are currently in production. In addition, we are adding software management capabilities to our inverter offerings that allow customers the ability to remotely monitor and control individual photovoltaic ("PV") plants or assets. We are also expanding our Power Solutions product line which includes our Platinum efficiency for custom front-end applications as well as other applications supporting our medical, rail and industrial equipment customers.

As part of our Renewable Energy Solutions operational strategy, we have entered into the North American and Asia Pacific markets and have established factories in North America and China, as well as product development laboratories, and we continue to build our regional sales and service teams. We will continue to strategically invest in sales and marketing, research and development ("R&D") and our global service team as we believe these are key drivers of our business. We are focused on reducing lead times, improving deliveries to customer request dates, and reducing freight and other transportation costs by localizing the supply chain.

Lastly, we are continuing to drive profitability and cash flow generation by refining our manufacturing operations thereby reducing our costs to manufacture products. To mitigate ongoing price erosion in our markets, we design our new products to be significantly lower in cost than the


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product being replaced along with value engineering existing products to reduce material, labor and other costs. In addition, we continually evaluate our operating expense structure to ensure it is appropriate to business conditions.

Renewable Energy Solutions: We offer inverters, management systems, accessories and services for the renewable energy marketplace that includes PV applications. In the renewable energy market, we sell a broad product line of inverters and service offerings that provide our customers with industry-leading efficiency, greater harvested power, increased uptime and reliability, ease of installation, and monitoring software. We sell our renewable energy products to distributors/installers, engineering, procurement and construction contractors ("EPC") and original equipment manufacturers ("OEMs"). We are engaged in the design and production of inverters for renewable energy products that convert PV energy into useable alternating current ("AC") power. Our string inverters are used in residential and small commercial applications, while our central inverters are designed for large commercial and utility installations for the solar market. These products scale in size from 250 watts ("W") up to 2.5 megawatts ("MW"). Our product offerings also provide our customers with greater control and monitoring of their renewable energy assets using a Software-as-a-Service ("SaaS") platform.

Power Solutions: Our power conversion and power management solutions are used in computer servers, data storage, networking, telecommunications and industrial applications. We sell our power conversion products to OEMs, distributors, and service providers. We are engaged in the design and production of the following power conversion products:


AC/DC power supplies that convert AC from a primary power source, such as a wall outlet, into a precisely controlled direct current ("DC") voltage. Virtually every electronic device that plugs into an AC wall outlet requires some type of AC/DC power supply, and we provide a broad range of solutions that power a wide variety of OEM equipment.


DC power systems that are used by communications and Internet service providers to power their equipment, and are used as backup power for large communications infrastructure equipment.


DC/DC converters that modify an existing DC voltage level to a different DC voltage level to meet the power needs of various subsystems and components within electronic equipment. Our DC/DC converters include high-density and low-density "brick" converters that are generally used to control power on communications printed circuit boards and also include POL converters that power devices within an IBA as well as in other applications.


Additional products that include digital control products for motors and a variety of other application-specific specialty power products.

Recent Pronouncements and Accounting Changes-See Part I. Item 1.
Note 2-"CHANGES TO SIGNIFICANT ACCOUNTING POLICIES AND RELATED
DISCLOSURES-Recent Pronouncements and Accounting Changes" in the notes to the consolidated condensed financial statements, herein.

We follow accounting standards set by the Financial Accounting Standards Board, ("FASB"). The FASB sets generally accepted accounting principles ("GAAP") that we follow to ensure we consistently report our financial condition, results of operations, and cash flows. There have been no material changes in our critical accounting policies described in Management's Discussion and Analysis in our Annual Report on Form 10-K for the fiscal year ended December 30, 2012 filed February 28, 2013, as amended by our Amendment No. 1 to Annual Report on Form 10-K/A filed April 29, 2013.


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Results of Operations

Consolidated

Net Sales decreased $21.1 million, or 9.4%, to $204.6 million for the first quarter of fiscal 2013 from $225.7 million for the first quarter of fiscal 2012. The decrease in sales primarily relates to lower demand in Power Solutions' servers, storage and networking segment due to customer usage of high inventory levels and the overall economic sales environment. The negative sales impact was partially offset by increased sales in Australia.

Net sales by business segment were as follows, in millions:

                                                   Three Months Ended
                                           March 31, 2013       April 1, 2012
            Renewable Energy Solutions    $ 146.1      71.4 % $ 148.7      65.9 %
            Power Solutions                  58.5      28.6 %    77.0      34.1 %

            Total                         $ 204.6     100.0 % $ 225.7     100.0 %

Net sales by customer category were as follows, in millions:

                                              Three Months Ended
                                      March 31, 2013       April 1, 2012
                Distributors         $ 111.2      54.3 % $ 108.5      48.1 %
                OEMs                    50.9      24.9 %    80.1      35.5 %
                EPCs                    41.5      20.3 %    36.0      16.0 %
                Service providers        1.0       0.5 %     1.1       0.4 %

                Total                $ 204.6     100.0 % $ 225.7     100.0 %

Net sales by end-markets, as a percentage of total sales, were as follows:

                                                     Three Months
                                                        Ended
                                                March 31,     April 1,
                                                  2013          2012
             Renewable Energy                         71.3 %       65.9 %
             Servers, Storage and Networking          13.8 %       18.3 %
             Industrial                               11.1 %       10.4 %
             Network Power Systems                     3.8 %        5.4 %

             Total                                   100.0 %        100 %



     Gross Profit

                                                  Three Months
                                                      Ended
                                             March 31,     April 1,
                                                2013         2012
                 Gross profit, in millions     $   38.1    $    55.0
                 Gross profit margin               18.6 %       24.4 %

Gross profit for the first quarter of fiscal 2013 decreased by $16.9 million to $38.1 million from a gross profit of $55.0 million in the comparable period in 2012. As a percentage of net sales, gross margin decreased to 18.6% for the first quarter of fiscal 2013 from a gross margin of 24.4% for the first quarter of fiscal 2012. Gross margin declined in 2013 due to year over year price erosion, product


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mix and factory absorption in the Renewable Energy Solutions SBU and a lower factory absorption in our Power Solutions SBU as a result of lower production volume.

Selling, General and Administrative Expense increased $1.6 million, or 6.6%, to $25.8 million for the first quarter of fiscal 2013 from $24.2 million for the first quarter of fiscal 2012. As a percentage of net sales, selling, general and administrative expense increased to 12.6% for the first quarter of fiscal 2013 from 10.7% for the first quarter of fiscal 2012. The increase in selling, general and administrative expense was primarily a result of our investment in the expansion of the sales and marketing teams to support our Renewable Energy business.

Research, Development and Engineering Expense decreased by $0.1 million, or 0.9%, to $11.6 million for the first quarter of fiscal 2013 from $11.7 million for the first quarter of fiscal 2012. As a percentage of net sales, research, development and engineering was 5.7% and 5.2% for the first quarters of fiscal 2013 and 2012, respectively.

Amortization of Intangible Assets was $0.4 million for each of the quarters ended March 31, 2013 and April 1, 2012.

Litigation Charges increased during the first quarter of fiscal 2013, due to an addition of $4.3 million for damages related to loss on appeal of the judgment assessed by the court in connection with the patent infringement lawsuit initiated by SynQor, Inc. See "Legal Proceedings" under Part II, Item 1 of this Quarterly Report on Form 10-Q. In accordance with ASC 450-20, "Accounting for Contingencies: Loss Contingencies," we accrued the portion of the contingency that is deemed to be probable and reasonably estimable.

(Loss) Income from Operations As a result of the items above, loss from operations was $4.0 million for the first quarter of fiscal 2013 as compared with income from operations of $18.5 million for the first quarter of fiscal 2012.

Interest Income (Expense), Net was $(0.5) million expense for the first quarter of fiscal 2013 as compared with less than $(0.1) million expense for the first quarter of fiscal 2012 primarily due to the write off of debt issuance costs related to the revolving credit facility that was amended on January 30, 2013. See Liquidity and Capital Resources below.

Other Income (Expense), Net was $1.2 million income for the first quarter of fiscal 2013 compared with a $9.0 million expense for the same period in 2012. Included in other income (expense) for the first quarter of fiscal 2013 were gains on foreign currency transactions of approximately $1.2 million compared with losses on foreign currency transactions of approximately $9.1 million in 2012. The first quarter 2013 foreign currency remeasurement gain was due primarily to the Euro weakening compared to the USD, while the Euro strengthened against the USD during the first quarter of 2012. Our primary foreign currencies are the Euro, the Chinese RMB, the Australian dollar, and the British Pound.

Provision for Income Taxes was $3.8 million for the first quarter of fiscal 2013 compared to $4.2 million for the first quarter of fiscal 2012. The provision for income taxes recorded in both periods primarily related to taxes recorded at certain of our profitable European locations. The effective tax rate was (115%) based on the income tax on the loss generated for the first quarter of fiscal 2013 compared to 44% in the first quarter of fiscal 2012 as a result of the change in geographical mix of pre-tax income at our foreign locations.

Our effective tax rate varies significantly from period to period due to the level, mix and seasonality of earnings generated in the U.S. and our various foreign jurisdictions. Under ASC 740-270, "Interim Reporting of Income Taxes," we are required to adjust our effective tax rate for each quarter to be consistent with the estimated annual effective tax rate. Jurisdictions with a projected loss where no tax benefit can be recognized are excluded from the calculation of the estimated annual effective tax rate. Applying the provisions of ASC 740-270 could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections.


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Although we record deferred income tax assets in jurisdictions where we generate a loss for income tax purposes, we also record a valuation allowance against these deferred income tax assets when, in management's judgment, it is more likely than not that the deferred tax assets will not be realized. As a result, we may record no tax benefit in jurisdictions where we incur a loss, but record tax expense in jurisdictions where we record taxable income and have no NOL carryforward. As a result, few meaningful comparisons can be made on our consolidated tax rates between periods.

Equity in Losses of Joint Venture During the first quarter of fiscal 2013, we recorded a $0.1 million loss related to our equity share in the loss of our China joint venture compared with a $0.3 million loss recorded during the same quarter of fiscal 2012.

Renewable Energy Solutions SBU

    Results for the Renewable Energy Solutions business segment are as follows,
in millions:

                                              Three Months
                                                 Ended
                                         March 31,     April 1,
                                           2013          2012
                     Revenue             $    146.1    $   148.7
                     Operating Income    $      5.8    $    18.7

During the first quarter of fiscal 2013, revenue decreased $2.6 million, or 1.7%, to $146.1 million from $148.7 million during the comparable period of fiscal 2012. The slight decrease in revenue was a result of pricing erosion offset by volume growth in North America and Australia as well as product line expansion into micro inverters. Operating margins decreased to 4.0% during the first quarter of fiscal 2013 from 12.6% during the first quarter of fiscal 2012 largely due to year over year price erosion, sales mix and under absorption of factory overhead in China and North America.

Power Solutions SBU

    Results for the Power Solutions business segment are as follows, in
millions:

                                             Three Months
                                                 Ended
                                        March 31,     April 1,
                                           2013         2012
                     Revenue              $   58.5    $    77.0
                     Operating Income     $    1.5    $     7.0

During the first quarter of fiscal 2013, revenue decreased $18.5 million, or 24.0%, compared to fiscal 2012 due to lower demand in the server, storage and networking segment due to customer usage of high inventory levels and market conditions. Operating margins decreased to 2.6% during the first quarter of fiscal 2013 as compared to 9.1% operating margins in the comparable period of 2012. The decreased operating margins were due to the reduction in sales volume and resulting unabsorbed factory overhead.

Liquidity and Capital Resources

Our cash and cash equivalents balance increased to $255.5 million at March 31, 2013 from $230.5 million at December 30, 2012. Our primary sources of cash in the first quarter of fiscal 2013 consisted of $38.1 million of cash generated from operating activities, partially offset by $4.3 million cash used in investing activities primarily for capital expenditures, and $0.4 million cash used in financing activities.

Cash provided by operating activities included adjustments to reconcile net income to cash provided of $9.6 million, an $8.6 million decrease in accounts receivable, an $8.9 million decrease in


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inventories and an increase in accounts payable, accrued expenses, income taxes payables and other liabilities of $9.3 million, $3.0 million, $3.1 million and $4.0 million, respectively, partially offset by a $1.3 million increase in prepaid and other current assets.

We used $4.5 million cash for capital expenditures and other assets increased by $0.2 million.

We used $0.6 million cash in financing activities to satisfy debt issuance costs in connection with renegotiating our Credit Agreement in the first quarter of fiscal 2013, partially offset by $0.2 million cash arising from the exercise of employee stock options, net of cash paid to satisfy employee tax withholding obligations.

Our total in cash and cash equivalents and fixed-income securities, maturing in 2013, held outside of the U.S. in various foreign subsidiaries was approximately $269.6 million as of March 31, 2013. Historically, we have deemed the earnings of our foreign subsidiaries to be permanently reinvested in the foreign operations. Under current tax laws and regulations, if cash and cash equivalents held outside the U. S. were to be distributed to the U.S. in the form of dividends or otherwise, we would be subject to additional U.S. income taxes and foreign withholding taxes. With respect to our U.S. operations, we believe that cash and cash equivalents held in the U.S.; expected cash to be generated from our U.S. operations; and borrowings available under our Credit Agreement are adequate to continue to meet our U.S. obligations (including our plans to repurchase stock) without the repatriation of undistributed earnings in the form of cash and cash equivalents of our subsidiaries outside the U.S. We intend, and have the ability, to permanently reinvest the undistributed earnings of our foreign subsidiaries outside the U.S. Since 2010, we have expanded our Renewable Energy Solutions business into new foreign markets, including China, Spain, Greece, Israel and India. We expect this trend to continue with targeted market expansions in 2013 into Brazil, Japan, South Africa and Thailand as well as further expansions into additional countries contemplated for 2014 and thereafter. We expect our Italian subsidiary to continue as the largest generator of cash and we expect to fund the cash needs of our existing foreign operations and foreign expansions with cash accumulated and to be generated by our Italian subsidiary. During fiscal 2011, we established a Dutch holding company structure which facilitates the tax-efficient use of Italian cash for the funding of existing and new subsidiaries' cash needs. Excess cash which is not required to fund international operations will be invested by the Dutch holding company and the holding company will expand its activities as our global offshore treasury and financing vehicle.

Within the U.S., we held $20.5 million in cash and cash equivalents in various checking and savings accounts in U.S. financial institutions insured by the Federal Deposit Insurance Corporation ("FDIC"). Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act provided temporary unlimited deposit insurance coverage for noninterest-bearing transaction accounts at all FDIC-insured depository institutions ("IDIs") from December 31, 2010 through December 31, 2012. Beginning January 1, 2013, noninterest-bearing transaction accounts will no longer be insured separately from depositors' other accounts at the same IDI. Instead, noninterest-bearing transaction accounts will be added to any of a depositor's other accounts in the applicable ownership category, and the aggregate balance insured up to at least the standard maximum deposit insurance amount of $250,000, per depositor, at each separately chartered IDI.

On January 30, 2013, we amended and restated our existing $150.0 million revolving credit facility with BOA and a syndicate of other lenders, which was set to expire on April 30, 2014, into a $50.0 million five-year senior secured asset-based revolving credit agreement with BOA as the sole lender and administrative agent. See Note 8-CREDIT FACILITIES.

In addition to the Credit Agreement secured in North America, we maintain a credit facility with a bank in Asia. The aggregate availability under this credit facility was approximately $0.8 million at March 31, 2013. The credit facility bears interest on amounts outstanding at various intervals based on published market rates. At March 31, 2013, no amounts were outstanding on the credit facility. In addition, we had $0.5 million committed to guarantee letters of credit to vendors in Europe.


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We currently anticipate that our total capital expenditures for 2013 will be in the range of $20 million to $30 million primarily for manufacturing equipment and process improvements, equipment related to research and development and product development, additions and upgrades to our facilities and information technology infrastructure, and other administrative requirements. However, the amount of these anticipated capital expenditures likely will change during the year based on changes in expected revenues, our financial condition and the general economic climate.

We establish our allowance for doubtful accounts by considering both customer-specific and country-specific issues. Our assessments consider customer financing availability, customer payments as compared with contractual terms, customer liquidity, and all other known customer-specific issues.
Country-specific issues include feed-in tariffs, financing within the region and any other known issues. We also monitor the economic and political changes and evaluate the related impact on our customers' credit worthiness and establish reserves on those related receivables at the point in time when collectability is no longer deemed probable.

Currently, we have not experienced any increasing trends in uncollectible accounts that are material to our financial statements. However, changes to government incentive programs in certain European countries have increased market uncertainty resulting in reduced availability of capital and credit impacting our customers in the Renewable Energy Solutions SBU and may, in turn, impact our ability to collect our receivables from our European customers. Availability of capital to our customers correlates to the markets in which government incentives and feed-in tariffs are offered, and the increases or decreases of available customer financing follows the increases and decreases in such incentives in most markets. Accordingly, as a result of the uncertainty in Europe, we have established credit insurance covering approximately 50% of our Renewable Energy Solutions receivables in Europe, established upfront credit limits with our customers, require certain customers to provide bank guarantees and letters or credit, and have required certain customers to make advanced payment for product in order to mitigate uncollectible accounts.

Based on current plans and business conditions, we believe our existing working capital and borrowing capacity, coupled with the funds that we expect to generate from our operations, will be sufficient to meet our liquidity requirements for at least the next twelve months. We will continue to evaluate our liquidity position, and when and if necessary, explore alternatives to maximize our position and we may determine to raise additional funding through the issuance of equity securities or incurrence of debt; however, there can be no assurances that we will be able to obtain additional funds on favorable terms or at all.

Off-Balance Sheet Arrangements

Below we identify and disclose all of our significant off balance sheet arrangements and related party transactions. We do not utilize special purpose entities or have any known financial relationships with other companies' special purpose entities.

Operating Leases. We enter into operating leases where and when the economic climate is favorable.

Purchase Commitments. We do not have material purchase commitments for materials, supplies, services, and property, plant and equipment as part of the normal course of business.

Other Contractual Obligations. We do not have material financial guarantees . . .

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