POWER-ONE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
2013
|
|
April 1,
2012
|
|
NET (LOSS) INCOME
|
|
$
|
(7,161
|
)
|
$
|
4,979
|
|
OTHER COMPREHENSIVE (LOSS) INCOME
|
|
|
|
|
|
|
|
Foreign currency translation adjustment(a)
|
|
|
(14,841
|
)
|
|
11,676
|
|
|
|
|
|
|
|
COMPREHENSIVE (LOSS) INCOME
|
|
$
|
(22,002
|
)
|
$
|
16,655
|
|
|
|
|
|
|
|
-
(a)
-
Foreign
currency translation adjustments exclude the related tax effects in accordance with the Financial Accounting Standards Board ("FASB") Accounting
Standards Codification ("ASC") section 220-10-45 "Comprehensive IncomeOverallOther Presentation." As of March 31, 2013, the Company has
not provided for U.S. income taxes on its undistributed earnings of foreign subsidiaries since the Company considers these earnings to be reinvested indefinitely.
The accompanying notes are an integral part of these unaudited
consolidated condensed financial statements.
3
Table of Contents
POWER-ONE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
2013
|
|
April 1,
2012
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(7,161
|
)
|
$
|
4,979
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,859
|
|
|
5,411
|
|
Undistributed loss of joint venture
|
|
|
141
|
|
|
303
|
|
Amortization of bond premium on fixed-income securities
|
|
|
147
|
|
|
|
|
Amortization of debt issuance costs
|
|
|
81
|
|
|
|
|
Stock-based compensation
|
|
|
3,741
|
|
|
3,358
|
|
Foreign exchange (gain) loss
|
|
|
(297
|
)
|
|
2,318
|
|
Net loss on disposal of property and equipment
|
|
|
30
|
|
|
112
|
|
Deferred income taxes
|
|
|
(81
|
)
|
|
(934
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
8,615
|
|
|
30,234
|
|
Inventories
|
|
|
8,897
|
|
|
4,186
|
|
Prepaid expenses and other current assets
|
|
|
(1,256
|
)
|
|
1,335
|
|
Accounts payable
|
|
|
9,312
|
|
|
(33,079
|
)
|
Income tax payable
|
|
|
3,113
|
|
|
2,302
|
|
Other accrued expenses
|
|
|
3,025
|
|
|
(1,450
|
)
|
Other liabilities
|
|
|
3,950
|
|
|
3,499
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
38,116
|
|
|
22,574
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(4,475
|
)
|
|
(9,359
|
)
|
Other assets
|
|
|
153
|
|
|
769
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(4,322
|
)
|
|
(8,590
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Payments of debt issuance costs
|
|
|
(614
|
)
|
|
|
|
Issuance of common stock
|
|
|
222
|
|
|
12
|
|
Cash paid to satisfy share-related employee tax withholding obligations
|
|
|
(22
|
)
|
|
(294
|
)
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(414
|
)
|
|
(282
|
)
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
|
(8,439
|
)
|
|
5,413
|
|
|
|
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
24,941
|
|
|
19,115
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
230,524
|
|
|
204,881
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
255,465
|
|
$
|
223,996
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
240
|
|
$
|
7
|
|
Income taxes
|
|
$
|
518
|
|
$
|
3,327
|
|
During the quarters ended March 31, 2013 and April 1, 2012, an additional $5.1 and $2.0 million of property and equipment had
been purchased but not yet paid, respectively.
The accompanying notes are an integral part of these unaudited
consolidated condensed financial statements.
4
Table of Contents
POWER-ONE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1BASIS OF PRESENTATION
These statements should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the 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. The balance sheet at
December 30, 2012 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. The operating results and cash flows for the three-month period ended March 31, 2013 are not necessarily indicative
of the results that will be achieved for the full fiscal year ending December 29, 2013 or for future periods.
The
accompanying consolidated condensed financial statements have been prepared without audit and reflect all adjustments, consisting of normal recurring adjustments, which are, in the
opinion of management, necessary for a fair statement of financial position and the results of operations for the interim periods. Preparing financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts,
inventory
valuation, indefinite-lived intangible asset impairment, depreciation and amortization, sales returns and discounts, warranty costs, uncertain tax positions and the recoverability of deferred tax
assets, stock-based compensation, contingencies and the fair value of assets and liabilities disclosed. Due to the inherent uncertainty involved in making estimates, actual results and outcomes may
differ from management's estimates and assumptions. The statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and pursuant
to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such SEC rules and regulations.
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- to 14-week periods ending on the Sunday nearest to March 31, June 30, September 30 and December 31. The three-month periods ended
March 31, 2013 and April 1, 2012 were 13-week periods.
NOTE 2CHANGES TO SIGNIFICANT ACCOUNTING POLICIES AND RELATED DISCLOSURES
None
NOTE 3INVESTMENTS
The Company has investments in fixed-income held-to-maturity debt securities consisting of U.S. mortgage-backed securities with contractual maturity dates of less
than one year. At March 31, 2013, these investments had an amortized cost of $34.6 million, unrealized gains of $0.5 million, and fair value of $35.1 million. At
December 30, 2012, these securities had an amortized cost of $35.2 million, unrealized gains of $0.1 million, and fair value of $35.3 million.
The
Company has an investment in a joint venture in China which is included in other assets on the Company's consolidated condensed balance sheets and is accounted for using the equity
method. The carrying value of this investment was $2.3 million and $2.4 million at March 31, 2013 and
5
Table of Contents
POWER-ONE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 3INVESTMENTS (Continued)
December 30,
2012 respectively. During the three months ended March 31, 2013 and April 1, 2012, the Company recorded equity in losses of joint venture of approximately
$0.1 million and $0.3 million, respectively, in its accompanying consolidated condensed statements of operations. See Note 13.
No
other-than-temporary impairments were recorded during fiscal years 2013 or 2012.
NOTE 4FAIR VALUE FINANCIAL INSTRUMENTS
ASC 820, "Fair Value Measurements and Disclosures" establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 establishes a fair
value hierarchy that prioritizes the inputs to valuation techniques used to measure fair values into three levels as follows:
-
-
Level 1Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that
the Company has the ability to access at the measurement date.
-
-
Level 2Inputs include quoted prices for similar assets and liabilities in active markets, quoted
prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived
principally from or corroborated by observable market data by correlation or other means.
-
-
Level 3Unobservable inputs reflect the Company's judgments about the assumptions market participants
would use in pricing the asset or liability since limited market data exists. The Company develops these inputs based on the best information available, including the Company's own data.
As
of March 31, 2013 and December 30, 2012, the Company had $65.2 million and $94.3 million in money market fund investments, which are valued using
Level 1 valuation techniques. The Company's fixed-income held-to-maturity securities, which are recorded at amortized
cost on the accompanying condensed consolidated balance sheets, have fair values determined using Level 2 valuation techniques of $35.1 million and $35.3 million, as of
March 31, 2013 and December 30, 2012, respectively.
During
the fiscal quarter ended March 31, 2013, the Company entered into foreign exchange forward contracts (the "Forward Contracts"), maturing April 11, 2013, to mitigate
the foreign currency risk related to certain balance sheet positions denominated in Euros. The Forward Contracts are carried at their fair value of $4.6 million at March 31, 2013,
included in other accrued expenses on the accompanying consolidated condensed balance sheet, and have an aggregate notional amount of $152.9 million as of March 31, 2013. The Company has
not elected hedge accounting for the Forward Contracts. A net loss of $4.6 million related to the Forward Contracts was recognized as a component of other income (expense), net, for the three
months ended March 31, 2013 in the accompanying consolidated condensed statements of operations. No such contract was utilized during the three months ended April 1, 2012 or the fiscal
year ended December 30, 2012.
The
fair value of certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and other current
liabilities approximate their recorded carrying amounts because of their short-term nature.
6
Table of Contents
POWER-ONE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 5INVENTORIES
Inventories consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
December 30,
2012
|
|
Raw materials
|
|
$
|
94.3
|
|
$
|
107.6
|
|
Subassemblies-in-process
|
|
|
6.0
|
|
|
3.6
|
|
Finished goods
|
|
|
49.1
|
|
|
49.0
|
|
|
|
|
|
|
|
|
|
$
|
149.4
|
|
$
|
160.2
|
|
|
|
|
|
|
|
Inventories
are stated at the lower of cost (first-in, first-out method) or market. The Company reviews the historical and projected usage for inventory in
determining excess and obsolete inventory. The Company estimates the projected usage of each inventory item by performing a quarterly analysis of expected future usage of raw materials,
subassemblies-in-process and finished goods on an item-by-item basis. Such analysis includes the consideration of current sales backlog supported by
customer purchase orders as well as forecasted sales of each inventory item for the next four quarters. Forecasted sales of each inventory item takes into consideration historical usage during the
last 12 months, expected demand in the next 12 months, known or anticipated technological changes, the commonality of components and sub-assemblies used in multiple products,
the maturity of the product in its life cycle, and any other macroeconomic factors. The methodology for forecasting demand may be modified depending on specific product lifecycles and local
circumstances. The Company writes down the carrying value of its inventory in excess of this
demand. In addition, the Company evaluates the reliability of its assessment of projected usage by comparing such projected usage amounts to actual subsequent usage.
During
the quarters ended March 31, 2013 and April 1, 2012 the Company wrote off approximately $2.6 million and $1.5 million, respectively, related to excess
and obsolete inventory and recorded the charges as costs of goods sold in the accompanying consolidated condensed statements of operations.
7
Table of Contents
POWER-ONE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 6INTANGIBLE ASSETS
Intangible assets consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
|
|
|
|
Gross
Intangible
Assets
|
|
Accumulated
Amortization
|
|
Net
Intangible
Assets
|
|
Weighted
Average Life
(In Years)
|
|
Non-amortizable intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
$
|
11.4
|
|
$
|
|
|
$
|
11.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product technology
|
|
|
5.6
|
|
|
3.1
|
|
|
2.5
|
|
|
7
|
|
Customer relationships
|
|
|
5.3
|
|
|
4.8
|
|
|
0.5
|
|
|
7
|
|
Other
|
|
|
6.3
|
|
|
5.7
|
|
|
0.6
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
17.2
|
|
|
13.6
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28.6
|
|
$
|
13.6
|
|
$
|
15.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2012
|
|
|
|
|
|
Gross
Intangible
Assets
|
|
Accumulated
Amortization
|
|
Net
Intangible
Assets
|
|
Weighted
Average Life
(In Years)
|
|
Non-amortizable intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
$
|
11.4
|
|
$
|
|
|
$
|
11.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product technology
|
|
|
5.7
|
|
|
2.9
|
|
|
2.8
|
|
|
7
|
|
Customer relationships
|
|
|
5.4
|
|
|
4.8
|
|
|
0.6
|
|
|
7
|
|
Other
|
|
|
6.3
|
|
|
5.6
|
|
|
0.7
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
17.4
|
|
|
13.3
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28.8
|
|
$
|
13.3
|
|
$
|
15.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
accordance with ASC 350, the Company reviews indefinite-lived intangible assets for impairment annually at the end of its August fiscal month, or more often if events or circumstances
indicate that impairment may have occurred. In addition, management considers whether certain impairment indicators are present in assessing whether the carrying value of intangible assets may be
impaired. No impairment charges were recorded in the three months ended March 31, 2013 and April 1, 2012.
Amortization
expense for each of the three-month periods ended March 31, 2013 and April 1, 2012 was $0.5 million, of which $0.4 million was included in
amortization of intangible assets and $0.1 million was included in cost of goods sold in the accompanying consolidated condensed statements of operations, respectively.
8
Table of Contents
POWER-ONE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 6INTANGIBLE ASSETS (Continued)
Estimated
future amortization expense is as follows (in millions):
|
|
|
|
|
Year Ending December 31,
|
|
Amortization
Expense
|
|
2013 (nine months)
|
|
$
|
1.3
|
|
2014
|
|
|
1.1
|
|
2015
|
|
|
0.9
|
|
2016
|
|
|
0.3
|
|
|
|
|
|
Total
|
|
$
|
3.6
|
|
|
|
|
|
NOTE 7OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
December 30,
2012
|
|
Litigation reserve
|
|
$
|
27.7
|
|
$
|
23.4
|
|
Accrued warranties, current portion
|
|
|
17.2
|
|
|
17.5
|
|
Accrued payroll and related expenses
|
|
|
11.3
|
|
|
12.8
|
|
Accrued bonuses
|
|
|
5.1
|
|
|
8.8
|
|
Forward contract payable
|
|
|
4.6
|
|
|
|
|
Other accrued expenses
|
|
|
9.8
|
|
|
10.9
|
|
|
|
|
|
|
|
|
|
$
|
75.7
|
|
$
|
73.4
|
|
|
|
|
|
|
|
During
the quarter ended March 31, 2013, the Company accrued an additional $4.3 million reserve related to SynQor claims due to an appeal lost in March 2013. See
Note 10CONTINGENCIES.
NOTE 8CREDIT FACILITIES
In fiscal 2011, the Company entered into a $150.0 million revolving credit facility with Bank of America, N.A. ("BOA") and a syndicate of other lenders with an expiration date of
April 30, 2014. On January 30, 2013 the Company amended and restated its $150.0 million revolving credit facility into a $50.0 million five-year senior secured
asset-based revolving credit agreement ("Credit Agreement") with BOA as the sole lender and administrative agent. Any amounts outstanding under the Credit Agreement will be due and payable on
January 30, 2018. The Credit Agreement is subject to a Borrowing Base limitation, which is calculated based on a percentage of eligible inventory, percentage of eligible accounts receivable and
qualified cash, as defined in the Credit Agreement. After considering the Borrowing Base limitation, $34.1 million of borrowing capacity was available to the Company on March 31, 2013.
As
defined in the Credit Agreement, the Company's borrowings will bear interest at either LIBOR, plus 1.75% to 2.25% or at the base rate plus 0.75% to 1.25%.
9
Table of Contents
POWER-ONE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 8CREDIT FACILITIES (Continued)
In
addition to the usual and customary covenants for credit facilities of this type, including covenants limiting debt, investments, dividends, transactions with affiliates, liens,
mergers, asset sales, and material changes in the business of the Company or its subsidiaries, the Company is subject to a Minimum
Fixed Charge Coverage Ratio covenant during any "Trigger Period" as defined in the agreement. The Credit Agreement also contains certain cross-default provisions.
In
connection with the Credit Agreement, the Company paid $0.6 million in bank fees which are recorded as debt issuance cost in other assets on the accompanying consolidated
condensed balance sheet at March 31, 2013. There were no amounts outstanding under the Credit Agreement at March 31, 2013.
NOTE 9WARRANTIES
The Company generally offers its customers a standard two-year warranty on power products sold, although warranty periods may vary by product type and application. The
Company offers standard five- and ten-year warranties on its renewable energy products and also offers customers extended warranty contracts with terms between five and 10
years after the standard warranty period expires. The Company accounts for such extended warranty contracts in accordance with ASC 605-20-25, "Revenue Recognition." The Company
reviews its warranty liability quarterly based on an analysis of actual expenses and failure rates by specific product lines and estimated future costs and projected failure rate trends by specific
product lines. Factors taken into consideration when evaluating the Company's warranty reserve are (i) historical claims for each product, (ii) the maturity of the product within its
life cycle, (iii) volume increases, (iv) life of warranty, (v) historical warranty repair costs and (vi) other factors. To the extent that actual experience differs from
our estimate, the provision for product warranties will be adjusted in future periods. Actual warranty repair costs are charged against the reserve balance as incurred.
A
tabular presentation of the activity within the warranty accrual account for each of the three months ended March 31, 2013 and April 1, 2012 is presented below, (in
millions):
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
April 1,
2012
|
|
Beginning balance
|
|
$
|
49.2
|
|
$
|
31.4
|
|
Charges and costs accrued
|
|
|
6.7
|
|
|
6.1
|
|
Adjustments related to pre-existing warranties (including changes in estimates)
|
|
|
1.4
|
|
|
2.5
|
|
Less repair costs incurred
|
|
|
(4.7
|
)
|
|
(5.2
|
)
|
Change due to foreign currency
|
|
|
(1.3
|
)
|
|
0.8
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
51.3
|
|
$
|
35.6
|
|
|
|
|
|
|
|
The
increase in accrued warranties and repair costs from April 1, 2012 to March 31, 2013 primarily results from recording the warranty liability associated with inverters
sold during that period partially offset by the expiration of warranties related to past sales. As of March 31, 2013 and December 30, 2012,
$17.2 million and $17.5 million, respectively, of the accrued warranties were included in other accrued expenses in the accompanying consolidated balance sheets.
10
Table of Contents
POWER-ONE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 9WARRANTIES (Continued)
The
Company offers its renewable energy customers extended warranty contracts with terms between five and 10 years after the base warranty period expires and revenue is recognized
over the extended warranty period in accordance with ASC 605-20-25, "Revenue Recognition." Deferred revenue related to such extended warranty contracts was $29.4 million
and $28.1 million, as of March 31, 2013 and December 30, 2012, respectively, and was included as part of deferred revenue in the accompanying consolidated condensed balance
sheets.
NOTE 10CONTINGENCIES
Legal Proceedings
SynQor, Inc. v Power-One, Inc, et. al
. United States
District Court, Eastern District of Texas, Civil Action No. 2:07cv497 TJW/CE. This action was initiated by SynQor, Inc. against the Company and eight other power supply manufacturers on
November 13, 2007. The complaint alleged that certain products of the Company infringe certain patents held by SynQor in relation to unregulated bus converters and/or point of load (POL)
converters used in Intermediate Bus Architecture (IBA) power supply systems. On December 21, 2010, a jury verdict in favor of SynQor was returned, finding that the defendants directly or
indirectly infringed all of the asserted claims in the five patents-in-suit and finding Power-One liable for damages in the amount of approximately
$25.6 million. The patents-in-suit are United States patents and the decision covers only the
sales or uses of infringing products in the United States. On August 17, 2011, final judgment in the amount of $27.1 million was entered, including supplemental damages of
$1.1 million covering sales of accused products from November 1, 2010 through trial and pre-judgment interest in the amount of $0.4 million. As of December 30,
2012, the Company estimated that its probable exposure, including interest and supplemental damages was $23.4 million.
On
October 28, 2011, notice was filed in the United States District Court, Eastern District of Texas, of Power-One's intent to appeal the district court's final judgment entered
on August 17, 2011, the court's partial judgment entered on December 29, 2010, and all other orders decided adversely, in whole or in part, against Power-One. On
November 22, 2011, Power-One filed a motion to stay the appeal pending re-examination of the patents-in-suit by the Patent and Trademark Office
("PTO"). On January 31, 2012, the Court denied the motion to stay. The Company filed its appeal brief with the Court of Appeals, Federal Circuit ("CAFC") on March 20, 2012. Oral argument
was heard on October 2, 2012 and the CAFC issued its decision on March 14, 2013 to uphold the District Court's decision in its entirety. Defendants filed petitions for
re-hearing on April 12, 2013. As a result of the CAFC ruling, the Company recorded an additional $4.3 million in litigation expense in the quarter ended March 31,
2013.
All
of the asserted claims of the '190 and '021 patents (upon which half of the damages against Power-One are based) were fully rejected by the PTO and the Examiner's answer
confirming the rejection of all of the claims being reexamined in the '083 and '702 patents has been issued. The reexaminations are now before the Board of Patent Appeals and Interferences ("BPAI").
The BPAI heard oral argument on the appeal of the '190 patent on October 17, 2012. The parties are currently waiting for the BPAI's written decision on the '190 appeal and are waiting for the
BPAI to schedule the hearings on the '021, '803 and '702 reexaminations. Upon issuance of the CAFC's decision, SynQor filed petitions to terminate the re-examinations, which have been
opposed by a codefendant.
11
Table of Contents
POWER-ONE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 10CONTINGENCIES (Continued)
On
October 6, 2011, SynQor filed a separate action,
SynQor, Inc. v Power-One, Inc., et. al.
United States
District Court, Eastern District of Texas, Civil Action 2:11-CV-00444-DF. This action was initiated by SynQor against the Company and the other power supply
manufacturers sued in Civil Action No. 2:07cv497 TJW/CE. The complaint seeks post injunction damages against all of the defendants for inducement of infringement.
Power-One, Inc. has filed a motion to be dismissed from the lawsuit on grounds that all accused products sold by Power-One, Inc. after December 21, 2010,
the date of the jury verdict, were sold outside the United States and were marked, as required by the injunction, as being subject to an injunction and not available for use in products for the U.S.
market. On October 12, 2012, defendants' motion to stay the trial pending the CAFC's decision on the appeal of Civil Action No. 2:07cv497 TJW/CE was granted. The stay was lifted upon
issuance of the CAFC's decision and trial has been scheduled for July 30, 2013.
As
of March 31, 2013, the Company accrued $27.7 million for the SynQor claims, covering what the Company believes to be its probable exposure, including interest and
supplemental damages.
On
April 21, 2013, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with ABB Ltd, a corporation organized under the Laws of Switzerland
("ABB"), Verdi Acquisition Corporation, a Delaware corporation and an indirect wholly-owned subsidiary of ABB, pursuant to which Verdi Acquisition Corporation will be merged with and into the Company,
with the Company surviving as an indirect wholly-owned subsidiary of ABB (the "Merger"). Beginning on April 22, 2013 and through May 6, 2013, 11 separate class action lawsuits were filed
against the Company, each of its directors, ABB and Verdi Acquisition Corporation, by purported stockholders of the Company. Three of those lawsuits were filed in the Court of Chancery of the State of
Delaware, and the other eight were filed in the Superior Court for the State of California, County of Ventura. Each of those lawsuits purports to be brought individually and on behalf of the public
stockholders of the Company and alleges claims for breaches of fiduciary duties against the Company's directors in connection with the Merger and that the Company and ABB aided and abetted the
purported breaches of fiduciary duties. Each lawsuit seeks, among other things, preliminary and permanent injunctive relieve prohibiting consummation of the Merger, rescission of the Merger Agreement,
damages, and an award of attorneys' fees and costs. The Company believes that it has substantial and meritorious defenses to the plaintiffs' claims in these lawsuits and intends to vigorously defend
its position. However, a negative outcome in any of these lawsuits could therefore have a material adverse effect on the Company if it results in preliminary or permanent injunctive relief or
rescission of the Merger Agreement. In addition, although the Company has directors and officers liability insurance, the Company has incurred and anticipates that it will continue to incur
significant expense within its self-insured retention under that insurance. The Company is not currently able to estimate the potential outcome of any of these lawsuits.
Indemnification
In the normal course of business, the Company periodically enters into agreements to indemnify customers or suppliers against
claims
of intellectual property infringement made by third parties arising from the use of the Company's products. Historically, costs related to these indemnification provisions have not been significant
and the Company is unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.
In
addition, the Company is involved in various other claims and legal proceedings which have arisen in the normal course of business. Management does not believe that the outcome of any
12
Table of Contents
POWER-ONE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 10CONTINGENCIES (Continued)
currently
pending claims or legal proceedings in which the Company is involved will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flow.
NOTE 11STOCK BASED COMPENSATION PLANS
The Company accounts for stock-based awards in accordance with ASC 718, "CompensationStock Compensation." The Company has granted stock awards under its 1996 and 2004 stock
incentive plans which generally vest between one and four years from the date of grant.
The
fair value of non-vested share units awarded by the Company is measured using the closing fair market value as reported on the NASDAQ Stock Market of the Company's stock
on the date the awards are granted. Stock compensation expense related to non-vested share units, including performance-based share units, for the three months ended March 31, 2013
and April 1, 2012, was $2.6 million and $2.5 million, respectively. The following table presents the non-vested share unit activity for which only a service condition
exists under the Company's stock-based compensation plans:
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
April 1,
2012
|
|
Non-vested share units granted, in millions(a)
|
|
|
|
|
|
0.1
|
|
Weighted average grant date fair value of non-vested share units
|
|
$
|
3.87
|
|
$
|
4.52
|
|
-
(a)
-
Less
than 100,000 units granted in Q1 2013
The fair value of the stock options granted during each of the three months ended March 31, 2013 and April 1, 2012 was
estimated on the date of grant using the Black-Scholes valuation model, with the assumptions shown below.
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
|
|
|
|
March 31,
2013
|
|
April 1,
2012
|
|
Risk-free interest rate
|
|
|
1.3
|
%
|
|
1.4
|
%
|
Volatility
|
|
|
86
|
%
|
|
86
|
%
|
Expected term, years
|
|
|
5.8
|
|
|
5.8
|
|
Dividend yield
|
|
|
|
|
|
|
|
Stock options granted, in millions(a)
|
|
|
|
|
|
0.1
|
|
Weighted-average grant date fair value of stock options
|
|
$
|
2.75
|
|
$
|
3.24
|
|
Stock compensation expense related to stock options, in millions
|
|
$
|
1.2
|
|
$
|
0.8
|
|
-
(a)
-
Less
than 100,000 units granted in Q1 2013
13
Table of Contents
POWER-ONE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 12(LOSS) EARNINGS PER SHARE
For the first fiscal quarters of 2013 and 2012, basic (loss) earnings per share ("EPS") was calculated utilizing the two-class method, and diluted EPS was calculated
utilizing the if-converted method as the if-converted and two-class method of calculating diluted EPS yielded the same result.
Under
the two-class method, EPS is computed by dividing earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period.
Earnings are allocated to both common shares and participating securities based on the respective number of weighted average shares outstanding for the period. Shares of the Company's Junior Preferred
Stock are participating securities due to their participation rights related to cash dividends declared by the Company. If dividends are distributed to the common stockholders, the Company is required
to pay dividends to the holders of the preferred stock and common stock pro-rata on an as-converted basis. GAAP requires net losses attributable to common stockholders to be
allocated among common stock and participating securities to the extent that the securities are required to share in the losses. Since the preferred stock is not contractually obligated to share in
the Company's losses, no allocation is made to preferred stock for periods when a net loss exists.
Components
of Basic EPS and Diluted EPS are calculated as follows (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
|
|
|
|
March 31,
2013
|
|
April 1,
2012
|
|
Basic EPS
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders
|
|
$
|
(7.2
|
)
|
$
|
5.0
|
|
Less: undistributed income allocated to participating preferred stockholders
|
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
Net (loss) income allocated to common stockholders (basic)
|
|
$
|
(7.2
|
)
|
$
|
4.1
|
|
Weighted average common shares outstanding (basic)
|
|
|
122.1
|
|
|
121.9
|
|
|
|
|
|
|
|
|
|
$
|
(0.06
|
)
|
$
|
0.03
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders (diluted)
|
|
$
|
(7.2
|
)
|
$
|
5.0
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (basic)
|
|
|
122.1
|
|
|
121.9
|
|
Common shares issuable assuming dilution
|
|
|
|
|
|
34.3
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (diluted)
|
|
|
122.1
|
|
|
156.2
|
|
|
|
|
|
|
|
|
|
$
|
(0.06
|
)
|
$
|
0.03
|
|
|
|
|
|
|
|
Employee
equity share options, nonvested share units, convertible preferred stock, warrants and similar equity instruments granted by the Company are treated as potential common shares
outstanding in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of in-the-money options and nonvested share units. The dilutive
effect of such equity awards is calculated based on the average share price for each fiscal period using the treasury-stock method. For the first
14
Table of Contents
POWER-ONE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 12(LOSS) EARNINGS PER SHARE (Continued)
fiscal
quarter of 2013, as the Company had a net loss attributable to common shareholders, the dilutive effects of 39.6 million weighted average common share equivalents outstanding during the
period were excluded from the calculation of diluted earnings per share because their effect on the net loss per share would have been anti-dilutive. For the first fiscal quarter of 2012,
the weighted average common share equivalents outstanding during the period that were excluded from the computation of diluted earnings per share because the exercise price for these options was
greater than the average market price of the Company's shares of common stock during the first fiscal quarter of 2012 were 5.5 million.
NOTE 13RELATED PARTIES
The Company maintains minority ownership in a joint venture located in China. The joint venture is accounted for and recorded on the consolidated condensed balance sheet as other assets
under the equity method. The Company recorded a $0.1 million and $0.3 million loss during the quarters ended March 31, 2013 and April 1, 2012, respectively, related to the
Company's equity share in losses of the joint venture.
The
joint venture may purchase raw components and other goods from the Company and may sell finished goods to the Company as well as to other third parties. The Company records revenue
on sales to the joint venture only when the components and goods are for sales to third parties. When the joint venture purchases components that will be assembled and sold back to the Company, no
revenue is recorded. The Company also has significant and similar relationships with contract manufacturers. These contract manufacturers may purchase raw components from and sell finished goods back
to the Company. No revenue is recognized for these transactions.
The
Company paid $2.7 million and $2.1 million for inventory purchased from the joint venture during the quarters ended March 31, 2013 and April 1, 2012,
respectively. At March 31, 2013 and December 30, 2012, the Company owed the joint venture approximately $3.6 million.
NOTE 14SEGMENT INFORMATION
The Company operates as two reportable business segments in accordance with ASC 280, "Segment Reporting." The Company's chief operating decision maker and management personnel review the
Company's performance and make resource allocation decisions by reviewing the results of the two business segments separately. Revenue and operating profit are reviewed by the chief operating decision
maker; however, the Company assets are not divided based on business segment.
The
Company is organized into the Renewable Energy Solutions and Power Solutions segments based on the products and services provided. Renewable Energy Solutions segment offers inverters
and accessories for the photovoltaic/solar and wind markets. These inverters convert DC energy from solar panels and wind turbines into AC energy for customer use or for the utility grid. The Power
Solutions segment represents the Company's products for AC/DC, DC/DC and digital power conversion, including power conversion products for data centers, such as servers, storage and networking, as
well as telecom and industrial power conversion products.
15
Table of Contents
POWER-ONE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 14SEGMENT INFORMATION (Continued)
Revenue
with respect to operating segments was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
|
|
|
|
March 31,
2013
|
|
April 1,
2012
|
|
Sales:
|
|
|
|
|
|
|
|
Renewable Energy Solutions
|
|
$
|
146.1
|
|
$
|
148.7
|
|
Power Solutions
|
|
|
58.5
|
|
|
77.0
|
|
|
|
|
|
|
|
Total
|
|
$
|
204.6
|
|
$
|
225.7
|
|
|
|
|
|
|
|
Operating
(loss) income by operating segment was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
|
|
|
|
March 31,
2013
|
|
April 1,
2012
|
|
Operating (Loss) Income:
|
|
|
|
|
|
|
|
Renewable Energy Solutions
|
|
$
|
5.8
|
|
$
|
18.7
|
|
Power Solutions
|
|
|
1.5
|
|
|
7.0
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$
|
7.3
|
|
$
|
25.7
|
|
|
|
|
|
|
|
Unallocated amounts:
|
|
|
|
|
|
|
|
Corporate and unallocated
|
|
|
(11.3
|
)
|
|
(7.2
|
)
|
|
|
|
|
|
|
Total
|
|
$
|
(4.0
|
)
|
$
|
18.5
|
|
|
|
|
|
|
|
Corporate
is a non-operating business segment with the main purpose of supporting operations.
NOTE 15SUBSEQUENT EVENTS
As referenced under Note 10, on April 21, 2013, the Company entered into the Merger Agreement with ABB and Verdi Acquisition Corporation, pursuant to which the Merger would
be consummated, with the Company surviving as an indirect wholly-owned subsidiary of ABB. Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each
outstanding share of Power One's common stock will be converted into the right to receive $6.35 in cash without interest. Power-One's board of directors has unanimously approved the Merger and the
Merger Agreement. The Merger Agreement requires that the Merger be approved by the holders of at least a majority of the voting power of the Company's outstanding common stock (the "Stockholder
Approval"). In addition to the Stockholder Approval, consummation of the Merger is subject to other customary closing conditions, including the receipt by ABB of all requisite antitrust approvals and
the absence of any government order or other legal restraint prohibiting the Merger.
16
Table of Contents