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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal year ended DECEMBER 31, 1999 Commission File No. 0-4466
ARTESYN TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-1205269
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION) IDENTIFICATION NO.)
7900 GLADES ROAD, SUITE 500, BOCA RATON, FL 33434-4105
- ------------------------------------------- ----------
(Address of principal executive offices) (ZIP CODE)
(561) 451-1000
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(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
COMMON STOCK PURCHASE RIGHTS
----------------------------
(Title of each class)
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 periods 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 [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of February 29, 2000 was approximately $628 million.
As of February 29, 2000, 37,059,751 shares of the Registrant's, $0.01 par value,
Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's proxy statement for the annual meeting of shareholders
to be held on May 4, 2000 are incorporated by reference into Part III hereof.
PART I
ITEM 1. BUSINESS
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Artesyn Technologies, Inc. (Nasdaq: ATSN) (the "Company" or "Artesyn"),
headquartered in Boca Raton, Fla., is primarily engaged in the design,
development, manufacture, sale and service of electronic products and subsystems
for producers of electronic equipment in the computing and communications
industry. The Company's customers include worldwide market leaders in each of
its chosen market sectors. These customers include, among others, Alcatel, Cisco
Systems, Compaq, Dell Computer, Ericsson, Hewlett-Packard, Lucent Technologies,
Nortel, Siemens and Sun Microsystems. The Company is also a leading supplier of
power supplies to the many other companies in the computing and communications
industry and maintains a worldwide network of leading distributors including
Arrow, Avnet, EBV/Unique, Sager Electronics and Newark Electronics.
The Company is one of the pre-eminent suppliers of power conversion products and
power system solutions to its chosen markets. The Company provides a full range
of both custom and standard AC/DC power supplies and DC/DC converters. With one
of the premier engineering organizations in the industry, Artesyn Technologies
provides a catalog offering over 1,200 standard products. The Company also
provides high performance single-board computers, systems and subsystems for
real-time applications through its Communication Products division and provides
repair services and logistics for a variety of products as Artesyn Solutions.
INDUSTRY AND MARKET OVERVIEW
As a provider of electronic products, subsystems and services to Original
Equipment Manufacturers ("OEMs"), the producers of electronic equipment, the
Company has chosen to focus on those sectors of the communications industry that
offer both sufficient opportunity and strong prospects for sustained growth. The
Company's products directly address the Internet infrastructure through its
focus on the key sectors of the communications industry, including
computing/mass storage, carrier/enterprise solutions, wireless infrastructure
and network access technologies.
The leading companies in the communications industry typically value quality,
reliability, solid technical support, rapid product development and flexible
manufacturing. The Company benefits from a number of trends within this industry
as described below.
Reduced Development Intervals
As technology life cycles shorten, the producers of electronic equipment are
pressed to deliver new generations of equipment to market even faster. In
working under this growing time-to-market pressure, these companies place
increasing value on a supplier that can consistently deliver new solutions on an
aggressive development schedule.
Outsourcing
Many companies, and particularly those in growth markets, are identifying their
core competencies and outsourcing as many of the other tasks as possible. Those
companies that design and manufacture their own power supplies and subsystems
are typically referred to as the "captive market". Those that choose to
outsource these functions are known as the "merchant market". Currently, the
merchant market is growing much faster than the total market.
High Performance Silicon
In order to realize greater speed from new generations of silicon, the supply
voltage of many electronic devices has been greatly reduced. Even so, these
devices are consuming more power than ever before. The resulting requirement for
fast, low-voltage, high-current power supplies has raised the technology bar in
the power industry. Those entities, such as the Company, with the technological
resources and capabilities to meet these new challenges are faced with many new
opportunities to add value in the development of electronic equipment.
2
Vendor Base Reduction
Improving supply-chain management is a key strategy of many companies today.
Building better relationships in the supply chain has forced entities to reduce
the number of suppliers from whom they purchase. In the process of rationalizing
their vendor base, companies generally grant more business to those vendors that
can meet a variety of needs on a global basis, such as the Company.
PRODUCTS AND SERVICES
POWER CONVERSION
All electronic systems require a steady supply of electrical power at one or
more voltage levels. AC/DC power supplies convert alternating electric current
("AC") (the form in which virtually all electric current is delivered by utility
companies) from a primary power source, such as a wall outlet, into the direct
current ("DC") required to operate virtually all solid state electronic
equipment. DC/DC power supplies are used to convert a particular direct current
voltage into another (higher or lower) direct current voltage. Power supplies
can also be designed to perform diagnostic functions, protect equipment from
power surges, power outages, or even the equipment's own malfunction. In
addition, certain power supplies may provide reserve power through use of a
short-term battery back-up system when the electronic equipment's primary power
source fails.
The company provides standard (or "off-the-shelf") products, modified standard
products and custom products. Standard products provide for rapid time-to-market
and minimal risk due to proven design. They are ideal for low to moderate volume
applications or for application specific requirements. Modified standard
products are those products that are slightly customized from an existing
platform to meet a particular customer's special requirement. Custom products
are developed specifically for a single customer to his own specification. The
Company maintains a large group of custom power supply designers and focuses
these resources on carefully selected companies that are either leaders or
emerging as leaders in high growth market segments. Whether custom or standard,
the Company's power conversion products fall into one of the following three
categories of product.
AC/DC Power Supplies
These products represent the majority of the Company's product sales as they are
used by almost any piece of electronic equipment powered from an AC outlet. They
are typically designed to operate from a universal input voltage allowing the
product to operate from standard AC voltages anywhere in the world. These
products range in power from a few watts to several thousand watts.
External Power Supplies
These products, commonly referred to as adapters, are a special type of AC/DC
power supply. External power supplies are provided in their own housing outside
of the equipment being powered. Typically, these products range from a few watts
of power to as much as 100W. The Company provides these products in high volume
to makers of various types of terminals, modems, and storage systems. They are
commonly used for mobile applications.
DC/DC Converters
Due to the emergence of low-voltage, high performance silicon, the demand for
DC/DC converters has grown rapidly in recent years. These products are
frequently used to provide power in close physical proximity to the point of
use. This reduces the impedance between the power supply and the device being
powered and significantly improves system performance. DC/DC converters are also
used extensively in modular systems employing a scheme known as Distributed
Power Architecture or DPA. This architecture is quite commonly employed in
larger networking and communication systems.
COMMUNICATIONS PRODUCTS
The Company's Communications Products division provides the core communications
technology and building blocks for today's converging telecommunications
networks. Product lines include communication interfaces, CPU boards, and
hardware/software subsystems to many of the top names in the telecom industry.
Based on worldwide industry standards and open systems technology like PCI,
CompactPCI(TM) and VME for communication between computer boards, these
solutions can be used off-the-shelf or customized to meet specific cost and
performance requirements.
3
The primary product line is communication interfaces, such as T1 or E1, which
carry either voice or data. These products and systems are employed in a wide
range of worldwide telecom and datacom networks, such as gateway/routers,
switching, call processing, and wireless communications infrastructure.
REPAIR AND LOGISTICS
The Company provides repair, logistics, assembly, and supply chain services for
a variety of products primarily manufactured by Hewlett-Packard, Apple Computer
and Aspect Communications. The process of repairing products that fail in the
field involves the logistics of arranging for return of products and, when they
have been repaired, arranging for delivery of products to their customers. This
function has traditionally been accomplished as part of the OEM's business. In
the 1980s and 1990s, as companies focused their energies on core competencies,
electronics manufacturers have often outsourced many activities that they do not
consider essential to their business. The Company was retained by
Hewlett-Packard ("HP") in 1992 to manage inbound and outbound logistics for some
of HP's computer products and to repair certain products. This business has
grown steadily since 1992 as HP has transferred repairs of more products to the
Company. Since 1992, the Company has taken over from HP the repair of laserjet
and deskjet printers, facsimile machines, and scanners and the servicing of
other products. Through 1999, 97% of the Company's revenue from repair and
logistics services was from HP. We believe this percentage will decrease as the
Company solicits new OEMs to become clients.
The Company's repair and logistics services are centered in its Lincoln,
California, facility.
STRATEGY
The Company's objective is to be the supplier of choice to multinational OEM
customers who require sophisticated power supply solutions and who are likely to
have substantial volume requirements. While continuing to concentrate on its
established customer base, the definition of the Company's target markets has
been redefined to focus on high growth sectors supporting the internet:
computing/mass storage, carrier/enterprise solutions, wireless infrastructure
and network access technologies. To achieve its objective, the Company's
strategy is to differentiate itself from its competition through utilization of
new and advanced technology and design, fastest time-to-market and superior
product performance, quality, service and the lowest total cost of ownership.
The Company implements its strategy by combining the following key elements:
Deliver High-Quality Products and Services
The Company believes that quality and responsiveness to the customer's needs are
of critical importance in its efforts to compete successfully. The Company
actively involves its employees in implementing techniques to measure, monitor
and improve performance and provides its employees with education and training,
including courses in statistical process control and related techniques. Also,
employees participate in the Company's planning sessions and monitor adherence
to their annual plans on a monthly basis. Through its commitment to customer
service and quality, the Company believes it is able to provide superior value
to its customers.
Provide Leading-Edge Engineering and Time-to-Market
The Company's target markets and customers are characterized by high growth
rates and continually evolving technology. As a result, its customers typically
require leading-edge technology designed in a relatively short period. The
Company has been working to reduce the time-to-market for its products through
two initiatives: concurrent engineering and design-ready platforms. Concurrent
engineering creates a process allowing all functional disciplines to take part
in a product's design from the very beginning. With design-ready platforms, the
Company can modify standard platforms to meet specific customers' needs for a
customized product, a fast fulfillment schedule and an affordable price.
4
Develop and Expand Collaborative Relationships
Through the development and expansion of collaborative relationships with its
customers, the Company attempts to satisfy their needs by offering a full range
of value-added services, including design expertise, process development and
control, testing, inventory management, and rapid response to volume and design
changes. Some custom-designed projects are priced based on agreed-to gross
margins and allow for a sharing of the costs, risks and rewards of the
manufacturing process with the customer. These relationships also provide the
Company with increased knowledge regarding the customer's products. The Company
focuses its efforts on customers with which it believes the opportunity exists
to develop long-term business collaborations.
Offer Customers the Lowest Total Cost of Ownership
The Company strives to create value for its customers by seeking to offer them
the lowest total cost of ownership. Through manufacturing flexibility, reduced
time-to-market, worldwide procurement, design for manufacturability, and
unmatched customer service, the Company is able to complement each customer's
unique set of needs. The Company has built long-standing relationships with
industry leaders by providing a high level of consultation at the earliest
stages of design development. This hands-on approach is intended to enable the
Company to design all its products to maximize quality and minimize unit cost.
Leverage Advanced Manufacturing and Management Techniques
The Company's strategy focuses on the quality of all elements of the production
process, rather than merely the quality of the end product. To implement this
strategy, the Company uses sophisticated design and manufacturing techniques
(such as computer integrated design and manufacture, computer aided design, and
automated testing and assembly of printed circuit boards), combined with
advanced management techniques, including just-in-time manufacturing,
statistical process control and total quality commitment. These techniques allow
the Company to decrease production costs by improving the efficiency of
production processes.
Expand Complementary Businesses
The Company believes that providing a wide range of services affords the Company
a competitive advantage, as it further addresses customer needs and, therefore,
increases the likelihood that the Company will make continuing sales to its
customers. For example, at a customer's request, the Company may build
assemblies by adding cables, harnesses, frames, and other components to its
power supply unit. In addition, it offers power supply repair services for power
supplies manufactured by others.
MARKETING AND DISTRIBUTION
The Company's power conversion products are sold directly to OEMs, private-label
customers and distributors. In addition, the Company's sales and engineering
personnel supervise and provide technical assistance to independent domestic
sales representatives and to domestic and foreign distributors.
The Company's communication products are marketed domestically through
independent sales representative organizations. Substantially all foreign sales
are made through independent foreign distributors and foreign trading companies,
although certain sales are made on a direct basis.
Sales representatives are responsible for marketing the Company's repair
business in North America.
Although the Company seeks to diversify both its customer and market application
bases, sales to three customers represented 17%, 13%, and 12%, respectively, of
1999 sales.
The Company has derived a significant portion of its sales in recent years from
its international operations. Thus, the Company's future operations and
financial results could be significantly affected by international factors, such
as changes in foreign currency exchange rates or political instability. The
Company's operating strategy and pricing take into account changes in exchange
rates over time. However, the Company's future results of operations may be
significantly affected in the short term by fluctuations in foreign currency
exchange rates. See Note 17 of the Notes to Consolidated Financial Statements
for additional information.
5
CUSTOMERS AND APPLICATIONS
The targeted customers and applications are generally the same in the power
conversion and communication products groups. These include market leaders and
emerging player in the computing and communications markets. The applications
and key customers for the Company's products can be grouped as follows:
Servers and Storage Systems Transmission Backbone / Optical Networking
- - Compaq - Alcatel
- - Dell Computer Corporation - Ciena
- - Eurologic - GEC Marconi
- - Hewlett-Packard - Pirelli
- - Iomega - Siemens
- - Sun Microsystems - Sycamore
- Tellabs
Routers/Switches Wireless Infrastructure
- - 3Com - Alcatel
- - Cisco - Lucent
- - Ericsson - Siemens
- - Lucent
- - Newbridge
- - Nortel Networks
MATERIALS AND COMPONENTS
The manufacture of the Company's products requires a wide variety of materials
and components. The Company has multiple external sources for most of the
materials and components used in its production of off-the-shelf standard
products. As a result of the custom nature of certain of the Company's
manufactured products, components used in the manufacture of these products are
currently obtained from a limited number of suppliers. The Company also
manufactures certain of its components. Although the Company has from time to
time experienced shortages of certain supplies, such shortages have not resulted
in any significant disruptions in production. The Company believes that there
are adequate alternative sources of supply to meet all of its requirements.
MANUFACTURING
The Company maintains a number of manufacturing facilities around the world.
Most of the high-volume, labor intensive products are manufactured at the
Company's facility in Zhongshan, China. A smaller number of moderate to
high-volume products are manufactured at the Company's factory in Kindberg,
Austria. The Company operates a facility in Redwood Falls, Minnesota, which
manufactures higher value products in the low to moderate volume range. The
Company's DC/DC products tend to be more highly automated designs and are
manufactured in Broomfield, CO and Youghal, Ireland. The Company also maintains
manufacturing facilities in Oberhausen and Einsiedel, Germany as well as
Tatabanya, Hungary. The Company's Communication Products division manufactures
its products in Madison, WI.
INTELLECTUAL PROPERTY MATTERS
The Company believes that its future success is primarily dependent upon the
technical competence and creative skills of its personnel, rather than upon any
patent or other proprietary rights. However, the Company has protected certain
of its products with patents where appropriate and has defended, and will
continue to defend, its rights under these patents.
6
BACKLOG
Sales are generally made pursuant to purchase orders rather than long-term
contracts. Backlog consists of purchase orders on hand generally having delivery
dates scheduled within the next six months. Order backlog at December 31, 1999
was $140.4 million as compared to $98.3 million at January 1, 1999 due to strong
orders received in the fourth quarter of fiscal 1999. Historically, the effects
of changes and cancellations have not been significant to the Company's
operations. The Company expects to ship substantially all of its December 31,
1999 backlog in the first six months of fiscal 2000.
COMPETITION
The industry in which the Company competes is highly competitive and
characterized by increasing customer demands for improved product performance,
shorter manufacturing cycles and lower prices. These trends result in frequent
introductions of new products with added capabilities and features and
continuous improvements in the relative price/performance of the products.
Increased competition could result in price reductions, reduced profit margins
and loss of market share, each of which could adversely affect the Company's
results of operations and financial condition. The Company's principal
competitors include Lucent Technologies, Delta Product and Astec (BSR) plc.
Certain of the Company's competitors have also been engaged in merger and
acquisition transactions. Such consolidations by competitors are likely to
create entities with increased market share, customer bases, technology and
marketing expertise, sales force size, and/or proprietary technology. These
developments may adversely affect the Company's ability to compete.
RESEARCH AND DEVELOPMENT
The Company maintains active research and development departments, which are
engaged in the modification and improvement of existing products and the
development of new products. Expenditures for research and development during
fiscal years 1999, 1998, and 1997 were approximately $36.4 million, $33.4
million, and $30.0 million, respectively. As a percentage of sales, research and
development accounted for 6.1%, 6.3%, and 5.7% in fiscal years 1999, 1998 and
1997, respectively. Research and development spending in absolute dollars has
increased in each of the past three years as the Company invested in new product
platforms to service the communications industry. The Company believes that the
timely introduction of new technology and products is an important component of
its competitive strategy.
EMPLOYEES
The Company presently employs approximately 4,600 full-time people. In addition,
the Company presently has approximately 3,300 temporary employees and
contractors a majority of whom is at its China facility. The Company's ability
to conduct its present and proposed activities would be impaired if the Company
lost the services of a significant number of its engineers and technicians and
could not readily replace them with comparable personnel. Although there is
demand for qualified technical personnel, the Company has not, to date,
experienced difficulty in attracting and retaining sufficient engineering and
technical personnel to meet its needs. None of the Company's domestic employees
is covered by collective bargaining agreements. The Company considers its
relations with its employees to be satisfactory.
ENVIRONMENTAL MATTERS
Compliance with federal, state, local and foreign laws and regulations
regulating the discharge of materials into the environment has not had and,
under present conditions, the Company does not anticipate that such laws and
regulations will have a material effect on the results of operations, capital
expenditures, financial condition or competitive position of the Company.
7
ITEM 2. PROPERTIES
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The Company currently occupies approximately 1,480,000 square feet of office and
manufacturing space worldwide. Approximately 37% of the space utilized by the
Company is owned while 63% is leased. The Company maintains the following
facilities:
Approximate Owned vs.
Facility Primary Activity Square Footage Leased
-------- ---------------- -------------- ------
Boca Raton, FL Corporate Headquarters 7,000 Leased
Broomfield, CO Manufacturing 81,000 Leased
Eden Prairie, MN Engineering, Administration 28,000 Leased
Edinburgh, Scotland Engineering 4,000 Leased
Einsiedel, Germany Manufacturing 28,400 Owned
Etten-Leur, Netherlands Administration 19,000 Leased
Framingham, MA Engineering, Administration 25,000 Leased
Fremont, CA Engineering, Administration 45,000 Leased
Hong Kong Manufacturing 144,900 Owned
Huntington Beach, CA Manufacturing 45,000 Leased
Kindberg, Austria Manufacturing 75,000 Leased
Lincoln, CA Repair, Logistics 515,000 Leased
Madison, WI Manufacturing 46,000 Owned
Oberhausen, Germany Manufacturing 62,500 Owned
Redwood Falls, MN Manufacturing 117,000 Owned
Redwood Falls, MN Manufacturing 71,000 Leased
Tatabanya, Hungary Manufacturing 62,000 Owned
Vienna, Austria Engineering, Administration 17,200 Leased
Youghal, Ireland Manufacturing 86,000 Owned
In addition to the above locations, the Company has leased sales offices located
in or near London, England; Paris, France; and Munich, Germany. The Company
considers the facilities described in this Item to be adequate for its current
needs. However, the Company is in the process of replacing and/or expanding
certain of its owned facilities to increase manufacturing capacity to support
higher demand for its products and services.
ITEM 3. LEGAL PROCEEDINGS
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The Company is a party to various legal proceedings, which have arisen in the
ordinary course of business. While the results of these matters cannot be
predicted with certainty, the Company believes that losses, if any, resulting
from the ultimate resolution of these matters will not have a material adverse
effect on the Company's consolidated results of operations, cash flows or
financial position.
8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.
ITEM 4A. EXECUTIVE OFFICERS
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Name Age Position(s) with the Company
- ---- --- ----------------------------
Robert J. Aebli 64 President - Communication Products
Harvey Dewan 60 President - Global Manufacturing
Eoin Gilley 38 Managing Director - Europe Commercial
Hartmut Liebel 37 Corporate Treasurer
Joseph M. O'Donnell 53 Co-Chairman of the Board of Directors;
President and Chief Executive Officer
John M. Steel 55 Vice President - Marketing and New
Product Development, Director
Richard J. Thompson 50 Vice President - Finance; Chief Financial
Officer and Secretary
Norman C. Wussow 54 President - North America Commercial
Robert J. Aebli was appointed President of the Company's Communication Products
division in November 1993.
Harvey Dewan was appointed President of Global Manufacturing in January
2000. From December 1997 to December 1999, Mr. Dewan served as the Company's
President of North America and Asia Manufacturing. From February to December
1997, Mr. Dewan was Vice President of Operations for the Company's
Communication Products division. From 1969 to April 1996, Mr. Dewan held
various positions with General Instruments Corporation, most recently as Vice
President of Quality and General Manager.
Eoin Gilley was appointed Managing Director - Europe Commercial in January 2000.
Mr. Gilley joined the Company on February 2, 1998 as General Manager - European
Operations and was appointed to the position of Managing Director - Europe in
August 1998. From 1995 to early 1998, Mr. Gilley served as Vice
President/General Manager Europe with Quarterdeck International Ltd.
Hartmut Liebel was appointed as the Company's Corporate Treasurer in February
1998. Prior to joining the Company, Mr. Liebel had been employed by W.R.
Grace & Co., a global specialty chemical supplier, as Assistant Treasurer
from 1995 to December 1997 and as Director of Financial Risk Management
during 1993 and 1994.
Joseph M. O'Donnell was appointed as Chairman of the Board of Directors in
February 1997 and as Co-Chairman of the Board following the Company's merger
with Zytec. Mr. O'Donnell has served as President and Chief Executive Officer
of the Company since July 1994. Mr. O'Donnell is a Director of Boca
Research, Inc., a manufacturer of data communications, multimedia and
networking products.
John M. Steel was appointed to the position of Vice President - Marketing and
New Product Development in December 1997 and was elected to the Board of
Directors at that time. Mr. Steel was a co-founder of Zytec and had been an
officer and a director of Zytec since 1984.
Richard J. Thompson has served as Vice President - Finance, Chief Financial
Officer, and Secretary of the Company since June 1990. Mr. Thompson is a
Director of Blue Wave Systems, Inc., a manufacturer of high-channel Digital
Signal Processing (DSP) subsystems used in telecommunication infrastructure
equipment.
Norman C. Wussow was appointed to the position of President - North America
Commercial in June 1999. From January 1998 through June 1999, Mr. Wussow served
as Vice President of Custom Engineering of the Company's North America
Commercial division. Mr. Wussow joined Zytec in 1993 and held various
engineering positions, most recently Vice President of Engineering, until
December 1997, when Zytec merged with the Company.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The common stock of the Company is traded on The Nasdaq Stock MarketSM under the
symbol ATSN. High and low sales prices by quarter for the Company's common stock
appear in Note 19 of the Company's Notes to Consolidated Financial Statements
entitled "Selected Consolidated Quarterly Data" on page 42.
As of December 31, 1999, there were approximately 12,818 Company shareholders
consisting of record holders and individual participants in security position
listings.
To date, the Company has not paid any cash dividends on its capital stock. The
Board of Directors presently intends to retain all earnings for use in the
Company's business and does not anticipate paying cash dividends in the
foreseeable future. However, on July 22, 1998, the Company's Board of Directors
authorized a share repurchase program to purchase up to 4.0 million shares of
the Company's common stock in the open market or in privately-negotiated
transactions, depending on market conditions and other factors. As of December
31,1999, the Company repurchased and retired 3,072,200 shares of its common
stock for a total of approximately $51.3 million in cash. Currently, the Company
maintains a $200 million revolving credit facility, which contains certain
restrictive covenants that, among other things, require the Company to maintain
certain financial ratios and may limit the purchase, transfer or distribution of
the Company's assets.
10
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the selected financial information of
the Company.
For the Years Ended on the Friday Nearest December 31
(Dollars in Thousands Except Per Share Data)
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
RESULTS OF OPERATIONS
Sales $594,155 $532,392 $527,236 $435,731 $344,969
Income from continuing operations 43,362 27,044 31,882 29,555 16,483
Per share - basic 1.16 0.70 0.87 0.84 0.50
Per share - diluted 1.11 0.67 0.80 0.78 0.49
Net income 43,362 27,044 29,820 30,059 17,598
Per share - basic 1.16 0.70 0.81 0.85 0.53
Per share - diluted 1.11 0.67 0.75 0.79 0.52
FINANCIAL POSITION
Working capital $127,637 $120,970 $115,822 $ 92,029 $ 66,449
Property, plant & equipment, net 88,468 75,032 61,581 48,671 38,491
Total assets 359,050 325,392 322,177 239,487 202,858
Long-term debt and capital lease obligations 44,154 50,283 52,949 43,945 33,590
Total debt 46,110 52,990 68,547 57,097 50,251
Shareholders' equity 199,912 181,088 162,676 117,006 82,889
Total capitalization 246,022 234,078 231,223 174,103 133,140
FINANCIAL STATISTICS
Selling, general and administrative expenses $ 52,404 $ 54,548 $ 52,058 $ 42,232 $ 36,353
- as a % of sales 8.8% 10.2% 9.9% 9.7% 10.5%
Research and development expenses 36,413 33,401 30,032 23,612 21,085
- as a % of sales 6.1% 6.3% 5.7% 5.4% 6.1%
Operating income 64,861 41,981 52,443 41,077 26,776
- as a % of sales 10.9% 7.9% 9.9% 9.4% 7.8%
Total debt as a % of total capitalization 19% 23% 30% 33% 38%
Debt to equity ratio 23% 29% 42% 49% 61%
Interest coverage ratio 21.01 11.06 11.00 9.21 6.48
OTHER DATA
Capital expenditures $ 33,359 $ 26,795 $ 22,231 $ 9,387 $ 10,046
Depreciation and amortization $ 20,109 $ 16,898 $ 13,561 $ 10,287 $ 7,606
Common shares outstanding (000's) 37,127 37,882 38,381 36,042 34,607
Employees 4,628 4,290 4,219 3,519 2,870
Temporary employees and contractors 3,269 2,326 2,663 1,670 1,923
Data for fiscal years 1995 and 1996 have been restated to reflect the
merger of Computer Products, Inc. and Zytec Corporation effective
December 29, 1997, which was accounted for as a pooling-of-interests.
Data for fiscal years 1995 and 1996 have been restated to give effect
to the discontinued operations of RTP Corp. substantially all of the
assets of which were sold on July 5, 1997.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
BUSINESS COMBINATIONS
ZYTEC -- On December 29, 1997, Computer Products, Inc., the former name of the
Company ("CPI"), merged with Zytec Corporation ("Zytec") in a transaction
whereby Zytec became a wholly-owned subsidiary of CPI. As a result of the
merger, each share of Zytec's common stock, no par value, outstanding
immediately prior to the merger was converted into 1.33 shares of CPI's common
stock, $0.01 par value. The Zytec shares were exchanged for a total of
approximately 14.1 million shares of CPI's common stock. The merger was
accounted for as a pooling-of-interests; accordingly, consolidated financial
statements presented herein for periods prior to the merger have been restated
to include the combined results of operations, financial position and cash flows
of Zytec as though it had always been a part of CPI.
The restatement of the consolidated financial information combines the financial
information of CPI and Zytec giving retroactive effect to the merger as if the
two companies had operated as a single company for all periods presented.
However, the two companies actually operated independently prior to the merger,
and the historical changes and trends in the financial condition and results of
operations of these two companies resulted from independent activities. The
financial information presented for 1997 on a historical restated basis is not
necessarily indicative of the financial condition and results of operations that
may have been achieved in the past or will be achieved in the future had the
companies operated as a single entity for the periods presented. The following
discussion of the consolidated operations and financial condition of the Company
should be read in conjunction with the Company's consolidated financial
statements and related notes thereto included elsewhere herein.
THE ELBA GROUP -- On July 22, 1997, pursuant to an Agreement on the Sale,
Purchase and Transfer of Shares, the Company acquired all the outstanding
capital stock of the following affiliated companies: Elba Electric GmbH, Elba
Modul GmbH, Elba Elektronik AG, Elba Electronics Ltd., Elba-electric-produktion
s.r.o., Elba Electronique S.A.R.L., and KRP Power Source B.V., collectively
referred to as the Elba Group.
The purchase price of 52 million Deutsche marks (approximately $28.5 million)
was paid in cash with proceeds from two seven-year term loans from First Union
National Bank, London Branch. On January 8, 1999, the term loans were repaid
from borrowings under the Company's new revolving credit facility (see Note 8).
Effective December 11, 1998, the Company sold Elba-electric-produktion s.r.o.
(its Czech Republic division) to a third party for 20,000 Deutsche marks and the
repayment of the balance of an intercompany loan of approximately $400,000. In
addition, to eliminate duplicate facilities, the sales offices of the Elba Group
located in Pfaffikon, Switzerland; Vaulx-Milieu, France; and Chesterfield,
United Kingdom were closed during 1998. Costs related to such facilities
closures were included in the restructuring charge described in Note 6 of the
Notes to Consolidated Financial Statements.
BUSINESS ENVIRONMENT AND RISK FACTORS
The following discussion should be read in conjunction with the consolidated
financial statements and related notes as well as the section under the heading
"Risk Factors that May Affect Future Results." With the exception of historical
information, the matters discussed below may include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 that involve risks and uncertainties. The Company wishes to caution
readers that a number of important factors, including those identified in the
section entitled "Risk Factors that May Affect Future Results" as well as
factors discussed in the Company's other reports filed with the Securities and
Exchange Commission, could affect the Company's actual results and cause them to
differ materially from those in the forward-looking statements.
12
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
Sales for 1999 increased 12% to $594.2 million from $532.4 million reported in
1998. Sales in 1999 have increased principally as a result of higher volume
shipments to major OEM customers in the networking and computing market sectors.
Orders for 1999 grew to $639.9 million representing a 22% increase over the
$526.5 million received in 1998. At December 31, 1999, the Company's order
backlog was $140.4 million compared to a backlog of $98.3 million at January 1,
1999.
Gross profit margin for 1999 was 25.9% compared to 25.8% reported in 1998.
Despite higher sales in 1999, gross margins were adversely impacted by increased
competitive pricing involving high volume sales, by new product start-up costs,
and by a shift in sales mix to the Company's high-volume but lower-margin OEM
customers compared to 1998. Although the Company continues to focus on reducing
manufacturing costs and improving overall processes, the Company does not
anticipate that in the reasonably foreseeable future gross profit margins will
vary significantly from the current level due to continuing competitive pricing
pressures and changes in product mix partially offset by improved cost of
purchased materials.
Operating expenses decreased to approximately 14.9% of sales in 1999 from the
17.9% reported in 1998. Operating expenses for 1998 include a $7.2 million
non-recurring charge related to the Company's 1998 restructuring plan. Excluding
the restructuring charge, operating expenses were 16.5% of sales in 1998.
Operating income increased to 10.9% of sales from 7.9% in 1998 as a result of
slightly higher gross profit margins and lower operating expenses.
Selling, general and administrative expenses were $52.4 million, or 8.8% of
sales, in 1999 compared to $54.5 million, or 10.3% of sales, in 1998. This
decrease primarily reflects efficiencies gained from the Company's merger with
Zytec partially offset by expenses associated with Year 2000 compliance and the
implementation of the Company's new Enterprise Resource Planning ("ERP")
computer information system. The Company continues to monitor operating expenses
and to eliminate excess manufacturing resources wherever it seems prudent.
However, the Company expects to incur additional expenses in 2000 relating to
new product start-up costs and to depreciation expense and other costs
associated with the completion of the phased implementation of the ERP system.
Research and development expenses The Company continued its long-term commitment
to new products by investing $36.4 million, or 6.1% of sales, in research and
development activities during 1999 compared to $33.4 million, or 6.3% of sales,
in 1998. 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 in the
reasonably foreseeable future from its historical trend as a percentage of sales
of approximately 6%.
Provision for income taxes decreased to 31.4% of pretax income in 1999 from
33.0% in 1998. The effective tax rate was lower in 1999 primarily due to tax
planning strategies and to the mix of earnings and income tax rates of
international subsidiaries. For additional information regarding income taxes,
refer to Note 11 of the Company's Notes to Consolidated Financial Statements on
pages 34-35.
Net income for 1999 was $43.4 million, or $1.11 per diluted share, representing
a 60% improvement from the $27.0 million, or $0.67 per diluted share, reported
in 1998 which included one-time $9.6 million pre-tax restructuring and inventory
charges taken in the first quarter of 1998 as a result of the merger with Zytec.
13
1998 COMPARED TO 1997
Sales for 1998 improved modestly to $532.4 million compared to $527.2 million in
1997. Lower demand from OEM customers as a result of economic turmoil in Asia
and South America, as well as widespread customer inventory reductions, hampered
growth in the Company's primary market sectors: computing/mass storage,
carrier/enterprise solutions, access and wireless infrastructure.
Orders for 1998 were $526.5 million compared to $530.0 million in 1997. On
January 1, 1999, the Company's order backlog was $98.3 million compared to
$103.1 million on January 2, 1998.
Gross profit margin for 1998 was 25.8% compared to 26.1% in 1997 primarily due
to the $2.4 million charge for the write-off of duplicate product lines between
the merged companies related to the Company's 1998 restructuring plan further
described below. In addition, material cost and plant rationalization savings
following the merger were offset by new product direct start-up costs.
Operating expenses increased to approximately 17.9% of sales in 1998 from the
16.1% reported in 1997. Operating expenses for 1998 include a $7.2 million
non-recurring charge related to the Company's 1998 restructuring plan. Excluding
the restructuring charge, operating expenses were 16.5% of sales in 1998.
Operating income decreased to 7.9% of sales from 9.9% in 1997, as a result of
lower gross profit margins, increased operating expenses, and restructuring and
related inventory charges.
Selling, general and administrative expenses were $54.5 million in 1998 compared
to $52.1 million in 1997 reflecting the inclusion of a full year of operations
for Elba, which was acquired mid-year 1997, and various integration activities
following the merger. Certain of these additional costs were incurred to begin
implementation of a new company-wide ERP information system and to familiarize
the Company's employees, customers, suppliers and investors with the resources
of the new combined company, Artesyn Technologies.
Research and development expenses totaled $33.4 million, or 6.3% of sales, in
1998 compared to $30.0 million, or 5.7% of sales, in 1997 reflecting the
Company's continued investment in new product development for its global
communications customers.
Restructuring charge -- During the first quarter of 1998, the Company recorded a
$9.6 million pre-tax charge in connection with the Company's restructuring plan
following its merger with Zytec. This amount is allocated in the accompanying
Consolidated Statements of Operations as follows: $7.2 million to Restructuring
Charge, as further described below, and $2.4 million to Cost of Sales, which
relates principally to inventory write-offs of duplicate product development
programs which were underway at CPI and Zytec prior to the merger. The
restructuring charge relates primarily to the elimination of duplicate
facilities in an effort to reduce costs pursuant to the Company's integration
plan. Specific restructuring actions included the closure of certain domestic
and foreign manufacturing and other facilities through the consolidation of
manufacturing operations with corresponding personnel reductions, the
realignment of the Company's workforce to eliminate duplicate functions
particularly in administrative areas, and other related cost-savings actions.
Provision for income taxes decreased to 33.0% of pretax income in 1998 from
35.5% in 1997. The effective tax rate was lower in 1998 primarily due to lower
state income taxes following the merger. Income from continuing operations for
1998 was $27.0 million, or $0.67 per diluted share, compared to $31.9 million,
or $0.80 per diluted share, in 1997. Such amounts include $9.6 million
restructuring and related inventory charges in 1998 and a $3.0 million
merger-related charge in 1997.
Adoption of recent accounting pronouncements- In 1998, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" which requires companies to report all changes in equity
during a period, except those resulting from investment by owners and
distributions to owners, in a financial statement for the period in which they
are recognized. The Company has chosen to disclose Comprehensive Income, which
encompasses net income and foreign currency translation adjustments, in the
Consolidated Statements of Shareholders' Equity and Comprehensive Income. The
fiscal year 1997 presentation has been reclassified to conform to the SFAS 130
requirements.
14
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information" which
was adopted by the Company in 1998. SFAS 131 establishes standards for reporting
information about operating segments and related disclosures about products and
services, geographic areas and major customers. The fiscal year 1997
presentation has been reclassified to conform to the SFAS 131 requirements.
In March 1998, the Accounting Standards Executive Committee released Statement
of Position 98-1, ("SOP 98-1"), "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 requires companies to
capitalize certain costs of computer software developed or obtained for internal
use, provided that those costs are not research and development. In 1998, the
Company adopted the guidelines established by SOP 98-1 in accounting for the
costs of computer software developed or obtained for internal use in connection
with its implementation of the ERP system.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company's cash and equivalents decreased to $37.6
million from $41.5 million on January 1, 1999 as cash on hand, cash generated
from operations and $10.0 million proceeds from exercises of stock options
funded $31.9 million spent for repurchases of the Company's common stock, $33.4
million for capital expenditures, and $3.2 million for principal debt
repayments.
Accounts receivable increased to $90.3 million at December 31, 1999 from $88.8
million at January 1, 1999 due primarily to higher sales volume in 1999 compared
to 1998 partially offset by productive collection efforts. Days sales
outstanding, or DSO, in receivables decreased to 52 days for 1999 compared to 55
days for 1998. The Company continued to monitor credit and collection processes
during 1999, which contributed to improved collection periods, especially in
Europe.
The significant increase in inventory levels from $62.5 million at January 1,
1999 to $89.4 million at December 31, 1999 was primarily attributable to
production planning to meet manufacturing lead times, increased investment in
raw materials to mitigate some lengthening of component procurement lead times,
expansion of inventory depots to better service customers, and anticipated
demand for new product introductions. As a result, inventory turnover decreased
to 4.7 turns at December 31, 1999 compared to 6.4 turns at January 1, 1999.
Capital expenditures for 1999 totaled $33.4 million primarily for the continued
upgrade of facilities and equipment in support of the Company's current
operating activities including $10.1 million related to the implementation of a
new 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 computer system is approximately $25
million 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 December 31, 1999 totaled approximately
$20.8 million, of which $19.8 million has been capitalized and $1.0 million was
expensed.
At December 31, 1999, accounts payable increased $8.0 million, or 19%, from
January 1, 1999 due to increases in capital expenditures, including the
implementation of the ERP system, and materials purchases to support the
Company's growth in sales.
On July 22, 1998, the Company's Board of Directors authorized a share repurchase
program to purchase up to 4.0 million shares of the Company's common stock in
the open market or in privately-negotiated transactions, depending on market
conditions and other factors. During fiscal years 1999 and 1998, the Company
repurchased and retired 1,860,700 and 1,211,500 shares, respectively, of its
common stock for a total of approximately $31.9 million and $19.4 million,
respectively. All of such repurchases were funded with cash from operations. The
Company expects to complete the share repurchase during the first half of fiscal
2000.
Cash provided by operations increased to $52.8 million in 1999 versus $44.1
million in 1998 and $38.8 million in 1997. The increase in 1999 was primarily
due to income from operations partially offset by an increase in inventories,
accounts payable and accrued liabilities. The increase in 1998 was primarily due
to income from operations, excluding the $7.2 million pre-tax restructuring
charge, and smaller increases in accounts receivable and inventories.
15
The Company used $30.2 million, $24.6 million and $44.7 million in investing
activities in fiscal years 1999, 1998 and 1997, respectively. Net cash used in
investing activities in 1999 primarily reflects capital expenditures of $33.4
million partially offset by a decrease in other long-term assets of $2.8
million. The use of cash in fiscal 1998 reflects capital expenditures of $26.8
million partially offset by $2.2 million proceeds from the sale of substantially
all of the assets of RTP Corp. The use of cash in fiscal 1997 was due mainly to
the acquisition of the Elba Group for $26.2 million (net of cash acquired) and
increased purchases of property, plant and equipment in line with the continued
upgrading of the Company's overseas manufacturing facilities.
Net cash used in financing activities in fiscal 1999 of $25.1 million mainly
reflects the repurchase and retirement of 1,860,700 shares of the Company's
common stock for $31.9 million, partially offset by $10.0 million in proceeds
from stock option exercises.
Net cash used in financing activities in fiscal 1998 of $33.7 million mainly
reflects: (1) long-term debt principal repayments including $4.4 million on the
Company's seven-year term loan, $3.2 million on its 6.9% mortgage note,
approximately $7.6 million on the Company's Austrian subsidiary's revolving
loans and notes payable, and $3.5 million in capital lease principal payments
and (2) repurchase and retirement of 1,211,500 shares of the Company's common
stock for $19.4 million, partially offset by $4.6 million in proceeds from stock
option exercises.
Net cash provided by financing activities in fiscal 1997 of $27.1 million
reflects borrowings under the 52 million Deutsche mark term loans, net of debt
issuance costs, and $5.5 million proceeds from exercises of stock options
partially offset by $14.2 million long-term debt and capital lease principal
repayments including $3.7 million on the Company's seven-year term loan
Effective December 31, 1998, the Company entered into a revolving credit
agreement with a syndicate of banks which provided a three-year, multi-currency
$200 million credit facility. The 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 ("LIBOR") 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. On January
8, 1999, the Company's then existing term loans totaling $46.4 million were
repaid from borrowings under this new revolving credit facility. Any amounts
outstanding under the facility are due on December 31, 2001. At December 31,
1999, the Company had not repaid any portion of the $46.4 million outstanding
under the facility, and the Company has made no additional borrowings under the
facility. The Company is 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, its available credit line, 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 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
133 will require the Company to record all derivatives as either assets or
liabilities in the Consolidated Statement of Financial Position and measure
those instruments at fair value. The accounting for changes in the fair value
depends on the intended use of the derivative and the resulting designation. The
impact of SFAS 133 on the Company's financial statements will depend on a
variety of factors, including future interpretative guidance from the FASB, the
future level of forecasted and actual foreign currency transactions, the extent
of the Company's hedging activities, the types of hedging instruments used and
the effectiveness of such instruments. However, given the Company's current use
of derivatives and hedging activities, the Company does not believe the effect
of adopting SFAS 133 will be material to its consolidated financial statements.
16
In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments
and Hedging Activities-Deferral of the Effective Date of FASB Statement 133."
The Statement defers the effective date of SFAS 133 to fiscal 2001 at which time
adoption is planned.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101, "Revenue
Recognition," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosure related to revenue recognition policies. We believe our
revenue recognition practices are in conformity with the guidelines prescribed
in SAB No. 101.
IMPACT OF YEAR 2000
The Year 2000 Issue was the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
In 1999, the Company formulated a plan to resolve the Year 2000 Issue that
included the following phases: awareness, assessment, remediation, testing and
implementation. The plan was initiated and executed to prevent major
interruptions in the business due to Year 2000 problems using both internal and
external resources to identify and correct problems and to test for readiness.
Also, the Company queried its important suppliers and customers regarding their
year 2000 remediation activities and developed a contingency plan for both
external and internal sources of non-compliance. As of December 31, 1999, all
phases were completed.
During 1998, the Company initiated the implementation and installation of a new
ERP system, which was a planned system change and was not deemed undertaken
solely for the Company to become Year 2000 compliant. The Company completed the
replacement of its existing internal computer systems to a new Year 2000
compliant ERP system throughout North America in July of 1999. The
implementation of the new Year 2000 compliant ERP system for the Company's
European and Asia-Pacific locations is scheduled for completion by mid-year
2000.
The total cost incurred for all phases of the Year 2000 project, excluding the
implementation of the ERP system, was approximately $3.0 million, of which
approximately $700,000 was incurred in 1998 and approximately $2.3 million was
incurred in 1999. Of the total amount, approximately $2.0 million related to
equipment purchases which was capitalized and approximately $1.0 million was
expensed as incurred. These costs were funded through operating cash flows.
Since January 1, 2000, the Company has experienced no disruptions in its
business operations as a result of Year 2000 compliance problems and received no
reports of any Year 2000 compliance issues from either internal or external
sources. Nonetheless, some problems related to Year 2000 risks may not appear
until several months after January 1, 2000. Year 2000 issues could include
problems with the Company's own products and services or with third-party
products or technology that we use. The Company can provide no assurance that
all supplier and customer Year 2000 compliance plans were successfully completed
in a timely manner, although it is not currently aware of any problems, which
would significantly impact its operations.
CONVERSION TO THE EURO CURRENCY
On January 1, 1999, eleven of the fifteen member countries of the European Union
adopted the euro as their common legal currency and established fixed conversion
rates between their existing sovereign currencies and the euro. The legacy
currencies of the participating European Union members will remain legal tender
in the participating countries for the transition period from January 1, 1999
through January 1, 2002. Beginning January 1, 2002, the participating countries
will issue new euro-denominated bills and coins for use in cash transactions.
Legacy currencies will no longer be legal tender for any transactions beginning
July 1, 2002, making conversion to the euro complete. The Company has begun to
assess and address the issues involved with the introduction of the euro. Issues
facing the Company relating to the euro include: converting
17
information technology systems; reassessing currency risk; negotiating and
amending licensing agreements and contracts; and processing tax and accounting
records.
The Company does not presently expect that introduction and use of the euro will
materially affect the Company's foreign exchange and hedging activities or the
Company's use of derivative instruments. While the Company will continue to
evaluate the impact of the euro's introduction over time, based on currently
available information, management does not believe that the introduction of the
euro currency will have a material adverse impact on the Company's financial
condition or overall trends in results of operations.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
As noted above, the foregoing discussion may include forward-looking statements
which involve risks and uncertainties. In addition, the Company has identified
the following risk factors that could affect its actual results and cause them
to differ materially from those in the forward-looking statements.
RISKS RELATED TO NEW PRODUCTS The markets for the Company's products are
characterized by rapidly changing technologies, increasing customer demands,
evolving industry standards, frequent new product introductions and, in some
cases, short product life cycles. The development of new, technologically
advanced products is a complex and uncertain process requiring high levels of
innovation and cost, as well as the accurate anticipation of technological and
market trends. There can be no assurance that the Company will successfully
develop, introduce or manage the transition of new products. The failure of or
the delay in anticipating technological advances or developing and marketing
product enhancements or new products that respond to any significant
technological change could have a material adverse effect on the business,
operating results and financial condition of the Company.
RELIANCE ON CUSTOMERS Sales to three customers accounted for approximately 17%,
13% and 12%, respectively, of sales in 1999. Decisions by a small number of
customers to defer their purchasing decisions or to purchase products elsewhere
could have a material adverse effect on the business, results of operations and
financial condition of the Company.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS Recently, the Company has
experienced erratic quarterly growth in sales partially due to customers
realigning their inventory needs and also partially attributable to Year 2000
uncertainty. Due to the rapidly changing nature of the markets for its products,
as well as the likelihood of increased competition, there can be no assurance
that the Company's sales and operating results will maintain their past growth
rates. If sales are below expectations in any given quarter, the adverse impact
of any shortfall on the operating results of the Company may be magnified to the
extent the Company is unable to adjust spending to compensate for the shortfall.
Accordingly, there can be no assurance that the Company will be able to sustain
profitability in the future, particularly on a quarter-to-quarter basis.
COMPETITION: INCREASED COMPETITION DUE TO INDUSTRY CONSOLIDATION The industry in
which the Company competes is highly competitive and characterized by increasing
customer demands for product performance, shorter manufacturing cycles and lower
prices. These trends result in frequent introductions of new products with added
capabilities and features and continuous improvements in the relative
price/performance of the products. Increased competition could result in price
reductions, reduced profit margins and loss of market share, each of which could
adversely affect the Company's results of operations and financial condition.
The Company's principal competitors include Lucent Technologies, Delta Product
and Astec (BSR) plc. Certain of the Company's major competitors have also been
engaged in merger and acquisition transactions. Such consolidations by
competitors are likely to create entities with increased market share, customer
bases, proprietary technology and marketing expertise, and expanded sales force
size. These developments may adversely affect the Company's ability to compete
in such markets.
18
RISKS RELATED TO GROSS MARGIN The Company's gross margin percentage is a
function of the product mix sold in any period. Other factors such as unit
volumes, heightened price competition, changes in channels of distribution,
shortages in components due to timely supplies of parts from vendors or ability
to obtain items at reasonable prices, and availability of skilled labor, also
may affect the cost of sales and the fluctuation in gross margin percentages in
future periods.
RISKS RELATED TO BACKLOG The Company has attempted to reduce its product
manufacturing lead times and its backlog of orders. To the extent that backlog
is reduced during any particular period, it could result in more variability and
less predictability in the Company's quarter-to-quarter sales and operating
results. If manufacturing lead times are not reduced, the Company's customers
may cancel, or not place, orders if shorter lead times are available from other
manufacturers
RISKS RELATED TO INTELLECTUAL PROPERTY RIGHTS The Company currently relies upon
a combination of patents, copyrights, trade marks and trade secret laws to
establish and protect its proprietary rights in its products. There can be no
assurance that the steps taken by the Company in this regard will be adequate to
prevent misappropriation of its technology or that the Company's competitors
will not independently develop technologies that are substantially equivalent or
superior to the Company's technology. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent, as
do the laws of the United States. Although the Company continues to evaluate and
implement protective measures, there can be no assurance that these efforts will
be successful or that third parties will not assert intellectual property
infringement claims against the Company.
RISKS RELATED TO ACQUISITIONS Acquisitions of complementary businesses and
technologies, including technologies and products under development, have been
an important part of the Company's business strategy. Acquisitions require
significant financial and management resources both at the time of the
transaction and during the process of integrating the newly acquired business
into the Company's operations. The Company's operating results could be
adversely affected if it is unable to successfully integrate such new companies
into its operations. Future acquisitions by the Company could also result in
issuances of equity securities or the rights associated with the equity
securities, which could potentially dilute your stakeholdings and/or the
Company's earnings per share. In addition, future acquisitions could result in
the incurrence of additional debt, or contingent liabilities, and amortization
expenses related to goodwill and other intangible assets. These factors could
adversely affect the Company's future operating results and financial position.
DEPENDENCE ON SOLE SOURCE SUPPLIERS As a result of the custom nature of certain
of the Company's manufactured products, components used in the manufacture of
these products are currently obtained from a limited number of suppliers.
Although there are a limited number of manufacturers of certain components,
management believes that other suppliers could provide similar components on
comparable terms. A change in suppliers, however, could cause a delay in
manufacturing and a possible loss of sales that could adversely affect the
Company's future operating results and financial position.
RISKS RELATED TO INTERNATIONAL SALES International sales have been, and are
expected to continue to be, an increasingly important component of the Company's
total sales. International sales are subject to certain inherent risks,
including unexpected changes in regulatory requirements and tariffs,
difficulties in staffing and managing foreign operations, longer payment cycles,
problems in collecting accounts receivable and potentially adverse tax
consequences. Other risks of international sales include changes in economic
conditions in the international markets in which the products are sold,
political and economic instability, fluctuations in currency exchange rates,
import and export controls, and the burden and expense of complying with foreign
laws. In addition, sales in developing nations may fluctuate to a greater extent
than sales to customers in developed nations, as those markets are only
beginning to adopt new technologies and establish purchasing practices. These
risks may adversely affect the operating results and financial condition of the
Company.
19
RISKS RELATED TO GOVERNMENT REGULATIONS AND PRODUCT CERTIFICATION The Company's
operations are subject to laws, regulations, government policies and product
certification requirements worldwide. Changes in such laws, regulations,
policies or requirements could affect the demand for the Company's products or
result in the need to modify products, which may involve substantial costs or
delays in sales and could have an adverse effect on the Company's future
operating results.
RISKS RELATED TO FOREIGN MANUFACTURING OPERATIONS The Company manufactures a
significant amount of its products in foreign locations. Approximately 38% of
the Company's 1999 sales were from products manufactured in Asia-Pacific, 27%
from products manufactured in Europe and the remaining 35% from domestic
operations.
The supply and cost of these products can be adversely affected, among other
reasons, by changes in foreign currency exchange rates, increased import duties,
imposition of tariffs, imposition of import quotas, interruptions in sea or air
transportation and political or economic changes. From time to time, the Company
explores opportunities to diversify its sourcing and/or production of certain
products to other low cost locations or with other third parties to reduce its
dependence on production in any one location. In addition, the Company has taken
necessary measures, including insuring against certain risks, to mitigate its
exposure to potential political and economic changes in Hong Kong and China. In
the event of confiscation, expropriation, nationalization, or governmental
restrictions in the above mentioned foreign or other locations, earnings could
be adversely affected from business disruption resulting in delays and/or
increased costs in the production and delivery of products.
VOLATILITY OF STOCK PRICE The market price of the Company's common stock has
been, and, may continue to be, relatively volatile. Factors such as new product
announcements by the Company, its customers or its competitors, quarterly
fluctuations in operating results, challenges associated with integration of
businesses and general conditions in the markets in which the Company competes,
such as a decline in industry growth rates, may have a significant impact on the
market price of the Company's common stock. These conditions, as well as factors
which generally affect the market for stocks of technology companies, could
cause the price of the Company's common stock to significantly fluctuate over
relatively short periods.
ITEM 7A. 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 currency forward contracts and purchased
option contracts 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 fiscal year
1999.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------------------------------------------
STATEMENT OF MANAGEMENT RESPONSIBILITY
The Company's management is responsible for the preparation, integrity and
objectivity of the consolidated financial statements and other financial
information presented in this Form 10-K. The accompanying financial statements
have been prepared in conformity with generally accepted accounting principles
and reflect the effects of certain estimates and judgments made by management.
The Company's management maintains a system of internal control that is designed
to provide reasonable assurance that assets are safeguarded and transactions are
properly recorded and executed in accordance with management's authorization.
The system is continuously monitored by direct management review and by internal
auditors who conduct an extensive program of audits throughout the Company. The
Company selects and trains qualified people who are provided with and expected
to adhere to the Company's standards of business conduct. These standards, which
set forth the highest principles of business ethics and conduct, are a key
element of the Company's control system. Additionally, our independent certified
public accountants, Arthur Andersen LLP, obtain a sufficient understanding of
the internal control structure in order to plan and complete the annual audit of
the Company's consolidated financial statements.
The Audit Committee of the Board of Directors, which consists of five outside
directors, meets regularly with management, the internal auditors and the
independent certified public accountants to review accounting, reporting,
auditing and internal control matters. The Committee has direct and private
access to both internal and external auditors.
JOSEPH M. O'DONNELL
Co-Chairman of the Board, President and Chief Executive Officer
RICHARD J. THOMPSON
Vice President, Finance and Chief Financial Officer
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Artesyn Technologies, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Artesyn Technologies, Inc. (a Florida corporation) and subsidiaries as of
December 31, 1999 and January 1, 1999, and the related consolidated statements
of operations, shareholders' equity and comprehensive income and cash flows for
each of the three fiscal years in the fiscal period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Artesyn
Technologies, Inc. and subsidiaries as of December 31, 1999 and January 1, 1999,
and the results of their operations and their cash flows for each of the three
fiscal years in the fiscal period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida,
January 19, 2000.
21
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended on the Friday Nearest December 31
(Amounts in Thousands Except Per Share Data)
1999 1998 1997
---------------------------------------
SALES $ 594,155 $ 532,392 $ 527,236
COST OF SALES 440,477 395,273 389,703
---------------------------------------
GROSS PROFIT 153,678 137,119 137,533
---------------------------------------
EXPENSES
Selling, general and administrative 52,404 54,548 52,058
Research and development 36,413 33,401 30,032
Restructuring charge -- 7,189 --
Merger-related charges -- -- 3,000
---------------------------------------
88,817 95,138 85,090
---------------------------------------
OPERATING INCOME 64,861 41,981 52,443
---------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (3,160) (4,013) (4,945)
Interest income 1,509 2,396 1,943
---------------------------------------
(1,651) (1,617) (3,002)
---------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 63,210 40,364 49,441
PROVISION FOR INCOME TAXES 19,848 13,320 17,559
---------------------------------------
INCOME FROM CONTINUING OPERATIONS 43,362 27,044 31,882
DISCONTINUED OPERATIONS
Loss from operations, net of tax benefit of $222 -- -- (333)
Loss on disposal of RTP (including provision of
$1,000 for operating losses during phase-out
period), net of tax benefit of $1,152 -- -- (1,729)
---------------------------------------
NET INCOME $ 43,362 $ 27,044 $ 29,820
=======================================
EARNINGS PER SHARE
BASIC
Income from Continuing Operations $ 1.16 $ 0.70 $ 0.87
Discontinued Operations -- -- (0.06)
---------------------------------------
Net Income $ 1.16 $ 0.70 $ 0.81
=======================================
DILUTED
Income from Continuing Operations $ 1.11 $ 0.67 $ 0.80
Discontinued Operations -- -- (0.05)
---------------------------------------
Net Income $ 1.11 $ 0.67 $ 0.75
=======================================
WEIGHTED SHARES OUTSTANDING
Basic 37,272 38,369 36,650
Diluted 38,999 40,635 40,654
The accompanying notes are an integral part of these consolidated financial
statements.
22
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
As of the Friday Nearest December 31
(Amounts in Thousands Except Share Data)
1999 1998
------------------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 37,562 $ 41,525
Accounts receivable, net of allowance for doubtful accounts of
$2,737 at December 31, 1999 and $1,875 at January 1, 1999 90,334 88,828
Inventories 89,370 62,460
Prepaid expenses and other 5,263 4,832
Deferred income taxes 9,866 7,685
------------------------
Total current assets 232,395 205,330
------------------------
PROPERTY, PLANT & EQUIPMENT, NET 88,468 75,032
------------------------
OTHER ASSETS
Goodwill, net 32,436 40,039
Deferred income taxes 3,573 2,682
Other assets, net 2,178 2,309
------------------------
Total other assets 38,187 45,030
------------------------
$ 359,050 $ 325,392
========================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt and capital leases $ 1,956 $ 2,707
Accounts payable and accrued liabilities 102,802 81,653
------------------------
Total current liabilities 104,758 84,360
------------------------
LONG-TERM LIABILITIES
Long-term debt and capital leases 44,154 50,283
Other long-term liabilities 4,819 4,974
Deferred tax liabilities 5,407 4,687
------------------------
Total long-term liabilities 54,380 59,944
------------------------
Total liabilities 159,138 144,304
------------------------
COMMITMENTS AND CONTINGENCIES (see Notes 8, 10 and 13)
SHAREHOLDERS' EQUITY
Preferred stock, par value $0.01; 1,000,000 shares authorized;
none issued or outstanding -- --
Common stock, par value $0.01; 80,000,000 shares authorized;
37,126,630 shares issued and outstanding at December 31, 1999
(37,882,248 at January 1, 1999) 371 379
Additional paid-in capital 94,465 85,018
Retained earnings 114,510 99,128
Foreign currency translation adjustment (9,434) (3,437)
------------------------
Total shareholders' equity 199,912 181,088
------------------------
$ 359,050 $ 325,392
========================
The accompanying notes are an integral part of these consolidated financial
statements.
23
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended on the Friday Nearest December 31
(Amounts in Thousands)
1999 1998 1997
------------------------------------
OPERATING ACTIVITIES
Net income $ 43,362 $ 27,044 $ 29,820
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 20,109 16,898 13,561
Deferred income taxes (2,340) 1,042 (3,395)
Provision for inventory writedown 9,436 6,407 4,963
Provision for restructuring charge -- 7,189 --
Other non-cash items (2,260) 720 2,473
Changes in operating assets and liabilities:
Increase in accounts receivable (6,902) (1,032) (22,264)
Increase in inventories (38,704) (6,466) (14,489)
(Increase) decrease in prepaid expenses and other (321) (1) 8,683
Increase (decrease) in accounts payable and accrued liabilities 30,461 (7,659) 18,037
Net cash provided by discontinued operations -- -- 1,423
------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 52,841 44,142 38,812
------------------------------------
INVESTING ACTIVITIES
Purchases of property, plant & equipment (33,359) (26,795) (22,231)
Proceeds from sale of property, plant & equipment 287 54 1,656
Purchase of the Elba Group, net of cash acquired -- -- (26,186)
Proceeds from sale of RTP Corp. -- 2,150 2,000
Decrease in other assets 2,831 -- 96
Investing activities of discontinued operations -- -- (32)
------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (30,241) (24,591) (44,697)
------------------------------------
FINANCING ACTIVITIES
Proceeds from issuances of long-term debt 17,633 -- 35,796
Principal payments on debt and capital leases (20,794) (18,968) (14,163)
Proceeds from revolving credit loans -- -- 14,726
Payments on revolving credit loans -- -- (14,726)
Proceeds from exercises of stock options 9,980 4,640 5,511
Repurchases of common stock (31,912) (19,379) --
------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (25,093) (33,707) 27,144
------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS (1,470) 289 (543)
------------------------------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (3,963) (13,867) 20,716
CASH AND EQUIVALENTS, BEGINNING OF YEAR 41,525 55,392 34,676
------------------------------------
CASH AND EQUIVALENTS, END OF YEAR $ 37,562 $ 41,525 $ 55,392
====================================
SUPPLEMENTAL CASH FLOW DISCLOSURES
CASH PAID DURING THE YEAR FOR:
Interest $ 2,926 $ 3,511 $ 4,754
Income taxes 10,045 12,442 9,213
NONCASH INVESTING AND FINANCING ACTIVITIES:
Fair value of assets acquired in connection with the Elba acquisition -- -- 35,000
Liabilities assumed in connection with the Elba acquisition -- -- 6,600
Common stock issued from conversion of note (including debt
issuance costs written off) -- -- 11,386
Tax benefit from exercises of stock options 3,391 5,011 3,163
Equipment acquired through issuance of debt -- -- 736
Property and equipment acquired through capital lease obligations 75 1,222 1,505
Note receivable from sale of RTP Corp. -- -- 2,150
The accompanying notes are an integral part of these consolidated financial
statements.
24
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
For the Years Ended on the Friday Nearest December 31
(Amounts in Thousands)
FOREIGN
ADDITIONAL CURRENCY
COMMON STOCK PAID-IN RETAINED TRANSLATION COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT INCOME
------------------------------------------------------------------------
BALANCE, JANUARY 3, 1997 $ 36,042 $ 360 $ 57,874 $ 58,949 $ (177)
Issuance of common stock 21 -- 146 -- --
Issuance of common stock under stock
option and employee purchase plans 1,151 12 5,499 -- --
Tax benefit from exercises of stock
options -- -- 3,163 -- --
Conversion of convertible subordinated
note (including debt issuance costs
written off) 1,167 12 11,374 -- --
Net income -- -- -- 29,820 -- $ 29,820
Other comprehensive income - foreign
currency translation adjustment, net
of tax of $2,397 -- -- -- -- (4,356) (4,356)
-------
Comprehensive income $ 25,464
---------------------------------------------------------------=========
BALANCE, JANUARY 2, 1998 38,381 384 78,056 88,769 (4,533)
Issuance of common stock under stock
option and employee purchase plans 713 7 4,633 -- --
Tax benefit from exercises of stock
options -- -- 5,011 -- --
Repurchases and retirement of common
stock (1,212) (12) (2,682) (16,685) --
Net income -- -- -- 27,044 -- $ 27,044
Other comprehensive income - foreign
currency translation adjustment,
net of tax of $539 -- -- -- -- 1,096 1,096
-------
Comprehensive income $ 28,140
---------------------------------------------------------------=========
BALANCE, JANUARY 1, 1999 37,882 379 85,018 99,128 (3,437)
Issuance of common stock under stock
option plans 1,105 11 9,969 -- --
Tax benefit from exercises of stock
options -- -- 3,391 -- --
Repurchases and retirement of common
stock (1,860) (19) (3,913) (27,980) --
Net income -- -- -- 43,362 -- $ 43,362
Other comprehensive income - foreign
currency translation adjustment,
net of tax of $2,745 -- -- -- -- (5,997) (5,997)
-------
Comprehensive income $ 37,365
---------------------------------------------------------------=========
BALANCE, DECEMBER 31, 1999 37,127 $ 371 $ 94,465 $ 114,510 $ (9,434)
===========================================================
The accompanying notes are an integral part of these consolidated financial
statements.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Artesyn
Technologies, Inc. (formerly named Computer Products, Inc., "CPI") and its
subsidiaries (collectively referred to as the "Company"). Intercompany accounts
and transactions have been eliminated in consolidation. On December 29, 1997,
CPI completed a merger with Zytec Corporation ("Zytec") in a transaction whereby
Zytec became a wholly-owned subsidiary of CPI (the "merger"). The consolidated
financial statements for all periods presented prior to the merger have been
restated as if the Company operated as one entity since inception. The merger
has been accounted for as a pooling-of-interests as discussed in Note 5.
The Company received shareholder approval at its annual shareholders' meeting
held in May 1998 to legally change the Company's corporate name from Computer
Products, Inc. to Artesyn Technologies, Inc. Since that date, the Company began
trading on The Nasdaq Stock MarketSM under the symbol ATSN.
FISCAL YEAR
The Company's fiscal year ends on the Friday nearest December 31, which results
in a 52- or 53-week year. The fiscal years ended December 31, 1999, January 1,
1999 and January 2, 1998 are all comprised of 52 weeks.
CASH AND EQUIVALENTS
Only highly liquid investments with original maturities of 90 days or less are
classified as cash and equivalents. These investments are carried at cost, which
approximates market value.
INVENTORIES
Inventories are stated at the lower of cost, on a first-in, first-out basis, or
market.
PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the assets ranging from
three to 30 years or the lease terms, if shorter. Leasehold improvements are
recorded at cost and are amortized using the straight-line method over the
remaining lease term or the economic useful life, whichever is shorter. Major
renewals and improvements are capitalized, while maintenance, repairs and minor
renewals not expected to extend the life of an asset beyond its normal useful
life are expensed as incurred. The Company periodically evaluates whether events
and circumstances have occurred that may warrant revision of the estimated
useful life of its property, plant and equipment or whether the remaining
balance of property, plant and equipment should be evaluated for possible
impairment. The Company uses an estimate of the related undiscounted cash flows
over the remaining life of the property, plant and equipment in measuring their
recoverability.
GOODWILL
The excess of purchase price over net assets of companies acquired (goodwill),
which are accounted for under the purchase method, is capitalized and amortized
on a straight-line basis over periods ranging from 20 to 40 years. Related
accumulated amortization was $11,911,000 and $9,701,000 at December 31, 1999 and
at January 1, 1999, respectively. Amortization expense was $2,210,000,
$2,257,000 and $1,550,000 in fiscal years 1999, 1998 and 1997, respectively. The
Company periodically evaluates whether events and circumstances have occurred
that may warrant revision of the estimated useful life of goodwill or whether
the remaining balance of goodwill should be evaluated for possible impairment.
The Company uses an estimate of the related undiscounted cash flows over the
remaining life of the goodwill in measuring its recoverability.
26
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's European subsidiaries is each entity's
local currency. Assets and liabilities are translated from their functional
currency into US dollars using exchange rates in effect at the balance sheet
date. Income and expense items are translated using average exchange rates for
the period. The effect of exchange rate fluctuations on translating foreign
currency assets and liabilities into US dollars is included in shareholders'
equity. Foreign exchange transaction gains and losses are included in the
results of operations. The functional currency of the Company's Asian
subsidiaries is the US dollar, as their transactions are substantially
denominated in US dollars. Financial exposure may result from the timing of
transactions and the movement of exchange rates.
REVENUE RECOGNITION
The Company recognizes revenue as products are shipped and title is passed to
the customer or as services are rendered by the Company.
PRODUCT WARRANTY
The Company records estimated product warranty costs in the period in which the
related sales are recognized.
INCOME TAXES
Income taxes reflect the current and deferred tax consequences of events that
have been recognized in the Company's financial statements or tax returns. The
realization of deferred tax assets is based on historical tax positions and
expectations about future taxable income.
EARNINGS PER SHARE
Basic earnings per share ("EPS") is calculated by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
during each period. Diluted earnings per share includes the potential impact of
convertible securities and dilutive common stock equivalents using the treasury
stock method of accounting. The reconciliation of the numerator and denominator
of the EPS calculation is presented in Note 12.
COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" which requires companies to
report all changes in equity in a financial statement for the period in which
they are recognized, except those resulting from investment by owners and
distributions to owners. The Company has chosen to disclose Comprehensive
Income, which encompasses net income and foreign currency translation
adjustments, in the Consolidated Statements of Shareholders' Equity and
Comprehensive Income. The fiscal year 1997 presentation has been reclassified to
conform to the SFAS 130 requirements.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. The more significant estimates made by management include
the provision for doubtful accounts receivable, inventory write-downs for
potentially excess or obsolete inventory, restructuring charges, warranty
reserves, and the amortization period for intangible assets. Actual results
could differ from those estimates. Management periodically evaluates estimates
used in the preparation of the financial statements for continued
reasonableness. Appropriate adjustments, if any, to the estimates used are made
prospectively based on such periodic evaluation.
27
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and equivalents, trade accounts
receivable and financial instruments used in hedging activities. The Company's
cash management and investment policies restrict investments to low-risk, highly
liquid securities, and the Company performs periodic evaluations of the credit
standing of the financial institutions with which it deals. The Company sells
its products to customers in various geographical areas. The Company performs
ongoing credit evaluations of its customers' financial condition and generally
does not require collateral. The Company maintains reserves for potential credit
losses, and such losses traditionally have been within management's expectations
and have not been material in any year. As of December 31, 1999 and January 1,
1999, management believes the Company had no significant concentrations of
credit risk.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. SFAS 133 will require the Company to record all
derivatives as either assets or liabilities in the Consolidated Statement of
Financial Position and measure those instruments at fair value. The accounting
for changes in the fair value depends on the intended use of the derivative and
the resulting designation. The impact of SFAS 133 on the Company's financial
statements will depend on a variety of factors, including future interpretative
guidance from the FASB, the future level of forecasted and actual foreign
currency transactions, the extent of the Company's hedging activities, the types
of hedging instruments used and the effectiveness of such instruments. However,
given the Company's current use of derivatives and hedging activities, the
Company does not believe the effect of adopting SFAS 133 will be material to its
consolidated financial statements.
In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments
and Hedging Activities-Deferral of the Effective Date of FASB Statement 133."
The Statement defers the effective date of SFAS 133 to fiscal 2001 at which time
adoption is planned.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101, "Revenue
Recognition," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosure related to revenue recognition policies. We believe our
revenue recognition practices are in conformity with the guidelines prescribed
in SAB No. 101.
In March 1998, the Accounting Standards Executive Committee released Statement
of Position 98-1, ("SOP 98-1"), "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". SOP 98-1 requires companies to
capitalize certain costs of computer software developed or obtained for internal
use, provided that those costs are not research and development. In 1998, the
Company adopted the guidelines established by SOP 98-1 in accounting for the
costs of computer software developed or obtained for internal use in connection
with the implementation of its ERP system.
RECLASSIFICATIONS
Certain prior years' amounts have been reclassified to conform to the current
year's presentation.
28
2. INVENTORIES
The components of inventori