Dailystocks.com - Ticker-based level links to all the information for the Stocks you own. Portal for Daytrading and Finance and Investing Web Sites
DailyStocks.com
What's New
Site Map
Help
FAQ
Log In
Home Quotes/Data/Chart Warren Buffett Fund Letters Ticker-based Links Education/Tips Insider Buying Index Quotes Forums Finance Site Directory
OTCBB Investors Daily Glossary News/Edtrl Company Overviews PowerRatings China Stocks Buy/Sell Indicators Company Profiles About Us
Nanotech List Videos Magic Formula Value Investing Daytrading/TA Analysis Activist Stocks Wi-fi List FOREX Quote ETF Quotes Commodities
Make DailyStocks Your Home Page AAII Ranked this System #1 Since 1998 Bookmark and Share


Welcome!
Welcome to the investing community at DailyStocks where we believe we have some of the most intelligent investors around. While we have had an online presence since 1997 as a portal, we are just beginning the forums section now. Our moderators are serious investors with MBA and CFAs with practical experience wwell-versed in fundamental, value, or technical investing. We look forward to your contribution to this community.

Recent Topics
Article by DailyStocks_admin    (11-14-08 05:29 AM)

Filed with the SEC from Oct 30 to Oct 05:

Power-One (PWER)
Bel Fuse (BELFB) reiterated its view that Power-One should divest the portion of its business that includes DC/DC converters. Bel and its Bel Ventures unit beneficially own 7,338,998 shares (8.4%).

BUSINESS OVERVIEW

Overview

We are a leading designer and manufacturer of power conversion and power management products, most of which are sold into the communications infrastructure, server/storage and other high technology markets. Our products are used to convert, process and manage electrical energy, in both alternating current ("AC") and direct current ("DC") form, to the high levels of quality, reliability and precision required by communications infrastructure and other equipment. With hundreds of different standard products and the ability to create custom products, we have one of the most comprehensive product lines in the power conversion and power management industry and are one of just a few companies that can power virtually every component and system of an infrastructure network.

Our power conversion and power management products include:

•
AC/DC power supplies that convert AC from a primary power source, such as a wall outlet, into a precisely controlled DC voltage. Virtually every electronic device that plugs into an AC wall outlet requires some type of AC/DC power supply, and we provide a broad range of AC/DC power supplies that power a wide variety of equipment in the communications, networking, server/storage, computer, instrumentation, industrial, and electronic industries;

•
DC power systems that are used by communications and Internet service providers to power and used as backup power for large communications infrastructure equipment;

•
DC/DC converters that modify an existing DC voltage level to a different DC voltage level to meet the power needs of various subsystems and components within electronic equipment. Our DC/DC converters include high-density and low-density "brick" converters that are generally used to control power on communications printed circuit boards and also include Point-of-Load ("POL") converters that power devices within an Intermediate Bus Architecture as well as in other applications. Our Z-One® digital power management products fall into the DC/DC converter category;

•
Inverters for Renewable Energy ("RE"), also called Alternative energy ("AE") products that convert solar (photovoltaic or "PV") or wind energy into useable AC/DC power. (Note: while the industry uses both "AE" and "RE" terms, this document will only use "RE" or Renewable Energy); and

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

We design power conversion and power management products primarily to meet the needs of communications and server/storage infrastructure equipment; industrial applications; high-end consumer and industrial appliances, and renewable energy inverters. We design our products to take lower quality power from the electrical grid and convert, process, and purify it to meet the quality demanded by the markets we serve. Our products can provide protection against power disturbances, fluctuations and outages. In addition, our products' compact designs are critical to our customers who need to minimize the space allocated to power conversion products within a system in order to maximize the space available for other components and subsystems.

While approximately 43% of our sales were to our top ten customers in 2007, we sell our products to hundreds of direct customers and to other customers through our distribution channels worldwide. Our largest customer in 2007 was Cisco Systems and its contract manufacturers, which accounted for less than ten percent of our sales in 2007, 12.2% of our sales in 2006, and 15.1% of our sales in 2005. No other customer accounted for more than 10% of our sales during 2007, 2006, and 2005.

In October 2006, we completed the acquisition of Magnetek, Inc.'s Power Electronics Group for approximately $69.4 million plus the assumption of approximately $27.8 million in debt. This highly strategic acquisition added a team of experienced engineers to our employee base, significantly enhanced our custom AC/DC design capabilities, expanded our product portfolio, broadened our customer list and markets, and provided us with a low-cost manufacturing operation in China.

We were originally incorporated in 1973 as a California corporation and re-incorporated in the State of Delaware in January 1, 1996.

Industry Background

The power conversion and power management industry is highly fragmented and diverse. Manufacturers of power conversion and power management products are generally divided into two broad categories: those who sell to third-party customers (merchant) and those who sell for use in-house to other divisions within the manufacturer's own company (captive). We are a merchant power supply manufacturer whose products are sold to third parties.

The communications industry experienced rapid change in the late 1990s through 2000 as deregulation and privatization fueled the entry of new competitors. In addition, advances in technology allowed communications service providers to offer a more varied range of services, and increases in Internet usage and demand for broadband and wireless services contributed to the growth of the communications industry. Because these technological advances required significantly greater and more reliable power, the demand for power conversion and power management products also grew. In 2001, however, the communications infrastructure industry entered into a severe, multi-year downturn that was characterized by delayed network deployments and upgrades by service providers and OEMs due to lower-than-expected demand for their products and services and a resulting oversupply of capacity and inventory. Due to the downturn, we experienced decreasing sales, price erosion, cancellation of orders, write-offs of excess inventory, restructuring charges and asset impairment charges. In recent years, however, we have experienced significant revenue growth due to mainly acquisitions, but also organic growth that we believe has been higher than the industry growth rate.

Long term, we believe the following key trends will continue to drive demand for power conversion and power management products:

Increasing Amounts of Power Required by the Communications Infrastructure Industry. With the development and proliferation of the Internet, wireless communications, broadband applications and other new technologies, recent years have witnessed unprecedented growth in the volume of information being transmitted around the world at any given moment. We believe that this increasing volume will drive demand for larger data processing capabilities among communications infrastructure companies and that increased data processing needs in turn will require increases in power and more demand for power conversion and power management products. Industry sources project that the amount of power required by communications infrastructure equipment manufacturers will grow significantly faster than the demand by other traditional users of power.

Increasing Demand for High Conversion Efficiencies. Recent developments in the European Union ("EU"), the United States and China to cut energy consumption will increase the demand for digital power. The use of digital control techniques can contribute to improved conversion efficiencies of AC/DC power supplies across a wide range of conditions.

Increasing Demand for Renewable Energy. The global demand for harvesting power from the sun (called solar or photovoltaic energy) and wind to be converted into useable power is one of the fastest growing markets due to increasing energy costs and concern for the overall environment. Additionally, the cost of renewable energy is decreasing and with many countries offering incentives to individuals and companies, we expect this market to expand rapidly throughout the world.

Increasing Demand for High Reliability Power. The nature of power demanded by the digital economy is significantly different from the power provided by the electric utility grid. The electric utility grid supplies acceptable power quality, or power that is free from surges, spikes, or sags, 99.9% of the time, resulting in the equivalent of nine hours per year of interrupted, or unavailable, power. These nine hours of downtime often occur in many isolated interruptions of very short duration. In traditional industries, a brief interruption of power only interrupts operations for the time that the power is actually unavailable. For a modern communications network, however, even a minor power disturbance or brief interruption could cause equipment to crash and significantly shorten the life-span of electrical components. A network crash could result in several hours of downtime, including the time necessary for complex microprocessor-based equipment to reboot and regain power. This downtime could lead to significant lost revenue and customer dissatisfaction. As a result, modern communications network operators are increasingly requiring significantly more reliable power than that provided by the electric utility grid. We believe this demand will increase as wireless communications, broadband applications and other new technologies became more pervasive in society and as society becomes more dependent on their reliability.

Proliferation of Distributed Power Architecture and Intermediate Bus Architecture, as well as the Trend Toward Power Management Rather than Simple Power Conversion. Traditional power supply architecture uses a single power supply and then distributes power through a cable of wires to various individual components and subsystems dispersed throughout a system. Newer communications systems demand increasing amounts of power for semiconductors located throughout their communications equipment to reduce "hot spots" in the system. At the same time, newer-generation communications technologies utilize semiconductors that require lower voltages than previous-generation technologies. In many sophisticated systems, the traditional architecture distributes power too inefficiently to accomplish these goals because as power increases and voltage decreases, the current level increases and therefore the cable thickness increases, often to an unacceptable size.

Distributed Power Architecture, or DPA, is a technology that has been developed to address this technical issue. DPA uses a simpler front-end power supply that converts AC voltage into a high-level DC voltage, typically 48 volts, thus allowing a smaller cable to be used within a system to distribute power and then uses DC/DC "brick" converters that are placed throughout the system close to the devices that actually use power and reduce the voltage to the precise amount needed by the devices. Furthermore, DPA helps to diversify the risk within a large communications system. While the failure of a traditional centralized power supply could jeopardize the entire system, the failure of a single DC/DC brick converter in a DPA system may only affect those few individual components that it serves. Finally, because there are many DC/DC brick converters within a system, DPA allows for greater flexibility by permitting part of the system to be reconfigured or upgraded without requiring a major change to the overall system.

More recently, a modified version of DPA called Intermediate Bus Architecture, or IBA, has emerged, which addresses the number of different and lower voltages required by different systems. Instead of using multiple DC/DC brick converters that have a typical input of 48 volts and low output voltages of less than 3 volts, the IBA uses a single brick converter with an input of 48 volts and an intermediate output voltage (typically between 12 volts and 3 volts) that is then transmitted to multiple DC/DC Point-of-Load (POL) converters, each of which converts the intermediate voltage to the voltage required by the local devices (typically 3 volts or less). During 2003, we announced that we would develop highly innovative and efficient silicon-based solutions for next generation DC/DC power management products in the IBA market and we created our maXyz® product line specifically for the IBA market. In 2004 we introduced our Z-One® digital power management architecture and related products as part of the maXyz product line.

We believe the needs of modern communication systems will increase the demand for power management products.

Our Competitive Advantages

We believe that we have key advantages that have helped us to establish a leading brand for our products. Some of the factors that we believe have contributed to this leading position are as follows:

Broad Product Line. We offer hundreds of products ranging in power from one watt to a half-megawatt. Our smaller products are no larger than a fingernail, while our larger DC power systems and RE inverters fill an entire cabinet. With millions of potential current and voltage configurations, our broad product line offers our customers a one stop-shop opportunity, allowing them to purchase nearly all of their power conversion and power management products from a single supplier. As a result, we are one of the few companies that can power virtually every component and system of an infrastructure network.

Leading Design and Development Capabilities. There are a limited number of highly-skilled power engineers in the world, and we believe that we have assembled some of the most capable and innovative of such engineers through our hiring efforts and through strategic acquisitions, including our October 2006 acquisition of Magnetek, Inc.'s Power Electronics Group. Furthermore, we have been effective at maintaining a high retention rate among our technical staff. This team of engineering talent has allowed us to consistently upgrade to new generations of power conversion and power management products, each of which has outperformed prior products with higher power density and smaller size. It has also allowed us to become a leader in the implementation of DPA and IPA technology. We believe that our Z-One digital power management architecture has created a first-to-market competitive advantage for us, although certain of our competitors have developed alternative or competing products and promote such products via a competing strategic alliance and open-standards consortium. We have been diligent in seeking to secure patent and other intellectual property rights for the technology that we have developed and implemented in our Z-One digital power management architecture and products, and we have also been diligent in protecting those rights. In 2007 we received a favorable jury verdict in our patent infringement litigation against a major competitor that announced and introduced a product that the jury found infringed upon certain of our intellectual property rights as secured in certain U.S. patents issued to us. See "Item 3. Legal Proceedings" for a description of Artesyn Technologies legal proceedings and other pertinent matters.

Reputation for Quality and Reliability. We have been in the power conversion and power management product industry since 1973. By establishing rigorous internal quality control programs, we believe that we have been able to provide our customers with products that are highly reliable. This is particularly important for manufacturers of infrastructure equipment. As a result, we established a strong customer base that includes many of the largest manufacturers in the communications infrastructure industry. Although power conversion products typically represent only 2% to 5% of the cost of an entire network, their failure can cripple the entire system in which they are installed. Consequently, we believe most customers are not willing to risk buying from an unproven supplier in an effort to cut costs in this area.

Changing Customer Needs. Manufacturers and service providers are facing greater competition to accelerate the time-to-market for their new products and are increasingly expected to produce newer generations of products in a shorter period of time. As a result, many customers, especially smaller-sized, are likely to purchase from suppliers who can offer a broad range of standardized power conversion products. Although larger-size customers also need standard products, for extremely high volume, they may opt for custom products, which tend to be lower cost. Manufacturers of communications infrastructure and other higher technology equipment are also focusing more on their core competencies and therefore increasingly are outsourcing the manufacture of power conversion and power management products to more efficient suppliers. Consequently, these customers are moving towards sourcing from the limited number of suppliers who can meet all of these needs, i.e., both standard and custom products.

Our Strategy: Powering the High Technology and Communications Markets

Our primary objective is to become one of the worldwide leaders in power conversion and power management equipment for the global communications, high technology, and renewable energy equipment markets. To achieve this objective, we plan to do the following:

Expand Product Lines, Including DPA/IBA Products and Renewable Energy Inverters. We provide one of the most comprehensive lines of power conversion and power management products, including DPA/IBA and renewable energy products. Our products are increasingly being designed into infrastructure equipment. We believe that we have good relationships with our customers, including leading infrastructure equipment manufacturers, and through these relationships we can work with our customers to understand their changing product needs in order to proactively develop leading technology products for them. We intend to continue our extensive research and development program to improve our products' performance and expand the breadth of our product offerings. Our Z-One digital power management products, bricks, and POLs play key roles in this strategy. In the area of Renewable Energy inverters, we led the field with our efficiency ratings from the California Electric Commission in 2007. This high efficiency provides a faster return on investment to the user.

Continue to Cross-Sell Products on a Global Basis. We expanded the geographic reach of our business into Europe and Asia through internal efforts and through a series of strategic acquisitions from 1998 through 2006. We believe we have substantial opportunities to market products developed in one region to customers located in other regions and to market products to customers who had previously purchased only a single line or family of products from us but who have increasing needs for other products that we develop.

Continue to Invest in Strategic Businesses and Technologies. We plan to selectively invest in businesses and technologies that can extend our geographic reach, increase the breadth of our product line, enhance the performance of our products, lower our manufacturing costs or expand our customer base in the communications infrastructure equipment market. We believe the fragmentation of the power conversion and power management product industry presents opportunities for further consolidation. In addition, we are investing aggressively in research and development initiatives to create next-generation power conversion and power management products and continuing to invest in advanced technologies to enable significantly smaller power conversion products, higher efficiencies and better performance in controlling and managing power on communications-oriented printed circuit boards and other products. We continue to earmark a significant portion of our overall research and development budget to develop technology.

In 2004, we introduced our Z-One digital power management architecture and released products designed using this architecture. We believe that these products integrate conversion, communications, and control for a digital board-level solution in a significantly enhanced manner over traditional power supplies. Features of this architecture and the related Z-7000 product line include the ability to fully manage up to 32 POL DC/DC converters with a single-wire digital bus. It also provides a significant reduction in printed circuit board space, design time and number of components, which in turn can lead to cost savings.

In 2005, we introduced our Z-1000 product line, which includes power conversion and power management products that contain many, but not all, of the same features as the Z-7000 products, and we market the Z-1000 products for customers' mid-range applications.

In 2006, we redesigned our digital power manager to be one-sixth the size of its predecessor, and we further increased the capability of the system by adding functionality that allows the control of devices manufactured by third parties. This provides the ability of the Z-One architecture to integrate with existing analog systems to provide customers with more flexibility and further enables adoption to a broader range of customers and applications.

In 2007, we entered the commercial solar market a series of inverter products that range in power from 50kW to 300kW. The solar or photovoltaic ("PV") market is an extremely fast-growing market with significant opportunities, especially in Europe.

Our Products

We design, develop, manufacture and market power conversion and power management products. All of our products are designed to convert, regulate, purify, store, manage or distribute electrical power for electronic equipment but, power conversion products generally convert one voltage into another voltage, whether AC-to-DC and DC-to-AC or DC-to-DC, while power management products generally manage multiple voltages and provide other functionality.

Depending on our customer's needs, including the balancing of cost and time-to-market of new products, we offer standard, modified-standard and custom-designed products. Standard products refer to products that are standard to a particular manufacturer, while modified-standard products refer to standard products of a manufacturer that can be easily modified to meet a customer's particular application. Because they have already been designed and manufactured, standard and modified standard products allow our customers to reduce their time-to-market and minimize costs for new product introductions. Custom products are usually designed from "scratch" to meet the specifications of a unique customer application and may require significant tool and die costs and four-to twelve-month lead-times from conception through production.

We operate in an industry where quantity discounts, price erosion (and corresponding decreases in revenues and margins), and product obsolescence due to technological improvements are normal. While we see price erosion on most of the products we sell, we also see price erosion on many of the components we purchase for inclusion in our products, thereby decreasing our costs. Product obsolescence refers to the tendency of small and less expensive products to replace larger and more expensive products. For example, the functions of a full-size DC/DC brick converter were replaced by a half-brick, which was subsequently replaced by a quarter brick and then a 1 / 8 th -brick, and is now being replaced by a 1 / 16 th -brick or even smaller product in some applications. Each successive product is smaller and somewhat less costly than its predecessor, but has usually retained or expanded the functionality of its predecessor. Sales of each successor product typically replace sales of the predecessor product, making the predecessor product obsolete. These phenomena are normal in our industry, and we have experienced price erosion and product obsolescence in line with industry trends. Price erosion and product obsolescence may continue to negatively impact gross margins and result in inventory write-offs. Price erosion may also mask increases in unit sales (as opposed to revenues) of certain products.

Our products can be classified into the following main groups: AC/DC power supplies, DC/DC converters, DC power systems, renewable energy inverters, and a category of other products, including smart motor control. Our Z-One silicon board power management products fall into the DC/DC converter category. These categories can be distinguished based on their location within a system, size and function.

AC/DC power supplies:

•
are typically embedded within the equipment that they are powering;

•
range in size from a small paperback book to a desktop computer;

•
may be standard, modified-standard or custom designed;

•
convert AC voltage, from a primary power source such as a wall outlet, into DC voltage; and

•
are used primarily in networking systems, large scale data processors and industrial equipment.



DC/DC converters ("Bricks") and POL converters:

•
are embedded within the equipment that they are powering and are generally mounted directly on a printed circuit board within the equipment;

•
bricks range in size from an AA battery to a portable CD player, while POL converters may be silicon-based and range in size from a fingernail to a small matchbox;

•
modify an existing DC voltage level to a different DC voltage level;

•
are the cornerstone of DPA and IBA technology; and

•
are used by our customers primarily to power communications infrastructure equipment, although their usage is expanding to other markets including server and storage.

DC power systems:

•
can be either stand-alone units that are external to the equipment or sub-systems (commonly called "racks") that are integrated into a system;

•
range in size from a shelf of integrated modules to large-scale systems that can fill entire cabinets;

•
convert AC voltage into DC voltage and, together with a generator or an array of batteries, provide several hours of additional power capacity in the event of an AC input disturbance or power outage; and

•
are used primarily to power communications networks and cellular communications systems.

Smart motor control and other products:

•
are used primarily in sophisticated appliances, such as high-end clothes washers and dryers, and air conditioners, where energy efficiency is very important; and

•
are generally board-level products or modules that are incorporated by the manufacturer in their system.

Renewable Energy (RE), also called Alternative Energy products:

•
are generally stand-alone units that are sometimes called "inverters." These products are DC-to-AC converters that convert DC voltage from solar arrays, wind generators, or fuel cells into useable AC power; and

•
range in size from a briefcase to a large cabinet.

We organize these products into two product lines, referred to as "embedded products" and "power systems." Embedded products include AC/DC power supplies, DC/DC converters (including "brick" converters and POL converters), and smart motor control. Power systems products include DC power systems and Renewable Energy products.

Structure

In 2005, we restructured and integrated most of our operations into a single integrated business. The most significant components of the restructuring involved the elimination of most of the DC power systems operations in Norway through their integration into our other existing locations and the elimination of certain manufacturing operations in North America through their transfer to our other existing locations or to contract manufacturers. Our digital engineers are focused on developing next-generation software and digital power management products,

The Power Electronics Group of Magnetek (the "acquisition" or "acquired business") acquired by Power-One in late 2006 is now integrated into our businesses. We have assimilated sales and marketing into the appropriate sectors and some products designed by the acquired business are manufactured in traditional Power-One facilities and vice versa. The engineering team in Italy is focused on developing Renewable Energy products and custom AC-DC solutions.

During 2007, we entered into a restructuring plan for which we expected to reduce our fixed spending by approximately $20 million annually by significantly downsizing the Company's operations in North America, as certain functions were moved to other existing Power-One facilities in low-cost locations, and we reduced operations and overhead in other foreign locations. We expect to fully realize the anticipated savings by the end of the first fiscal quarter of 2008. During the year ended December 30, 2007, we recorded pre-tax restructuring charges of $3.1 million and $1.2 million in asset impairment costs relating to restructuring activities, costs to transfer production to our low cost facilities and charges related to impairment of assets at facilities that are being downsized.

Customers

We sell our power conversion and power management products to a diversified group of hundreds of equipment manufacturers, including contract manufacturers. Cisco Systems and its contract manufacturers accounted for less than ten percent of our sales in 2007, 12.2% of our sales in 2006, and 15.1% of our sales in 2005. No other customer accounted for more than 10% of our sales during these periods.

Our top 10 customers accounted for approximately 43% of net sales in 2007, 36% of net sales in 2006, and 36% of net sales in 2005. Our "Other" market segment category includes Smart Motor Control and Renewable Energy markets. The following table illustrates the percentage of our net sales in our primary markets:

Sales and Marketing

We market our products through a global sales force. We have direct sales offices in Europe, North America, Asia, Middle East, and Australia. These direct sales offices are augmented by an extensive network of manufacturers' representatives and distributors.

Our direct sales force is typically oriented towards customers that have the potential to purchase large volumes of our products, generally several million dollars or more annually. Our direct sales force works closely with existing and potential customers to determine their long-term technology requirements for power conversion products. This close collaboration allows us to design products that best fit our customers' expected applications. We expect that our direct sales to strategic accounts will increase in the future as we increasingly focus on sales to these customers.

Research, Development and Engineering

We have spent and anticipate spending significant capital on research and development efforts to develop new power conversion technology. We spent approximately $27.2 million on research and development ("R&D") in 2007, approximately $21.7 million in 2006, and approximately $22.0 million in 2005. We have established engineering and design centers in areas that are strategically located for servicing our customers and where we have strong access to technical talent. Our engineering and design centers in the United States are located in Camarillo and Carlsbad, California. We also operate engineering and design centers in Santo Domingo, Dominican Republic; Uster, Switzerland; Dubnica, Slovakia; Tuscany, Italy; and Shenzhen, China. Additionally, we have engineering staff on site in each of our manufacturing facilities. Finally, we have engineering teams at each of our power plant system integration facilities to enable more efficient customization of our system configurations for our customers.

Manufacturing Process and Quality Control

Production of many of our products typically entails subassembly of sophisticated printed circuit boards that are in turn combined with hardware components to produce a final product. In response to demand for increased quality and reliability, design complexity, and sophisticated technology, we continue to invest in state-of-the-art processes. We have also standardized many of our manufacturing processes and much of our equipment worldwide to increase efficiency and optimize flexibility between facilities.

Our manufacturing processes are designed to rapidly produce a wide variety of quality products at a low cost. The use of surface mount technology, or SMT, permits us to reduce board size by eliminating the need for holes in the printed circuit boards and by allowing us to use smaller components. Our investment in SMT has significantly increased our product development processes and production capacity, and we believe it has also improved our product quality. In addition, we have outsourcing arrangements with contract manufacturers in Asia.

Product quality and responsiveness to our customers' needs are of critical importance in our efforts to compete successfully. We emphasize quality and reliability in both the design and manufacturing of our products. In addition to testing throughout the design and manufacturing process, we test and /or burn-in our products using automated equipment and customer-approved processes. We also perform out-of-box test or pre-ship audit on randomly selected units before delivery. We insist on the same levels of quality from our contract manufacturers, and as a result have and may continue to incur additional costs to ensure quality products.

As our customers' operations expand internationally, they increasingly require that their power products meet or exceed established international safety and quality standards. We therefore design and manufacture our power conversion and power management products in accordance with the certification requirements of many international agencies, including the Underwriters Laboratories in the U.S., the CSA International in Canada, and TUV Product Service for the European market. In addition, various products may be tested to Network Equipment-Building System requirements for the U.S. telecommunications market and to European Telecom Standard Institute requirements for the European Union telecommunications market.

We have manufacturing operations in the Dominican Republic, Slovakia, Italy, and China. Production of our silicon-based products is entirely outsourced to contract manufacturers. All of our manufacturing facilities are ISO certified. In addition to our own facilities, we utilize low-cost contract manufacturing in several locations around the world, although most of our contract manufacturers are located in Asia.

CEO BACKGROUND

Richard J. Thompson. Mr. Thompson joined us as our Chief Executive Officer in February 2008. Before joining us, Mr. Thompson served as a member of the Company's Board of Directors since August 2007. Mr. Thompson will continue to serve on the Board of Directors following his appointment as the Company's Chief Executive Officer, but he resigned as a member of the audit committee of the Board of Directors effective upon his becoming an employee of the Company. Mr. Thompson served as Senior Vice President, Finance and Chief Financial Officer of American Power Conversion Corporation (acquired by Schneider Electric in February 2007) from May 2005 to March 2007. Prior to joining American Power Conversion Corporation, Mr. Thompson served as Chief Financial Officer, Secretary and Treasurer of Artesyn Technologies for fifteen years.

Brad W. Godfrey. Mr. Godfrey, who joined us in 1988, was appointed President and Chief Operating Officer in February 2006. During his tenure with us, he has held a variety of positions of increasing responsibility and scope within the Company, including Senior Vice President—Global Operations. He served as the CAPS Division President from July 2003 until February 2006.

Jeffrey J. Kyle. Mr. Kyle, who joined us in January 2003 and served as the Vice President, Operations, in our Silicon Power Solutions business unit, was appointed Vice President—Finance, Treasurer and Chief Financial Officer in March 2007. Prior to joining the Company, Mr. Kyle served as Vice President of Operations, NAND products, SanDisk Corporation, a U.S. public company that designs, manufacturers and sells industry-standard flash memory data storage products, from 2001-2002, and as Vice President, Materials, SanDisk Corporation, from 1999-2001.

Alexander Levran. Dr. Levran joined Power-One, Inc. in January 2007 as Chief Technology Officer. Dr. Levran previously served as Executive Vice President and Chief Technology Officer of Magnetek, Inc. from July 1993 to December 2006. Dr. Levran received his B.S.E.E. in 1973, and M.S.E.E. in 1979 from Technion-Israel Institute of Technology, Haifa, Israel. He received his Ph.D. in Electrical Engineering in 1982 from Polytechnic Institute of NY. Dr. Levran is a Director of the Power Sources Manufacturers Association, and is active in other industry associations and standards bodies. Dr. Levran holds a number of U.S. and foreign patents in the field of power conversion and electronics.

Randall H. Holliday. Mr. Holliday joined us in 2000 as General Counsel and was appointed Secretary in 2001. Before joining us, Mr. Holliday served as Secretary and General Counsel of Xircom, Inc. He has held a variety of in-house legal positions in diverse industries since 1981. Mr. Holliday received his J.D. degree in 1974 from Florida State University, Tallahassee, FL.


MANAGEMENT DISCUSSION FROM LATEST 10K


Introduction

We are a worldwide organization and leading designer and manufacturer of hundreds of high-quality brand name AC/DC and DC/DC power supplies, converters, inverters and power management products. We sell our products to original equipment manufacturers, distributors and service providers who value quality, reliability, technology and service. We have hundreds of customers in the communications, networking equipment, server/storage, computer, instrumentation, industrial, renewable energy, and other electronic equipment industries.

Our AC/DC power supplies are typically embedded in our customers' products and convert alternating current to direct current. Our board-mounted DC/DC products provide precise levels of DC power to sensitive electronic components embedded in our customers' equipment. Our power management products also provide precise levels of DC power to sensitive electronic components, but include elements of communications and control. In addition, our power management products are programmable via a graphical user interface and offer our customers significant cost and time savings over traditional DC/DC converters. Our DC power systems, which provide back-up power, are sold primarily to telecommunications and Internet service providers worldwide. Our inverters for renewable energy provide conversion from either wind generators or photovoltaic energy into useable AC power for the grid.

In February 2005, we implemented a restructuring plan wherein we consolidated our division structure. The most significant components of this activity involved the elimination of most DC power systems operations in Norway and their integration into our other existing lower-cost locations, as well as the elimination of certain manufacturing operations in North America and subsequent transfer of the manufacturing to our other existing lower-cost locations or to contract manufacturers. We incurred $16.2 million of restructuring and asset impairment charges during 2005, of which approximately $5.1 million were non-cash in nature and primarily related to asset impairment charges for long-lived assets. The balance of the charges related to severance and continuing lease obligations for closed facilities, the longest of which continues into 2011.

In October 2006, we completed the acquisition of the Power Electronics Group subsidiary of Magnetek, Inc., (the "acquisition" or "acquired business") for approximately $69.4 million plus the assumption of approximately $27.8 million in debt. We financed this acquisition with a $50.0 million term loan and $19.4 million of cash and investments. The acquired business is primarily engaged in the design, manufacture and sale of custom AC/DC products to original equipment manufacturers (OEMs) and provides us with enhanced capability in the custom AC/DC power supply market, a talented workforce of design engineers located in Europe, and an established low-cost manufacturing facility in China, all of which we expect will continue to enable us to reduce our overall component and manufacturing costs and broaden our product line and product capabilities. Due to the mix of custom products produced by the acquired business for higher volume applications, they tend to generate lower gross margins than we have traditionally experienced. The acquired business also designs renewable energy inverters which have higher margins than custom products.

During 2007, the Company entered into a restructuring plan for which it expected to reduce its fixed spending by approximately $20 million annually by significantly downsizing the Company's operations in North America, as certain functions move to other existing Power-One facilities in low-cost locations, and reducing operations and overhead in other foreign locations. The Company expects to fully realize the anticipated savings by the end of the first fiscal quarter of 2008.

We are engaged in the design and production of highly innovative and efficient silicon-based digital power management solutions for next generation DC/DC power conversion products in the Intermediate Bus Architecture (IBA) market. These products are strategically significant to the Company. Our maXyz® product line was introduced in 2003 and was developed specifically for the IBA market. In 2004, we introduced our new Z-One® digital power management architecture and our new Z-series product line, which included a digital controller. We began full production of these products near the end of the third quarter of 2004. Murata Manufacturing Company is a second-source licensing partner for these products. We have continued to strengthen our Z-Alliance™ by announcing the addition of Atmel and Micrel to the partnership during 2006/2007. During 2005, we introduced the Z-1000 No-Bus™ family of digital point-of-load converters, which provides customers with digital power conversion without requiring a significant change in architecture. In 2006, we introduced the second generation of Digital Power Managers, which can also control non-Power-One products on the customers' printed circuit boards. In 2007, we announced a new product line targeted for the server/storage market, capable of tripling the output current of the original Z-One converters.

We have two main product lines, referred to as "embedded products" and "power systems." Embedded products include AC/DC power supplies, DC/DC converters (including "brick" converters and POL converters), and smart motor control products. Power systems products include DC power systems and renewable energy products.

We generate a significant percentage of our revenue internationally through sales offices located throughout Europe and Asia. In addition, manufacturing is performed in our own facilities in the Dominican Republic, China, Italy and Slovakia, and at contract manufacturers in Asia. Approximately 25% of our products are manufactured by our contract manufacturers. We are significantly increasing our presence in Asia to take advantage of a lower cost structure and closer proximity to certain major customers. However, we recognize that there are inherent risks to our international operations that may impact our business, which include but are not limited to the following:

•
Currency risk, since we will increasingly receive payments and purchase components in foreign currencies and we have historically not engaged in foreign currency hedging activities;

•
Risk associated with expanding sales or manufacturing operations into economies and markets that may experience financial or political instability;

•
Differing degrees of intellectual property protection outside of the United States;

•
Frequent changes in laws and policies affecting trade, investment and taxes, including laws and policies relating to repatriation of funds and to withholding taxes, that are administered under very different judicial systems;

•
Reliance on overseas contract manufacturers that may not be able to manufacture and deliver products in the quantity, quality and timeline required; and



•
Additional time constraints on management associated with overseeing an increased number of operations that are geographically dispersed across Asia.

We operate in an industry where quantity discounts, price erosion (and corresponding decreases in revenues and margins), and product obsolescence due to technological improvements are normal. While we see price erosion on most of the products we sell, we also see price erosion on many of the components we purchase for inclusion in our products, thereby decreasing our costs. Product obsolescence refers to the tendency of small and less expensive products to replace larger and more expensive products. For example, the functions of a full-size DC/DC brick converter were replaced by a half-brick, which was subsequently replaced by a quarter brick and then a 1 / 8 th -brick, and this will eventually be replaced by a 1 / 16 th -brick or even smaller product. Each successive product is smaller but has retained or expanded the functionality of its predecessor. In addition to the reduction in size, the dollar cost per watt is also reduced, which results in lower prices for the customer as well as lower system cost for the manufacturer. Sales of each successor product typically replace sales of the predecessor product, making the predecessor product obsolete. These phenomena are normal in our industry, and we have experienced price erosion and product obsolescence in line with industry trends. Price erosion and product obsolescence may negatively impact gross margins and result in inventory write-offs, and price erosion may also mask increases in unit sales (as opposed to revenues) of certain products.

Critical Accounting Policies

Application of our accounting policies requires management to make judgments and estimates about the amounts reflected in the financial statements. Management uses historical experience and all available information to make these estimates and judgments, although differing amounts may be reported if there are changes in the assumptions and estimates. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, inventory valuation, restructuring costs, impairment costs, depreciation and amortization, sales returns and discounts, warranty costs, uncertain tax positions and the recoverability of deferred tax assets, stock compensation, business combinations and contingencies. Management has identified the following accounting policies as critical to an understanding of our financial statements and as areas most dependent on management's judgment and estimates.

Revenue Recognition — We recognize revenue when persuasive evidence of an arrangement exists, title transfer has occurred, the price is fixed or readily determinable, and collectibility is probable. We recognize revenue in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition." Sales are recorded net of sales returns and discounts, which are estimated at the time of shipment based upon historical data.

We generally recognize revenue at the time of shipment (or at the time of inventory consumption for customers on Vendor Managed Inventory ("VMI") programs) because this is the point at which revenue is earned and realizable and the earnings process is complete. For most shipments, title to shipped goods transfers at the shipping point, so the risks and rewards of ownership transfer once the product leaves our warehouse. For shipments in which title transfers at a later date, revenue recognition is delayed. Revenue is only recognized when collectibility is reasonably assured. Shipping and handling costs are included in cost of goods sold. We may charge shipping and handling costs to customers, which are included in revenue.

We offer our distributors a standard agreement which includes payment terms, description of rights to return or exchange product, and price discounts. Under our standard agreement, payment is due within 30 days of shipment of the product to the distributors. The distributor has a right to return only if we discontinue a product that the distributor has on hand. The distributor has a right to exchange up to 5% of the dollar value of products purchased within the prior six-month period, so long as the distributor is currently purchasing at least the equivalent dollar value in new product. Estimated product exchanges or returns are accrued for at the time of the sale based on historical information in accordance with SFAS No. 48, "Revenue Recognition When Right of Return Exists." Finally, we may give price discounts to a distributor at the time a purchase order is received from the distributor for product that they will sell to a specific customer. The price discount is available for one year following issuance of the purchase order for items listed on the purchase order. We accrue for the estimated price discount at the time revenue is recognized.

We have a joint venture in Asia which, along with certain of our contract manufacturers, may purchase raw components and other goods from Power-One, and sell finished goods back to Power-One as well as to other third parties. We record revenue on sales to the joint venture and contract manufacturers only when the components and goods are for sales to third parties. When the joint venture or contract manufacturers purchase components that will be assembled and sold back to us, no revenue is recorded because the earnings process has not been completed.

Impairment of Long-Lived Assets and Goodwill — We review the recoverability of the carrying value of long-lived assets using the methodology prescribed in SFAS No. 144, "Accounting for the Impairment and Disposal of Long-Lived Assets" whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Upon such an occurrence, recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows to which the assets relate, to the carrying amount. If the asset is determined to be unable to recover its carrying value, it is written down to fair value. Fair value is determined based on discounted cash flows, appraised values or other information available in the market, depending on the nature of the assets. Methodologies for determining fair value are inherently based on estimates that may change, such as the useful lives of assets and our cash flow forecasts associated with certain assets. A change in these estimates may result in impairment charges, which would impact our operating results.

We review the carrying value of goodwill and non-amortizable intangible assets using the methodology prescribed in SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that we not amortize goodwill, but instead subject it to impairment tests on at least an annual basis and whenever circumstances suggest that they may be impaired. These impairment tests are also dependent on management's forecasts, which frequently change. A change in our forecasts may result in impairment charges. SFAS 142 requires the Company to perform a two-step impairment test. Under the first step of the goodwill impairment test, we are required to compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired and we do not perform the second step. If the results of the first step impairment test indicate that the fair value of a reporting unit does not exceed its carrying amount, then the second step of the goodwill impairment test is required. The second step of the goodwill impairment test compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The impairment loss is measured by the excess of the carrying amount of the reporting unit goodwill over the implied fair value of that goodwill.

We determined that we have one reporting unit under SFAS 142. We test goodwill for impairment on an annual basis at the end of each August fiscal month. The results of the impairment test performed during the year ended December 30, 2007 indicated that the goodwill of the Company was not impaired as the fair value of the Company exceeded its carrying amount, including goodwill.

Restructuring Charges — We record restructuring charges in accordance with SFAS No. 146, "Accounting for Costs Associated with Disposal Activities," which requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, in contrast to the date of an entity's commitment to an exit plan. Restructuring costs were related to the downsizing of operations and primarily consisted of specific charges that had been incurred or were to be incurred with no future economic benefit. These charges included costs related to personnel severance, continuing lease obligations for vacant facilities, and certain contract termination penalties and other shutdown costs. Calculation of the restructuring reserves includes management's judgment regarding closed facilities, which include assumptions about the length of time it will take for facilities to be subleased as well as the likely sublease income amount. Changes in these estimates may impact our operating results.

Income Taxes — We record a deferred income tax asset in jurisdictions where the Company generates a loss. We also record a valuation allowance against these deferred income tax assets in accordance with SFAS 109, "Accounting for Income Taxes," when, in management's judgment, it is more likely than not that the deferred income tax assets will not be realized in the foreseeable future. We record uncertain tax positions under the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109" ("FIN 48") and apply FSP FIN 48-1, "Definition of Settlement in FASB Interpretation 48," to clarify when a tax position has been settled under paragraph 10(b) of FIN 48. We recognize in the consolidated financial statements only those tax positions determined to be more likely than not of being sustained upon examination, based on the technical merits of the positions. Under these provisions, we must assume that the taxing authority will examine the income tax position and will have full knowledge of all relevant information. For each income tax position that meets the more likely than not recognition threshold, we then assess the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority. Unrecognized tax positions, if ever recognized in the financial statements, are recorded in the statement of operations as part of the income tax provision.

Inventories — Inventories are stated at the lower of cost (first-in, first-out method) or market. Slow moving and obsolete inventory are written down quarterly based on a comparison of on-hand quantities to historical and projected usages. Additionally, reserves for non-cancelable open purchase orders for components we are obligated to purchase in excess of projected usage, or for open purchase orders where the market price is lower than the purchase order price, are recorded as other accrued expenses on the balance sheet. Calculation of inventory write-downs is based on management's assumptions regarding projected usage of each component, which are subject to changes in market demand.

Accounts Receivable and Allowance for Doubtful Accounts — We establish the allowance for doubtful accounts using the specific identification method and also provide a reserve in the aggregate. Our estimates for calculating the aggregate reserve are based on historical information. Any changes to our assumptions or estimates may impact our operating results.

Business Combinations — We account for our acquisitions utilizing the purchase method of accounting. Under the purchase method of accounting, the total consideration paid is allocated to the underlying assets and liabilities, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of certain acquired assets and liabilities, identifiable intangible assets in particular, is subjective in nature and often involves the use of significant estimates and assumptions including, but not limited to: estimates of revenue growth rates; estimates of rates of return; royalty rates; and determination of appropriate discount rates. These assumptions are generally made based on available historical information. Identifiable intangible assets with finite lives are amortized on a straight-line basis over their useful lives.

Recent Pronouncements and Accounting Changes — In December 2007, the FASB issued SFAS No. 141(revised 2007), "Business Combinations." SFAS No. 141R will significantly change the accounting for business combinations in a number of areas, including the treatment of contingent consideration, contingencies, acquisition costs, in-process research and development and restructuring costs. SFAS No. 141R includes and amendment to SFAS No. 109, "Accounting for Income Taxes." This statement is effective for fiscal years beginning after December 15, 2008. We are assessing the impact of SFAS No. 141R and have not determined whether it will have a material impact on our results of operations or financial position.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 also includes an amendment to SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" which applies to all entities with available-for-sale and trading securities. This Statement is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. We are assessing the impact of SFAS No. 159 and have not determined whether it will have a material impact on our results of operations or financial position.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." The Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements, and does not require any new fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. The Statement is effective for the fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FSP FAS No. 157-1 and FSP FAS No. 157-2. FSP FAS No. 157-1 amends SFAS No. 157, "Fair Value Measurements" to exclude SFAS No. 13, "Accounting for Leases", and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS No. 13. FSP FAS No. 157-2 delays the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. We are assessing the impact of SFAS No. 157 and FSP FAS No. 157-1 and 157-2 and have not determined whether it will have a material impact on our results of operations or financial position.

Results of Operations

Comparison of Fiscal Year Ended December 30, 2007 with Fiscal Year Ended December 31, 2006

Net Sales. Net sales increased $173.6 million, or 51%, to $511.6 million for the year ended December 30, 2007 from $338.0 million for the year ended December 31, 2006. The increase in sales was attributable to our acquisition of the Power Electronics Group during the fourth quarter of 2006 as well as organic volume growth in sales across most market segments. Included in the results for the year ended December 31, 2006 is 10 weeks of activity related to the Power Electronics Group, or $43.3 million of net sales. In 2006 we announced several significant new customers in the server/storage industry and these customers generated a higher volume of sales for 2007, providing an associated revenue increase. We expect this trend to continue. During 2007, there was significant growth in the renewable energy inverter and smart motor controls markets, which represented approximately 29% of the year over year growth.

Cisco Systems and its contract manufacturers accounted for less than ten percent of our sales in 2007 and $41.2 million or 12% of our sales in 2006. No other customer accounted for more than 10% of our sales during these periods.

We have defined our end-markets based on the customers we serve. Our "Other" end-market category includes Smart Motor Control and Renewable Energy markets. Net sales for the years ended December 30, 2007 and December 31, 2006 by end-markets were as follows:

The combined backlog as of December 31, 2006 contained a high level of orders on hand whose expected shipment dates had passed, as a result of shipping delays experienced by the acquired business prior to the date of acquisition. During 2007, we executed on customer orders and were able to decrease past due orders by approximately $12 million.

We generally sell our products pursuant to purchase orders rather than long-term contracts. Backlog consists of purchase orders on-hand having delivery dates scheduled within the next six months. Customers may cancel or reschedule most deliveries without penalty. Our backlog may not necessarily be a reliable indicator of future revenue both because we do not maintain long-term contracts with our customers so they are free to cancel or modify their orders and also because a significant portion of our revenues derives from "turns" business (that is, revenues from orders that are booked and shipped within the same reporting period and that therefore do not appear as backlog at the end of a reporting period). Our bookings were not significantly impacted by any new Vendor Managed Inventory ("VMI") programs during 2007. When customers adopt our VMI program, they no longer place orders with us and instead use an automated forecasting model. We then manufacture products for the customer based on their forecast, and the customer uses the inventory as needed. As a result, under a VMI program, the booking and billing occur simultaneously upon use of the product, and therefore there is always a book-to-bill ratio of 1.0 for these programs. We may bring additional VMI programs on-line in the future, which would result in higher "turns" business, lower backlog, and higher finished goods inventory. As such, we believe that backlog may not necessarily be a reliable indicator of future results.

Gross Profit. Gross profit for the year ended December 30, 2007 was $105.1 million compared with a gross profit of $92.6 million for the year ended December 31, 2006. Our gross margin decreased to 20.5% for the year ended December 30, 2007 from a gross margin of 27.4% for the same period in 2006. The decrease in gross margin during the year ended December 30, 2007 was primarily because of unfavorable changes in our sales mix. The new customers and products that we acquired as a result of the 2006 acquisition tend to carry lower gross margins than the products we have traditionally sold. The overall change in sales mix and decreased gross margin are also a result of some of our new higher-volume programs which are in the early stages of their lifecycle and have not yet reached full production volumes. We also recorded $4.8 million in cost of goods sold related to the write off of excess inventory and other inventory adjustments during the year ended December 30, 2007 compared to $2.7 million during the year ended December 31, 2006.

Selling, General and Administrative Expense. Selling, general and administrative expense increased $12.1 million, or 19%, to $76.0 million for the year ended December 30, 2007 from $63.9 million for the year ended December 31, 2006. As a percentage of net sales, selling, general and administrative expense decreased to 15% for the year ended December 30, 2007 from 19% for the same period in 2006.

Selling expense increased $4.7 million, or 17%, to $32.5 million for the year ended December 30, 2007 from $27.8 million for the year ended December 31, 2006. The increase in selling expense was primarily attributable to the costs associated with the acquired business incurred during the year ended December 30, 2007. The year ended December 31, 2006 included 10 weeks of activity of the acquired business.

Administrative expense increased $7.4 million, or 20% to $43.5 million for the year ended December 30, 2007 from $36.1 million for year ended December 31, 2006. The increase in administrative expense was primarily attributable to the costs associated with the acquired business during the year ended December 30, 2007, as well as by approximately $3.5 million related to increased legal expenses in our patent infringement litigation against Artesyn Technologies, Inc during the year ended December 30, 2007 compared with 2006. The increases in administrative expense were partially offset by a decrease in administrative expense as a result of cost cutting measures associated with the 2007 restructuring plan.

Engineering and Quality Assurance Expense. Engineering and quality assurance expense increased $10.2 million, or 27% to $48.8 million for the year ended December 30, 2007 from $38.6 million for year ended December 31, 2006. As a percentage of net sales, engineering and quality assurance expense decreased to 10% for the year ended December 30, 2007 from 11% for the same period in 2006.

Engineering expense increased $6.5 million, or 21%, to $38.2 million for the year ended December 30, 2007 from $31.7 million for the same period in 2006. Quality assurance expense increased $3.7 million, or 54%, to $10.6 million for the year ended December 30, 2007 from $6.9 million for the same period in 2006. The increases in engineering and quality assurance expense were primarily due to the full year of costs associated with the acquired business during the year ended December 30, 2007 as compared to 10 weeks of costs included in the year ended December 31, 2006.

Amortization of Intangible Assets. Amortization of intangible assets increased by $0.4 million to $4.4 million for the year ended December 30, 2007 compared to $4.0 million for the year ended December 31, 2006. The increase was primarily due to amortization of intangibles resulting from the acquisition during the fourth quarter of 2006.

Restructuring Charge during Fiscal Year Ended December 30, 2007. During the year ended December 30, 2007, we recorded pre-tax restructuring charges of $3.1 million in accordance with SFAS 146, "Accounting for Costs Associated with Disposal Activities." We recorded approximately $1.6 million related to severance payments for a reduction in headcount of approximately 100 employees, $1.2 million as contract termination costs related to facility closures and downsizing, and $0.3 million related to consolidation of excess facilities and other contract termination costs. The charges were in part a result of our plan to restructure our organization domestically, as we move certain functions to our other existing facilities in low-cost locations.

As a result of the restructuring, we recorded asset impairment charges of $1.2 million for the year ended December 30, 2007, in accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." These charges were primarily incurred by our North American facilities and were related to leasehold improvements, computer software and manufacturing equipment at facilities whose operations are being closed or downsized.

Loss from Operations. As a result of the items above, loss from operations increased $14.2 million to a loss of $28.5 million for the year ended December 30, 2007 from an operating loss of $14.3 million for the same period in 2006.

Interest Income (Expense), Net. Net interest expense was $6.7 million for the year ended December 30, 2007 compared to net interest income of $0.7 million for the same period in 2006. The net interest expense recorded during the year ended December 30, 2007 related to $50.0 million in term debt, carrying an effective interest rate of 11.7%, borrowed to finance the acquisition in October 2006, along with interest related to credit facilities and long-term debt obligations at the newly acquired entity. Net interest income recorded during the year ended December 31, 2006 related to interest earned on held-to-maturity and available-for-sale investments. We sold a large portion of these investments during the third quarter of 2006 to fund a portion of the acquisition.

Other Income (Expense), Net. Net other income was $1.2 million for the year ended December 30, 2007, compared with net other expense of $1.8 million for the year ended December 31, 2006. Net other income during 2007 included a $0.6 million gain on the sale of an equity investment the Company held in one of its publicly-held Asian contract manufacturers as well as approximately $0.4 million in net gains related to foreign currency fluctuations. Net other expense during 2006 included $1.3 million in net losses related to foreign currency fluctuations, $0.4 million of realized loss on the sale of held-to-maturity securities that were sold prior to their maturity dates and $0.8 million in impairment losses related to an available-for-sale investment that experienced a decline in value that we deemed to be other-than-temporary in accordance with FASB Staff Position FAS115-1/124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments."

Provision for Income Taxes. The provision for income taxes was $2.4 million for the year ended December 30, 2007 compared to a benefit for income taxes of $0.7 million for the year ended December 31, 2006. We recorded a tax provision in certain European and Asian jurisdictions where we generated income during both years ended December 30, 2007 and December 31, 2006. Included in our provision for the year ended December 30, 2007 was approximately $0.1 million of interest related to unrecognized tax benefits. The benefit for income taxes for the year ended December 31, 2006 included approximately $1.6 million related to a foreign tax refund and $1.1 million related to a favorable European tax ruling during the second quarter ended June 30, 2006.

We record a deferred income tax asset in jurisdictions where we generate a loss. We also record a valuation allowance against these deferred tax assets in accordance with SFAS 109, "Accounting for Income Taxes," when, in management's judgment, it is more likely than not that the deferred income tax assets will not be realized in the foreseeable future. In 2007, we recorded a deferred income tax asset valuation allowance of approximately $14.9 million compared to $11.2 million recorded during the same period in 2006.


MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

The Company's results for the third fiscal quarter and first nine months of fiscal 2008 improved, with sales and income from operations increasing over the prior year period. Our international operations experienced favorable foreign currency fluctuations which contributed to the third quarter and first nine months' results. These results were primarily due to leverage on increased sales volume, benefits from product rationalization actions and business mix.

Net Sales. Net sales increased $27.8 million, or 7%, to $407.1 million for the nine months ended September 28, 2008 from $379.3 million for the nine months ended September 30, 2007. As a result of the strengthening of the functional currencies at our international locations, primarily the Euro and Swiss Franc, our consolidated revenue levels increased by approximately $18 million as compared with the same period in 2007. A substantial portion of our European revenue is transacted in foreign currencies such as the Euro, the Swiss Franc, and the British Pound. As these currencies strengthened over the US Dollar in 2008, our consolidated revenue was favorably impacted for the nine months ended September 28, 2008. Net sales were also favorably impacted by demand in the renewable energy and communications markets.

Net sales increased $8.6 million, or 7%, to $140.1 million for the quarter ended September 28, 2008 from $131.5 million for the quarter ended September 30, 2007. As a result of the strengthening of the functional currencies at our international locations, our consolidated revenue levels were favorably impacted by approximately $5 million as compared with revenue levels in the same period in 2007. Net sales were also favorably impacted during the quarter ended September 28, 2008 by strength in the renewable energy and communications markets. We also fulfilled a substantial amount of past due orders which further contributed to the improved results.

We generally sell our products pursuant to purchase orders rather than long-term contracts. 180-day backlog consists of purchase orders on-hand having delivery dates scheduled within the next six months. Our backlog may not necessarily be a reliable indicator of future revenue because our customers are able to cancel or modify their orders up to 30 days prior to delivery (up to 60 days prior to delivery without penalty). In addition, a significant portion of our revenues is derived from "turns" business (that is, revenues from orders that are booked and shipped within the same reporting period). Since a portion of our business is engaged in the design, manufacture and sale of AC/DC products that are customized to the particular customer, lead times can be longer and orders may be booked earlier than they would be for our standard products. Our bookings were not significantly impacted by any new Vendor Managed Inventory ("VMI") programs during the quarter and nine months ended September 28, 2008. Under a VMI program, we manufacture products for our customers based on their forecast. As a result, the booking and billing occur simultaneously upon use of the product, and therefore there is always a book-to-bill ratio of 1.0 for these programs. We may bring additional VMI programs on-line in the future, which would result in higher "turns" business, lower backlog, and higher finished goods inventory.

Gross profit for the nine months ended September 28, 2008 increased by $4.6 million to $81.8 million compared with a gross profit of $77.2 million in the comparable period in 2007. As a percentage of net sales, gross margin decreased to 20.1% for the first nine months of 2008 compared with a gross margin of 20.4% for the same period in 2007. Gross profit was favorably impacted by higher sales volume, favorable product mix, and gross margin improvement initiatives during the nine months ended September 28, 2008. These favorable impacts to the gross profit were offset by unfavorable variances related to manufacturing inefficiencies, supply chain constraints and costs associated with expediting past due orders. During the nine months ended September 28, 2008 and September 30, 2007 the Company recognized losses of approximately $6.9 million and $3.5 million, respectively, related to excess inventory and other inventory adjustments, and recorded the charges as costs of goods sold.

Gross profit for the quarter ended September 28, 2008 increased by $2.3 million to $29.9 million compared with a gross profit of $27.6 million in the comparable period in 2007. As a percentage of net sales, gross margin increased to 21.4% for the third quarter of 2008 from a gross margin of 21.0% for the same period in 2007. The increase in gross profit and related gross margin was primarily related to higher sales volume, favorable product mix and favorable impacts resulting from gross margin improvement initiatives during the quarter ended September 28, 2008, as compared with the same quarter in the prior year. During the three months ended September 28, 2008 and September 30, 2007 the Company recognized losses of approximately $2.4 million and $1.6 million, respectively, related to excess inventory and other inventory adjustments, and recorded the charges as cost of goods sold.

Selling, General and Administrative Expense. As a percentage of net sales, selling, general and administrative expense decreased to 14% for the nine months ended September 28, 2008 from 15% in the comparable period in 2007. Selling, general and administrative expense decreased $0.1 million to $57.3 million for the nine months ended September 28, 2008 from $57.4 million for the same period in 2007. As a percentage of net sales, selling, general and administrative expense decreased to 13% for the quarter ended September 28, 2008 from 14% for the same period in 2007. Selling, general and administrative expense increased $0.3 million, or 2%, to $18.2 million for the quarter ended September 28, 2008 from $17.9 million for the same period in 2007.

Selling expense decreased $0.8 million, or 3%, to $23.9 million for the nine months ended September 28, 2008 from $24.7 million for the same period in 2007. Selling expense decreased primarily as a result of the 2007 restructuring plan and related cost reduction efforts. These savings were partially offset by increased commissions related to increased renewable energy sales, one-time severance charges recorded during the nine month period ended September 28, 2008, and fluctuations in foreign currencies. As a result of the strengthening of the functional currencies at our international locations, primarily the Euro and Swiss Franc, our consolidated expense levels increased as compared with the same period in 2007. The translation of the functional currencies at our international locations to our reporting currency of the US Dollar negatively impacted our expense levels as the US Dollar weakened against most other foreign currencies during 2008 as compared with 2007.

Selling expense decreased $0.1 million, or 2%, to $7.5 million for the quarter ended September 28, 2008 from $7.6 million for the same period in 2007. Savings related to our 2007 restructuring plan and cost reduction efforts were partially offset by increased commissions related to increased renewable energy sales, and increased expense levels resulting from unfavorable foreign currency fluctuations.

Administrative expense increased $0.7 million or 2%, to $33.4 million for the nine months ended September 28, 2008, compared with $32.7 million for the comparable period in 2007. The increase in expense during this period was mainly due to approximately $2.0 million in one-time severance charges related to the reorganization of the company's management personnel in North America, approximately $0.8 million in legal fees and costs related to the extension of the $50 million PWER Bridge loan, as well as due to unfavorable variances resulting from foreign currency fluctuations. The increased expense was offset in part by reductions in legal fees of approximately $2.4 million related to the patent infringement litigation against Artesyn Technologies incurred during the nine months ended September 30, 2007, and by savings related to the Company's 2007 restructuring plan.

Administrative expense increased $0.4 million, or 4%, to $10.7 million for the quarter ended September 28, 2008, compared with $10.3 million for the comparable period in 2007. During the quarter ended September 28, 2008, we incurred severance and recruiting charges of approximately $0.7 million related to the reorganization of the company's management personnel and experienced unfavorable foreign currency fluctuations as compared with the same period of 2007. These expenses were partially offset by a reduction in legal fees associated with the patent infringement litigation and savings related to the 2007 restructuring plan compared to the same quarter of 2007.

Engineering and Quality Assurance Expense. As a percentage of net sales, engineering and quality assurance expense decreased to 9% for the nine months ended September 28, 2008 from 10% for the same period in 2007. Engineering and quality assurance expense decreased $1.7 million, or 5%, to $35.0 million for the nine-month period ended September 28, 2008 from $36.7 million in the comparable period in 2007. As a percentage of net sales, engineering and quality assurance expense decreased to 8% for the quarter ended September 28, 2008 from 9% for the same period in 2007. Engineering and quality assurance expense decreased by $0.4 million, or 4%, to $11.2 million for the quarter ended September 28, 2008 from $11.6 million in the comparable period in 2007.

Engineering expense decreased $0.1 million, or 1%, to $28.5 million for the nine months ended September 28, 2008 from $28.6 million for the same period in 2007. Engineering expense increased $0.2 million, or 2%, to $9.3 million during the quarter ended September 28, 2008 from $9.1 million during the comparable period in 2007. For the three- and nine-month periods ended September 28, 2008, we achieved approximately $0.5 million and $2.4 million, respectively, of estimated savings as compared to the same periods in the prior year as a result of the execution of our 2007 restructuring plan and associated cost reduction efforts. The decrease in engineering expense was partially offset by unfavorable foreign currency fluctuations associated with expenses at our European design centers.

Quality Assurance expense decreased $1.6 million, or 19%, to $6.5 million for the nine months ended September 28, 2008 from $8.1 million for the same period in 2007. Quality assurance expense decreased $0.6 million or 24% to $1.9 million for the quarter ended September 28, 2008 from $2.5 million for the same period in 2007. The decrease in quality assurance expense during these periods is primarily due to the 2007 restructuring plan executed savings, partially offset by unfavorable foreign currency fluctuations.

Amortization of Intangible Assets. Amortization of intangible assets was $1.9 million for the nine-month period ended September 28, 2008 compared to $3.4 million for the same period in 2007. Amortization of intangible assets was $0.5 million for the quarter ended September 28, 2008 compared to $1.0 million for the same period in 2007. The decrease in amortization expense during the periods was primarily due to certain intangibles reaching the end of their amortizable life.

Restructuring and Asset Impairment. No restructuring or asset impairment charges were recorded during the three- and nine-month periods ended September 28, 2008.

In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," we do not amortize goodwill and other intangible assets that are deemed to have indefinite lives. We review goodwill and intangible assets for impairment annually at the end of each fiscal August, or more often if events or circumstances indicate that impairment may have occurred. We calculated the estimated fair value of our company as the amount that we would receive to sell our company as a whole in an orderly transaction between market participants as of August 2008 using two acceptable valuation methods. First, we performed a discounted cash flow analysis using forward looking projections of our estimated future operating results. Second, we used the market approach which estimated the value of the Company at August 2008 based on market multiples of guideline public companies and market multiples from recent comparatively sized sale transactions. Based on the result of each method and a comparison of the quantitative assumptions between the methods, we have concluded that the fair value of our company exceeds its carrying value at the end of fiscal August 2008 and therefore, goodwill was not impaired as of our annual test date.

In addition to the testing above, which is done on an annual basis, management considers whether certain impairment indicators are present in assessing whether the carrying value of goodwill and other intangible assets may be impaired. Management's considerations include (i) forecasts that demonstrates continuing declines in the cash flow of the Company or inability of the Company to improve its operations to forecasted levels and (ii) a significant adverse change in the business climate that could affect the value of an entity or (iii) the book value of our shareholders' equity continues to be significantly in excess of our market capitalization. The risk of goodwill impairment losses increases to the extent that our market capitalization declines. A decrease in our market capitalization resulting from a short-term decrease in our stock price, or a negative long-term performance outlook, as well as a variety of other impairment indicators, could cause the carrying value of the Company to exceed its fair value, which may result in an impairment loss. Given the current economic environment, we have and will continue to monitor the need to test our intangibles for impairment as required by SFAS No. 142.

During the three- and nine-month periods ended September 30, 2007, we recorded pre-tax restructuring charges of $3.0 million in accordance with SFAS 146, "Accounting for Costs Associated with Disposal Activities." We recorded approximately $1.7 million related to severance payments for a reduction in headcount, $1.0 million as contract termination costs related to facility closures, and $0.3 million related to consolidation of excess facilities and other contract termination costs. The charges were a result of our plan to restructure our organization domestically, as we moved certain functions to our other existing facilities in low-cost locations. During the quarter ended September 30, 2007, we recorded pre-tax restructuring charges of approximately $1.0 million in accordance with SFAS 146. We recorded approximately $0.7 million related to severance payments for a reduction in headcount, $0.2 million related to facility closures, and $0.1 million related to other associated costs.

As a result of the restructuring, we recorded asset impairment charges of $0.5 million and $1.2 million during the three- and nine-month periods ended September 30, 2007, respectively, in accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." These charges were incurred by our North American facilities primarily related to leasehold improvements, computer software and manufacturing equipment for leased facilities whose operations were closed or downsized.

Income (Loss) from Operations. As a result of the items above, loss from operations was $12.3 million for the nine months ended September 28, 2008 compared with an operating loss of $24.4 million for the same period in 2007. Income from operations was $0.1 million for the quarter ended September 28, 2008 compared with an operating loss of $4.4 million for the comparable period in 2007. Interest Income (Expense), Net. Net interest expense was $7.0 million for the nine months ended September 28, 2008, compared with net interest expense of $4.9 million for the same period in 2007. Net interest expense was $2.2 million for the quarter ended September 28, 2008, compared with net interest expense of $2.1 million for the same period in 2007. Included in interest expense for the nine months ended September 28, 2008 is the write-off of $0.9 million debt issue costs and debt discount related to the $50 million PWER Bridge loan. The resulting increase in net interest expense for the nine months ended September 28, 2008 was a result of a decrease in interest income as compared with the same period in 2007. The decrease in interest income was primarily due to short-term investments sold during the first nine months ended September 30, 2007 and during the second fiscal quarter of 2008.

Other Income (Expense), Net. Net other expense was $2.5 million for the nine months ended September 28, 2008, compared with net other income of $2.0 million for the same period in 2007. Net other income was $0.2 million for the quarter ended September 28, 2008, compared with net other income of $1.2 million for the same period in 2007. Included in net other expense for the nine months ended September 28, 2008 was approximately $1.2 million expense related to the write-off of a loan to a foreign supplier and a $0.2 million investment in a privately-held company, as well as approximately $1.6 million expense related to net foreign currency transaction losses. Included in net other income for the three and nine months ended September 30, 2007 was approximately $0.6 million gain on the sale of an equity investment the Company held in one of its publicly-held Asian contract manufactuers. Also included in net other income for the three and nine months ended September 30, 2007 were gains of approximately $0.6 million and $1.0 million, respectively, attributable to net foreign currency transaction gains.

Provision (Benefit) for Income Taxes. The benefit for income taxes was $0.3 million for the nine months ended September 28, 2008 compared with a tax provision of $2.6 million for the nine months ended September 30, 2007. The benefit for income taxes was $0.1 million during the quarter ended September 28, 2008 compared with a tax provision of $1.1 million for the quarter ended September 30, 2007. During the three and nine months ended September 28, 2008, we reversed certain reserves for uncertain tax positions of approximately $0.9 million upon the expiration of a tax statute as well as due to a closed tax audit.

Our effective tax rate varies significantly from period to period due to the level, mix and seasonality of earnings generated in its various U.S. and foreign jurisdictions. Under Accounting Principles Board Opinion No. 28, "Interim Financial Reporting" ("APB 28"), and FASB Interpretation No. 18, "Accounting for Income Taxes in Interim Periods" ("FIN 18"), we are required to adjust our effective tax rate for each quarter to be consistent with the estimated annual effective tax rate. Jurisdictions with a projected loss where no tax benefit can be recognized are excluded from the calculation of the estimated annual effective tax rate. Applying the provisions of APB 28 and FIN 18 could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections.

Although we record deferred income tax assets in jurisdictions where we generate a loss for income tax purposes, we also record a valuation allowance against these deferred income tax assets in accordance with SFAS No. 109 when, in management's judgment it is more likely than not that the deferred tax assets will not be realized. As a result, we may record no tax benefit in jurisdictions where we incur a loss, but record tax expense in jurisdictions where we record taxable income and have no net operating loss (NOL) carryforward. As a result, few meaningful comparisons can be made on our consolidated tax rates between periods.

CONF CALL

Krystyn Hutzell

Good afternoon everyone. Thank you for joining us today to discuss Power-One 2008 third quarter results. Joining me today are Richard Thompson, Chief Executive Officer and Linda Heller, Chief Financial Officer. By now you should have received the copy of today’s press release. If not, it is available on the Company’s website at www.power-one.com.

Before we begin, I would like to remind you that this conference call may contain forward-looking statements reflecting Power-One’s current views of future events, projections or expectations. Any such forward-looking statements may deal with or include matters which involve risks and uncertainties. Power-One’s actual results may differ materially from those results just discussed or information provided in the forward-looking statements.

We refer you to the Company’s reporting documents filed with the SEC to discuss risk factors that may have a material impact on results. Additionally, in adherence with regulation FDs we have opened up this call so that all interested investors are free to listen in. The press release and this conference call will be our only forum to answer questions regarding our estimated performance going forward. Consequently, should you have any questions regarding our estimate of sales on profits or other financial matters for the upcoming quarter as well as how they may affect our income statement models and balance sheet. This is the time that we are able to respond to these questions.

I will now turn the call over to Richard Thompson, the Company’s Chief Executive Officer. Please go ahead Rich.

Richard Thompson

Thank you, Krystyn. Good afternoon and thank you for joining us on our third quarter 2008 financial results teleconference. I will begin this call with a review of the Company’s performance and then provide an update on recent developments and share with you the progress we are making in our recovery. After my remarks, Linda Heller, our Chief Financial Officer will provide greater detail on the financial results for the third quarter and discuss our outlook for the fourth quarter. We will then be happy to answer your questions.

Before I begin, I would like to introduce Linda Heller. Linda joined Power-One at the end of July having previously served in senior management roles in Applied Materials, Amgen, Johnson & Johnson, and Silicon Graphics, among others. We are very fortunate to have Linda on the Power-One team.

Today we reported net sales of $140 million for the third quarter of 2008 up 7% versus a year ago and a net loss of $0.02 per share which represents a significant narrowing over a loss of $0.07 in the year ago quarter. In a difficult economic environment, and with the Euro weakening during the quarter, our results were within guidance on both revenue and operating results and we improved our working capital position. The results confirmed that we are indeed making progress towards returning the Company to profitability and positive cash flow.

During the third quarter, bookings and backlog were up modestly year over year but as a result of unclear demand, backlog entering Q4 is lower than Q3. Revenues in North America increased during the quarter; however, we are experiencing order softness across most of our markets. In our core market, sales in telecommunications were slightly off while our other traditional Power product lines are showing some weakening.

On a more positive note, renewable energy delivered another outstanding quarter with year over year growth of 400%. As we expanded our solar product line, our geographic footprint and our market penetration, we anticipate that sales of renewable energy products will end 2008 at the revenue run rate of more than 10% of the Company’s total sales. Renewable energy inverter sales should surpass $100 million dollar mark in 2009. This business has a great future and I will discuss it in more detail in few moments.

Our growth margin improved in the quarter both on a year over year basis and sequentially despite seasonally lower volumes and a weaker Euro. Additionally, we further reduced operating expenses to 21% of sales down from 23% a year ago. First last year, the gross margin benefit from higher volumes and component cost savings realized from our supply chain initiative but were offset by continuing manufacturing inefficiencies. We have a long way to go toward correcting our manufacturing inefficiencies and as Linda will discuss when she analyzes the profit and loss statement, we are also incurring manufacturing and inventory expenses at two locations for some product lines tied to the transfer of production from the Dominican Republic to China. This transfer should be completed by the end of the fourth quarter or early in 2009.

As I did in the last quarter’s conversation, I will review the four key initiatives we are implementing to improve operating performance, while we have not met all of our original six months goals which we said at the outset were aggressive, we are achieving cost reductions from the ongoing actions and we are on track to meet these goals over the next several quarter.

During Q3, we made significant key management changes and I believe, with the new team in place, our progress will accelerate. We have hired several other extremely talented executives, each with unique qualification and track records in their fields of expertise. Gerry Kelleher is now leading our supply chain; Glenn Grindstaff is now leading our human resources efforts; and Neil Dial, our global operations as well as Linda Heller who I introduced at the beginning of this call.

Our first initiative is to grow revenues faster than the market and our goal was to increase revenue by 8% to 10% this year. We believe we are growing faster than the market. Our renewable energy business is outpacing the market growth rate by 10x and the revenue initiatives are likewise in place in our Power business. Our ongoing initiatives to improve customer service and work closely with our customers to create solutions for them using our leading edge technology are helping us win orders in a very competitive environment. However, the economy is having an impact on our growth. We anticipate that we will fall short of the 8% to 10% goal this year and end the year with 5% to 6% year on year growth despite exiting low margin, slow growth product models

Our second initiative is to significantly improve gross margin. Delays in the transfer of manufacturing to Asia and lower than anticipated demand will impact our goal of achieving mid 20s gross margin by year end but we expect continued progress. Once we complete the transfer of product to China, we will eliminate the redundant cost of manufacturing certain product line in the Dominican Republic while ramping up our currently underutilized China factory and as a result, we expect that gross margin will improve quickly.

We are working to position China as our high-volume factory, utilize Asia’s subcontractors where appropriate and better utilize our high-mix, low-volume plant in the Dominican Republic. We have initiated senior management changes in our global supply chain. We expect these changes will accelerate our supply chain initiatives including consolidating our material spend with fewer vendors and reducing sole source components.

We are repairing our vendor relationships and will speed our efforts to qualify vendors nearer to our manufacturing plants. This will reduce shipping and handling expense while significantly improving component availability and reducing inventory. We are working toward our goal to have vendors within a 100 mile range on average of our China plant. Longer term, our goal is to reduce the number of components we use from roughly 40,000 to less than10,000 over the next few years with initial progress in early 2009. As materials account for the largest element of our cost of goods sold, this represents an enormous long term opportunity for Power-One.

Our third initiative is to improve on-time delivery to our customers and during the third quarter we continued to implement specific improvement actions. We significantly reduced past due orders during the quarter and modestly improved our on-time delivery percentage to our customers. We remain committed to our goal of improving on-time delivery to 90% or higher. This is one of our most difficult challenges, as I have discussed previously, due to the multiple corrective actions required. New supplier managed inventory programs in Asia rolled out during the third quarter to support the ramp up in China and will be more of a factor in the fourth quarter and beyond as the factory becomes fully loaded.

In the area of demand planning, we initiated an SNOP process on a limited scope in July which will enhance our demand planning and supply planning processes. And we expect to initiate this process globally in Power-One during Q4. In order to improve master scheduling, we are implementing features in our ERP system to allow level loading and to balance the capacity across all four of our plants and our EMS partners. Our goal is to operate each plant at 85% capacity to create flexibility to address un-forecasted customer demand.

Our final initiative is to increase working capital efficiency. During the quarter, our accounts receivable and inventory investments were lower in dollars allowing us to reduce our vendor payables and still generate operating cash flow. We are changing our business processes to actively manage these areas to generate cash in support of our initiatives and to strengthen our balance sheet.

Let me conclude by discussing our renewable energy business. Last quarter as we announced, we launched five new solar inverters in the Aurora product family including our new 10kW and 12kW photovoltaic string inverters. These products are seeing excellent market reception. We are qualifying the solar product line for a number of countries while we add sales of support infrastructure to broaden our reach to residential and commercial customers and channel throughout Europe as well as to independent power providers and utilities.

We continue to grow our business in Germany, Italy and Spain. We have started building sales and support infrastructure in France, Greece, Portugal, the Benelux countries and Eastern Europe and we are qualifying product and assessing markets to expand globally. Our engineering capabilities match the needs of the market well and we have introduced best in class products that have a reputation in the marketplace for industry leading efficiency and reliability. As a result, our investment in sales and support is driving what we expect will be a substantial market share gain in Europe this and next year.

We are not only doing well in the distribution channel that sells products and inverters for our residential and commercial solar application, but we are having success with large power providers. We anticipate that we will repeat this success as we have seen in Europe and the rest of the world and we believe we can become a worldwide leader in renewable energy inverter within the next three to five years.

In addition, we are designing products for wind turbine OEMs that we expect to introduce next year. These will address the market for large wind projects which is roughly equal to the worldwide solar market and heretofore has been largely a captive inverter market.

There is still significant progress to be made on our strategic initiatives but our processes to improve operational performance and drive long term growth and profitability are in place. We believe we are on the track to recovering and look optimistically toward continued improvement in Q4.

I will now turn the call over to Linda for a detailed discussion of the Q3 financials and our guidance for Q4.

Linda Heller

Thank you, Rich. During the third quarter of 2008, we recorded revenue of $140.1 million, an increase of 7% from last year’s Q3 revenue of $131.5 million and a loss of $0.02 versus a loss of $0.07 last year. Our results were within the guidance range we projected last quarter despite the challenging economic environment. These results are largely attributable to the operational initiatives we have implemented which are positively contributing to Power-One turnaround.

I will start our discussion on the results by breaking down sales by market segment, sales channels and geography. In terms of market segments, the communications market sales were $70 million or 50% of sales compared to a $63 million or 48% of sales during Q3 of last year up 11% year over year. Instrumentation and industrial market sales were $23 million, a decline of $3 million compared to the same period last year. This decrease reflects, in part, our decision to only selectively pursue new business opportunities in this market.

Renewable energy sales came in at $19 million or 14% of sales versus $4 million or 3% of net sales in the third quarter of last year. The renewable energy business continues to expand in terms of both customers and market share. Sales to the server storage and computer market were $10 million or 7% of sales, a decrease of approximately 47% from $20 million or 15% of sales during the same quarter last year, due to timing issues with phasing out older products and the introduction of new products. Other markets represented the remaining sales of $18 million which was flat against last year.

In terms of sales channel, the OEM was predominant with 76% or $106 million of total sales followed by distributors at $29 million and service providers with $5 million. Q3 sales in North America and Europe rose by 18% and 13% respectively year over year while Asia declined 17%. Europe’s increase was driven primarily by the increase in renewable energies that was partially offset by weakness in the Power Systems business from a delay in the product launch which has now been resolved. Asia’s sales also were impacted by the delay in the Power Systems product launch as well as by a shift by the OEM customers of their business from Asia to North America.

Our 90-day backlog at the end of Q3 was approximately $93 million, 11% above Q3 2007 90-day backlog of $84 million. Net bookings for the quarter came in at $121 million, a 3% increase over last year’s third quarter bookings of $118 million. Based on our strong product offering and product roadmap, we expect to gain market share in key segments particularly renewable energy despite the economic environment.

Progress continues to be made on our gross margin which was 21.4% of sales in Q3, a 40 basis point increase over last year’s third quarter result and a 90 basis point improvement from the second quarter of 2008. The improvement was due to favorable product mix, selective price increases, and material cost savings and was partially offset by an asset write off from the closure of our Hungary operations and delays in transferring production to our low cost plant in China.

Operating expenses were tightly managed during the quarter with SG&A totaling $18.2 million which was slightly higher than SG&A in the third quarter of last year but lower as a percentage of net sales. Non-recurring severance and other costs associated with the executive management reorganization added $0.7 million to expenses in the third quarter of 2008.

Engineering and quality assurance expenses for the quarter were slightly lower year over year and the team remains focused on high opportunity projects and enhance quality initiative. Although Power-One is committing additional investments in our renewable energy business, we expect continued SG&A and engineering costs discipline. As a result of the improvement in gross margin and the reduction of operating expenses as the percentage of sales, Power-One achieved breakeven operating incomes despite the non-recurring cost and a negative foreign exchange impact.

Our consolidated tax benefit for the quarter was $0.1 million versus a provision of $1.1 million in the same quarter last year. This quarter’s tax benefit was comprised of an estimated tax provision offset by the reversal of the FIN 48 Tax Reserve which was released as a result of the completed tax audit and a closure of certain open tax years at one of our foreign locations.

As mentioned, net loss for Q3 was $1.7 million or $0.02 per share versus a loss of $6.5 million or $0.07 per share for the same period last year, which last year’s figure included a $0.02 loss from restructuring and impairment cost.

I would like to now move on to discuss the cash flow and the balance sheet. Our cash balance was $39.4 million at the end of Q3, an improvement of $1.7 million from $37.7 million at the end of Q2. The Company’s improved margins and management of working capital drove positive operating cash flow $1.6 million. Cash also increased from the exercise of the over allotment options of $4.8 million related to the debt refinancing which closed in the second quarter which was offset by the capital expenditures of $2 million and debt repayment of $1.4 million.

One of our key initiatives is to improve working capital and we have implemented a number of projects to optimize cash usage. Progress has been made although it is not reflected in our day’s working capital which was up six days to 87 from 81 in the second quarter. Concerted efforts were made to reduce our receivables and inventory balances both declining over $7 million which in turn allowed us to significantly reduce our accounts payable and foreign debt balances.

Despite the payables and debt pay down, we were still able to generate the $1.6 million in operating cash flow. DSOs were approximately 91 days, up one day from 90 in the previous quarter. We improved our collections in North America while DSOs in Asia and Europe stretched due to said decline in sales quarter over quarter.

During the quarter, we also substantially improved our inventory position. The inventory balance at the end of Q3 was $113 million, down from $120 million at the end of Q2. Terms remain flat at 3.9 despite having to hold the redundant inventory for some product lines as we transferred product to the lower cost facility in China.

We believe that as we improve our planning and achieve manufacturing and efficiency, complete product transfers and execute various supply chain initiatives, inventory terms will improve. Payables at the end of Q3 were $111 million versus $121 million at the end of Q2. We reduced payables to improve our relationships with suppliers.

Next, I will review our guidance for the fourth quarter. Given that we are experiencing some impact from a weaker economy, particularly in North America which incurred a quarter over quarter drop in orders, we expect that our Q4 2008 revenue will be in the range of $130 to $136 million. This brings our full year revenue guidance to a year over year revenue growth of 5% to 6% versus our previous range of 8% to 10%. Despite lower volumes, our margins should increase based on improving manufacturing efficiencies and pro-active expense management.

Consequently, we forecast that in Q4, our earnings per share will be in the range of a loss of $0.03 per share to earnings of $0.01 per share. The forecasted full year 2008 net loss is in the range of $18 to $22 million as compared to our previous guidance of $12 million to $20 million. Although the environment is more challenging today than when we exited Q2, we are focused on the many initiatives underway to improve the top line of our margins and our management of working capital. We will control and reduce expenses and analyze our cost to ensure that we employ our resources in the most effective manner. We will continue to streamline and optimize operating and business processes. As Rich has emphasized, we are in the position to take actions that will build long term shareholder values, strengthen our market position and create a lean cost structure.

At this time, we would be glad to answer your questions.

SHARE THIS PAGE:  Add to Delicious Delicious  Share    Bookmark and Share



 
Icon Legend Permissions Topic Options
You can comment on this topic
Print Topic

Email Topic

1141 Views