Power-One, Inc.

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Power-One, Inc.

740 Calle Plano
Camarillo, California 93012
U.S.A.
Telephone: (805) 987-8741
Fax: (805) 388-0476
Web site: http://www.power-one.com

Public Company
Incorporated: 1973 as Power CA
Employees: 2,422
Sales: $261.6 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: PWER
NAIC: 334419 Other Electronic Component Manufacturing

Listed on the NASDAQ, Power-One, Inc. is one of the world's leading manufacturers of power-conversion equipment for the telecommunications, networking, and technology markets. Its products are used in routers, data storage and servers, semiconductor-test equipment wireless communications, medical diagnostic equipment, and railway and industrial applications. The Camarillo, California-based company offers DC (Direct Current) to DC converters, AC (Alternating Current) to DC converters, and power systems. Major customers include Cisco Systems, Ericsson, Lucent, Motorola, Nortel Networks, Siemens, and Teradyne. In addition to its U.S. facilities, Power-One maintains operations in Europe and Asia.

ORIGINS

Although Power-One did not come into its own until the 1990s, it was founded in Chatsworth, California, in 1972 to make AC/DC power supplies. A year later the family-owned business was incorporated as Power CA and in the late 1970s relocated to Camarillo. The company opened a factory in Isabela, Puerto Rico, in 1981 and seven years later added a plant in San Luis, Mexico. Most of the Puerto Rican operations were relocated to Santo Domingo, Dominican Republic, in the 1990s where labor was cheaper.

In 1982 Power CA hired an engineer named Steven J. Goldman, who would play a major role in the growth of Power-One. With a degree in electrical engineering from the University of Bridgeport in 1979, he began working his way up through the ranks. After heading Power CA's research and development division, he turned his attention to executive-level posts and supplemented his education by earning a master's of business administration from Pepperdine University in 1989. He became Power CA's chief financial officer, and then in 1990 was named president.

Goldman led a management-team buyout of the company, now known as Power-One L.L.C., a Delaware entity that acquired Power CA in preparation for a sale, in September 1995, backed by the Little Rock, Arkansas investment firm of Stephens Group Inc. Stephens took a 66 percent stake in the company, with senior management dividing up the remaining interest. The deal was brokered by Power-One's investment banker, Los Angeles-based F.M. Roberts and Co. Its president, Fred Roberts, was a friend of Stephens chief executive officer, Warren Stephens, who was attracted to Power-One because its market was booming and sales were growing at a 30 percent clip, totaling close to $75 million in 1995.

Power-One also had developed a flexible operation, imperative because it combined dozens of power modules to satisfy the different needs of some 10,000 customers. As described by Electronic Engineering Times, "Carmillo headquarters acts as the nerve center for its entire planning, organization and process operation, while its factories in Mexico, the Dominican Republic and Puerto Rico make the physical products. These facilities are optimized for manufacturing a wide array of its current products and not designed for the high-volume component-type DC/DC converter manufacturing." The publication further explained that Power-One, which was strong in AC/DC switchers and linears, needed a financial partner such as Stephens in order "to become a diversified manufacturer and a global marketer of products. The two areas in which Power-One has been lacking are DC/DC converters and an international presence." The company's strategy, as developed by Goldman, was to provide "a complete power-supply solution to a worldwide customer base." Rather than a route to prosperity, it was in some respects a survival plan. Most of Power-One's customers were original equipment manufacturers (OEMs), and changes in the way they did business were having a profound impact on the power supply industry. Because OEMs were outsourcing more and more production processes, shortening the time-to-market of their products, and cutting the number of suppliers with which they dealt, component manufacturers across the board were forced to grow larger. This meant consolidation in the power supply industry, which numbered some 300 companies in North America. Hence, Power-One needed to grow larger or risk being left by the wayside.

1997 IPO

In order to fuel growth plans, Power-One was prepared to be taken public and make an initial public offering (IPO) of stock. In January 1996 the company was reorganized as a Delaware corporation, and later in the year it licensed new technology from Calex Manufacturing Co. to expand its line of AC/DC products. "That's really where the new Power-One started," Goldman told Electronic Buyers' News. "Previously, we were operating in a conservative environment focused on North America. We took no real risks, there were no acquisitions, and no strategic alliances." The IPO was completed in October 1997, raising more than $80 million. Of that amount $38 million was earmarked to pay down bank debt, and the rest was set aside for acquisitions and the upgrading of existing facilities. In order to expand capacity, the company soon broke ground on a new 110,000-square-foot manufacturing facility in Mexico, which would open in 1998.

Power-One's first acquisition took longer than most investors expected. It came in August 1998 when Power-One paid $43.4 million and assumed $11 million in debt for Melcher Holding AG, a group of Swiss companies with three locations. Melcher was an attractive addition because there was almost no overlap in products—Power-One focused on AC/DC power products and Melcher on DC/DC power products—and it provided Power-One with a gateway to Europe's $2 billion power supply market. Moreover, Melcher brought with it a highly desirable expertise in the fast-growing telecommunications market. Power-One's vice-president for finance and logistics, Ed Schnoop, told Electronic Buyers' News that Melcher was "more into telecom and transportation, and we were more into test equipment and datacom. So the communication aspect of it interested us, as well as the geographical and product-line synergies." Melcher would also benefit from the breadth of Power-One's operations. Melcher had outsourced a number of processes that Power-One was able to do in-house, such as magnetics, harnesses, and sheet metal.

COMPANY PERSPECTIVES

Power-One has evolved over 30 years into an industry leader, competitive on a world-class level. Power-One's structure provides business units with access to substantial financial, logistical, and technical resources, and the flexibility to adapt to changing market conditions.

The Melcher acquisition also demonstrated the unique attributes of Power-One's chief executive. One securities analyst quoted by Electronic Buyers' News explained, "Goldman comes with an engineering background, so while some people tend to look at acquisitions for size considerations, he's taken more of an engineer's viewpoint in determining what product capabilities he needs." He also brought a team approach to the process. "I have a philosophy, which is that, as a rule, [my staff ] must never let me make a mistake," he told Electronic Buyers' News. "If they think I'm wrong, they have the right to constantly disagree with me. The central thing we've learned as we work through our disagreements is that people have to be considered in the decisions we make as a company."

Sales were strong in the first half of 1998, but economic conditions soured, due in large part to an Asian recession, resulting in poor sales during the second half of the year. Revenues increased from $93 million in 1997 to more than $102 million in 1998, but net income dipped from $8.2 million to $5.7 million. Management anticipated a turnaround in the near term and took steps to position the company to take full advantage, including a greater investment in research and development to broaden the Power-One product line.

Power-One's second major acquisition came in January 1999 with the $31.8 million purchase of International Power Devices Inc. (IPD), a Boston-based manufacturer of high-density DC/DC board-mounted converters, the fastest-growing type in the industry and one in which Power-One had little representation. Moreover, IPD owned a 49 percent interest in a People's Republic of China distributor, providing Power-One with entry into the promising Chinese communications marketplace. In order to realize economies of scale and make its products more competitive, Power-One transferred production to the new Mexico facility.

Power-One's increasing focus on the telecommunications market, in which the company hoped to ultimately achieve three-quarters of its sales, paid off in 1999. Revenues more than doubled in 1999 to $205.4 million, and net income kept pace, increasing to more than $10 million. The year also brought a new president and chief operating officer, William T. Yeates, whose arrival allowed Goldman to devote more of his attention to acquisitions and big picture considerations.

In February 2000, Power-One completed another acquisition, the $98.4 million stock purchase of Irvine, California-based HC Power. Once again, the deal added new products and provided Power-One with access to a lucrative market. In this case, the company became involved in the high-end power systems for telecommunications and Internet service providers, a $3 billion market. For HC, joining forces with Power-One offered a number of dividends. It would be able to tap into Power-One's larger sales force, which offered greater geographical coverage, and by moving production to Power-One's Dominican Republic plant, where labor costs averaged about $1 per hour instead of the $14 paid to workers in California, HC's products could be priced cheaper and gain a competitive edge.

Another acquisition came just three months later in 2000 when Power-One paid $72 million in cash and stock for Powec A.S. of Norway. In a related transaction, Power-One spent another $14 million to add the telecommunications product line of the Crane Company. These deals opened up the telecommunications power supplies markets in Europe and Asia. In all, the year 2000 was a breakthrough year for Power-One. Revenues soared to $511 million and net income followed suit, increasing to $43.9 million for the year. As a result, the company was added to the S&P 500 and recognized by Forbes as one of the best 200 companies in the United States.

POOR BUSINESS CONDITIONS AT THE START OF THE 21ST CENTURY

To keep pace with demand, Power-One added about 275,000 square feet of manufacturing space to its Dominican Republic and Mexico plants, and in the spring of 2001 it replaced a small research and development center in Limerick, Ireland, with a new 35,000-square-foot facility. The company also looked to make further acquisitions, primarily targeting Asia, but such plans would have to be shelved as the telecommunications market began to falter and the global economy lapsed into recession. Demand for power supply products weakened as OEMs cut back on manufacturing to sell off excess inventory, and their problems were passed on to suppliers including Power-One. With 70 percent of its revenues derived from communications, Power-One suffered significant losses. Revenues dropped off 28.8 percent to $363.7 million as the company suffered a net loss of $185.9 million.

KEY DATES

1972:: The company is founded as Power CA.
1981:: The plant opens in Puerto Rico.
1988:: The plant opens in Mexico.
1995:: Stephens Group Inc. acquires a controlling interest.
1997:: The company is taken public.
1998:: Melcher Holding AG is acquired.
2000:: HC Power, Inc. is acquired.
2003:: The company completes the acquisition of di/dt Inc., maker of high-density DC/DC converters called "bricks."

Difficult conditions continued in 2002, leading to a cost reduction effort at Power-One that included laying off almost one-quarter of the workforce. This news, along with an announcement that the company planned to take nearly $200 million in restructuring charges in the third quarter of the year, resulted in the price of Power-One stock tumbling below the $2.50 mark. Company executives, who believed the industry had reached bottom and was due for a rebound, eagerly snapped up shares of Power-One stock at these distressed prices. When the year ended, Power-One recorded a 36.6 percent drop in revenues to $230.7 million and a net loss of $212 million.

Power-One completed an acquisition in 2003, using stock to buy di/dt Inc., maker of high-density DC/DC converters called "bricks." Whereas this addition helped to fill out Power-One's product lines, the company also took steps to become involved in silicon-based DC/DC power modules, which it believed communications customers were likely to embrace in the years to come because they were smaller and less expensive than brick-type converters, while offering comparable performance. Power-One formed the Silicon Power Systems unit and also unveiled a new corporate logo, the first redesign since the company was founded three decades earlier. The new unit would soon develop the industry's first digital power products.

Business began to pick up for Power-One in 2003, as revenues increased to $256.3 million, but the company posted a net loss of $18.2 million. Sales increased to $280.3 million in 2004, when the company lost another $21.2 million. Sales dipped to $261.6 million in 2005, and Power-One recorded a net loss of $38.3 million. The company believed, however, that the costs of restructuring were now complete and that prospects for the future looked better. There would be a slight change in the management ranks going forward, however, as Goldman turned over the CEO position to Yeates while retaining the chairmanship and continuing to guide Power-One's growth strategy. The company also increased its focus on the data storage and server markets, becoming less dependent on the volatile telecommunications industry.