SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended April 30, 1999 Commission File Number 0-10964
MAXWELL TECHNOLOGIES, INC.
Delaware IRS ID #95-2390133
9275 Sky Park Court
San Diego, California 92123
Telephone (619) 279-5100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
As of May 31, 1999, Registrant had only one class of common stock of
which there were 9,547,942 shares outstanding.
PART I - FINANCIAL STATEMENTS
Maxwell Technologies, Inc.
Consolidated Condensed Balance Sheet - (Unaudited)
(in thousands)
Assets
------
April 30, July 31,
1999 1998
---------- ----------
Current assets:
Cash and cash equivalents $ 7,680 $ 21,397
Accounts receivable - net 45,727 39,753
Inventories:
Finished products 2,292 1,494
Work in process 4,271 3,686
Parts and raw materials 17,713 14,198
---------- ----------
24,276 19,378
Other current assets 5,773 2,199
Deferred income taxes 457 457
---------- ----------
Total current assets 83,913 83,184
Property, plant and equipment - net 27,339 25,542
Goodwill and other non-current assets 9,146 6,659
---------- ----------
$ 120,398 $ 115,385
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 20,141 $ 24,019
Accrued employee compensation 6,631 7,039
Current portion of long-term debt and
short-term borrowings 2,692 1,244
---------- ----------
Total current liabilities 29,464 32,302
Long-term debt 450 1,218
Minority interest 2,517 1,712
Stockholders' equity:
Common stock 950 920
Additional paid-in capital 72,411 72,245
Deferred compensation (233) (413)
Accumulated other comprehensive income (31) --
Retained earnings 14,870 7,401
---------- ----------
87,967 80,153
---------- ----------
$ 120,398 $ 115,385
========== ==========
See notes to consolidated condensed financial statements.
PART I - FINANCIAL STATEMENTS, continued
Maxwell Technologies, Inc.
Consolidated Condensed Statement of Operations - (Unaudited)
(in thousands except per share data)
Three Months
Ended April 30,
----------------------------
1999 1998
---------- ----------
Sales $ 46,819 $ 35,519
Cost of sales 30,347 24,068
---------- ----------
Gross profit 16,472 11,451
Operating expenses:
Selling, general and administrative expenses 9,797 7,232
Research and development expenses 3,087 2,829
Acquired in-process R&D and other
acquisition related charges -- 8,942
---------- ----------
Total operating expenses 12,884 19,003
---------- ----------
Operating income (loss) 3,588 (7,552)
Interest expense 66 62
Interest income and other - net (86) (598)
---------- ----------
Income (loss) before income taxes and
minority interest 3,608 (7,016)
Income tax expense 50 74
Minority interest in net income (loss)
of subsidiaries 248 (15)
---------- ----------
Net income (loss) $ 3,310 $ (7,075)
========== ==========
Basic income (loss) per share $ 0.35 $ (0.77)
========== ==========
Diluted income (loss) per share $ 0.34 $ (0.77)
========== ==========
Weighted average number of shares used to calculate:
Basic income (loss) per share 9,497 9,181
========== ==========
Diluted income (loss) per share 9,830 9,181
========== ==========
See notes to consolidated condensed financial statements.
PART I - FINANCIAL STATEMENTS, continued
Maxwell Technologies, Inc.
Consolidated Condensed Statement of Operations - (Unaudited)
(in thousands except per share data)
Nine Months
Ended April 30,
----------------------------
1999 1998
---------- ----------
Sales $ 129,839 $ 100,593
Cost of sales 84,787 66,236
---------- ----------
Gross profit 45,052 34,357
Operating expenses:
Selling, general and administrative expenses 27,460 22,916
Research and development expenses 8,073 6,988
Acquired in-process R&D and other
acquisition related charges 1,645 8,942
---------- ----------
Total operating expenses 37,178 38,846
---------- ----------
Operating income (loss) 7,874 (4,489)
Interest expense 274 239
Interest income and other - net (585) (1,099)
---------- ----------
Income (loss) before income taxes and
minority interest 8,185 (3,629)
Income tax expense 275 261
Minority interest in net income (loss)
of subsidiaries 584 (24)
---------- ----------
Net income (loss) $ 7,326 $ (3,866)
========== ==========
Basic income (loss) per share $ 0.78 $ (0.47)
========== ==========
Diluted income (loss) per share $ 0.75 $ (0.47)
========== ==========
Weighted average number of shares used to calculate:
Basic income (loss) per share 9,379 8,247
========== ==========
Diluted income (loss) per share 9,720 8,247
========== ==========
See notes to consolidated condensed financial statements.
PART I - FINANCIAL STATEMENTS, continued
Maxwell Technologies, Inc.
Consolidated Condensed Statement of Cash Flows - (Unaudited)
(in thousands)
Nine Months
Ended April 30,
----------------------------
1999 1998
---------- ----------
Operating Activities:
Net income (loss) $ 7,326 $ (3,866)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 4,188 3,027
Acquired in-process R&D and other
acquisition related charges -- 7,450
Deferred compensation 180 156
Minority interest in net income (loss)
of subsidiaries 584 (24)
Changes in operating assets and
liabilities - net (21,156) (10,076)
---------- ----------
Net cash used in
operating activities (8,878) (3,333)
---------- ----------
Investing Activities:
Purchases of property and equipment (5,652) (5,656)
Business acquisitions under purchase
accounting, net of cash acquired -- (11,481)
---------- ----------
Net cash used in
investing activities (5,652) (17,137)
---------- ----------
Financing Activities:
Principal payments on long-term debt and
short-term borrowings (2,377) (5,147)
Proceeds from long-term debt and short-term
borrowings 2,875 3,586
Proceeds from issuance of Company and
subsidiary stock 2,172 50,262
Dividends paid to shareholders of Subchapter
S corporation prior to acquisition -- (407)
Repurchase of Company and subsidiary stock (1,826) (297)
---------- ----------
Net cash provided by
financing activities 844 47,997
---------- ----------
Effect of exchange rates on cash and
cash equivalents (31) --
---------- ----------
Increase (decrease) in cash and
cash equivalents (13,717) 27,527
Cash and cash equivalents at beginning
of period 21,397 2,194
---------- ----------
Cash and cash equivalents
at end of period $ 7,680 $ 29,721
========== ==========
See notes to consolidated condensed financial statements.
PART I - continued
NOTES TO FINANCIAL STATEMENTS
1. General
The preceding interim consolidated condensed financial statements contain
all adjustments (consisting of normal recurring accruals) which are, in the
opinion of management, necessary for a fair and accurate presentation of
financial position at April 30, 1999 and the results of operations for the
three and nine month periods then ended. These interim financial statements
should be read in conjunction with the Company's July 31, 1998 audited
consolidated financial statements and notes thereto included in its Annual
Report on Form 10-K for fiscal 1998. Interim results are not necessarily
indicative of those to be expected for the full year. The Balance Sheet at
July 31, 1998 has been derived from the audited financial statements at that
date, as adjusted for the unaudited balances of acquisitions accounted for by
the pooling-of-interests accounting method.
The consolidated financial statements include the accounts of Maxwell
Technologies, Inc., and its subsidiaries. All significant intercompany
transactions and account balances are eliminated in consolidation.
Backlog of unfilled orders at April 30, 1999 was $102.2 million, of which
$81.1 million is fully funded.
2. Foreign Currency Translation
The assets and liabilities of the Company's foreign operations are
translated to U.S. dollars at quarter-end exchange rates, and revenues and
expenses are translated at average rates prevailing during the period. There
was no material effect from foreign currency translation adjustments during
the three and nine-month periods ended April 30, 1999.
3. New Accounting Standards
In June 1997, the FASB issued Statement No. 131, Disclosures About Segments
of an Enterprise and Related Information, which is effective for the fourth
quarter of the Company's fiscal year 1999. The Company believes that its
current segment reporting is generally in compliance with Statement No. 131,
and therefore the adoption of Statement No. 131 will not have a material effect
on its financial statements.
4. Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", in the quarter ended October 31, 1998.
Statement No. 130 establishes new rules for the reporting and display of
comprehensive income and its components.
The components of comprehensive income for the three and nine month
periods ended April 30, 1999 and 1998 were as follows (in thousands):
Three Months Nine Months
Ended April 30, Ended April 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net income (loss) $ 3,310 $ (7,075) $ 7,326 $ (3,866)
Foreign currency translation adjustments (29) -- (29) --
-------- -------- -------- --------
Comprehensive income (loss) $ 3,281 $ (7,075) $ 7,297 $ (3,866)
======== ======== ======== ========
PART I - continued
5. Income per share
In accordance with Financial Accounting Standards Board Statement No. 128,
Earnings Per Share, basic earnings per share excludes any dilutive effects of
options, warrants, and convertible securities. Diluted earnings per share
includes the dilutive effects of all common stock equivalents.
The following table has set forth the computation of basic and diluted
income per share (in thousands, except per share amounts):
Three Months Nine Months
Ended April 30, Ended April 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Basic:
Net income (loss) $ 3,310 $ (7,075) $ 7,326 $ (3,866)
-------- -------- -------- --------
Weighted average shares 9,497 9,181 9,379 8,247
-------- -------- -------- --------
Basic income (loss) per share $ 0.35 $ (0.77) $ 0.78 $ (0.47)
======== ======== ======== ========
Diluted:
Net income (loss) $ 3,310 $ (7,075) $ 7,326 $ (3,866)
Effect of majority-owned
subsidiaries' dilutive securities -- -- (71) --
-------- -------- -------- --------
Income (loss) available to Common
Shareholders, as adjusted $ 3,310 $ (7,075) $ 7,255 $ (3,866)
======== ======== ======== ========
Weighted average shares 9,497 9,181 9,379 8,247
Effect of dilutive securities:
Stock options 301 -- 318 --
Convertible preferred stock
of subsidiaries 32 -- 23 --
-------- -------- -------- --------
Dilutive potential common shares 333 -- 341 --
-------- -------- -------- --------
Weighted average shares, as adjusted 9,830 9,181 9,720 8,247
-------- -------- -------- --------
Diluted income (loss) per share $ 0.34 $ (0.77) $ 0.75 $ (0.47)
======== ======== ======== ========
PART I - continued
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL POSITION
Business Segments
The Company's three business segments are as follows:
* Power Conversion Products: Includes design, development
and manufacture of electrical components, systems and
subsystems, including products that capitalize on pulsed
power such as ultracapacitors, microbial purification
systems, high voltage capacitors and other electrical
components, power distribution and conditioning systems
and electromagnetic interference filter capacitors.
* Industrial Computers and Subsystems: Includes design and
manufacture of standard, custom and semi-custom
industrial computer modules, platforms and fully
integrated systems primarily for OEMs.
* Space and Technology Products and Programs: Includes
research and development programs in pulsed power,
pulsed power systems design and construction, design and
assembly of high reliability radiation-hardened electronic
components and consulting services for commercial and
Government space systems, computer-based analytic
services and software, and weapons effects simulation,
primarily for the U.S. Government Department of Defense
("DOD").
Over the last several periods, the Company has re-directed some of its
space effects modeling and analysis services, with expertise developed over a
25-year period, from government to commercial programs. The success of these
activities and the size and growth potential of the commercial space market
have led Maxwell to focus on this business area. To complement its consulting
services, during the second quarter of this fiscal year the Company acquired
Space Electronics Incorporated, a San Diego based supplier of specially treated
electronic components for use in space environments, primarily by commercial
satellite manufacturers. The combination of Maxwell's world-class space
effects consulting and software with the newly acquired capabilities of SEi
provide the Company with a substantial value-added foothold in the commercial
space market. To reflect these capabilities, the Company last quarter re-named
and re-defined its Technology Programs and Systems business segment as the
Space and Technology Products and Programs segment.
In the first and second quarters of fiscal 1998, the Company had a fourth
business segment, Information Products and Services, which was primarily
focused on commercial software and Internet related services. During the
third quarter of last fiscal year, the Company reorganized the operations
within the Information Products and Services segment, including a refocusing
of certain operations along the lines of other of the Company's existing
business segments and the discontinuation of certain businesses. The Company
no longer operates or reports in the Information Products and Services segment,
and therefore prior year nine-month results include sales and cost of sales
for such segment, while current year results do not.
Results of operations for both the first three months of fiscal year 1999
and the three and nine month periods ended April 30, 1998 have been restated to
include the results of acquisitions completed in this year's second quarter and
accounted for by the pooling-of-interests accounting method. One of the
acquisitions is Space Electronics Incorporated, a San Diego based company that
provides electronics parts which have been hardened to withstand the effects of
radiation in space to customers in the satellite arena, primarily on a
commercial basis. The other acquired company is a small manufacturer of
ceramic capacitors located adjacent to the Company's ceramic filter/capacitor
business in Carson City, Nevada. While the operations of the acquired
companies are not material to Maxwell, the discussion of results of
operations below is based on the restated results.
Results of Operations
The following table sets forth selected operating data for
the Company, expressed as a percentage of sales, for the three and
nine month periods ended April 30, 1999 and 1998.
Three Months Nine Months
Ended April 30, Ended April 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 64.8 67.8 65.3 65.8
-------- -------- -------- --------
Gross profit 35.2 32.2 34.7 34.2
Operating expenses:
Selling, general and administrative expenses 20.9 20.4 21.1 22.8
Research and development expenses 6.6 7.9 6.2 6.9
Acquired in-process R&D and other
acquisition related charges -- 25.2 1.3 8.9
-------- -------- -------- --------
Total operating expenses 27.5 53.5 28.6 38.6
-------- -------- -------- --------
Operating income (loss) 7.7 (21.3) 6.1 (4.4)
Interest expense 0.1 0.2 0.2 0.2
Interest income and other - net (0.1) (1.7) (0.4) (1.0)
-------- -------- -------- --------
Income (loss) before income taxes and
minority interest 7.7 (19.8) 6.3 (3.6)
Income tax expense 0.1 0.2 0.2 0.3
Minority interest in net income (loss)
of subsidiaries 0.5 (0.1) 0.5 0.1
-------- -------- -------- --------
Net income (loss) 7.1% (19.9)% 5.6% (3.8)%
======== ======== ======== ========
The following table sets forth the Company's business segment sales, gross
profit and gross profit as a percentage of business segment sales for the three
and nine-month periods ended April 30, 1999 and 1998. As mentioned above, the
Company no longer maintains an Information Products and Services business
segment. Therefore, reporting for such segment is for prior periods only.
Three Months Nine Months
Ended April 30, Ended April 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Power Conversion Products:
Sales $ 11,628 $ 10,428 $ 37,824 $ 29,868
Gross profit 3,198 4,090 13,280 11,977
Gross profit as a percentage of sales 27.5% 39.2% 35.1% 40.1%
Industrial Computers and Subsystems
Sales $ 15,128 $ 11,342 $ 37,409 $ 30,751
Gross profit 4,591 3,783 11,533 11,032
Gross profit as a percentage of sales 30.3% 33.4% 30.8% 35.9%
Space and Technology Products and Programs
Sales $ 20,063 $ 13,749 $ 54,606 $ 35,308
Gross profit 8,683 3,578 20,239 9,042
Gross profit as a percentage of sales 43.3% 26.0% 37.1% 25.6%
Information Products and Services
Sales $ -- $ -- $ -- $ 4,666
Gross profit -- -- -- 2,306
Gross profit as a percentage of sales -- -- -- 49.4%
Consolidated
Sales $ 46,819 $ 35,519 $129,839 $100,593
Gross profit 16,472 11,451 45,052 34,357
Gross profit as a percentage of sales 35.2% 32.2% 34.7% 34.2%
Sales
Sales for the three months ended April 30, 1999 were $46.8 million, a
31.8% increase over the $35.5 million for the same period last year. Sales
for the nine months ended April 30, 1999 were $129.8 million, a 29.1% increase
over the $100.6 million in last year's first nine months. For both the three
and nine month periods, increases in sales over the prior year occurred in all
three of the Company's on-going business segments, with the largest amount of
increase in the Space and Technology Products and Programs business segment.
These results are more fully described in the business segment discussion
below.
Power Conversion Products. In the quarter ended April 30, 1999, Power
Conversion Products sales increased $1.2 million, or 11.5%, to $11.6 million
from $10.4 million in the third quarter of last fiscal year. This increase was
primarily attributable to the ramp-up in sales of power protection and delivery
systems, a business area acquired by the Company in last year's third quarter.
Sales of traditional high-voltage capacitors increased over the prior year,
primarily due to a large multi-year order under a National Laboratory program
which is expected to be completed in mid-fiscal year 2000. Offsetting this
increase was the completion in the first quarter of fiscal 1999 of an 18-month
contract for switches for the same National Laboratory program. This contract
was in full production in last year's third quarter.
For the nine months ended April 30, 1999, Power Conversion products sales
increased $7.9 million, or 26.6%, to $37.8 million from $29.9 million for the
same period last year. The increased power protection and delivery systems
sales are the largest factor in the increase in year-to-date revenues in this
segment, although increased sales from the PurePulse purification business area
were also significant in the nine-month revenue gains. The year-to-date
PurePulse sales include certain license agreements with key partners in several
strategic business areas. Several of the Company's other products, including
electromagnetic interference filter capacitors, traditional capacitors and
glass-to-metal seals, also contributed to the overall nine-month sales increase
in this business segment.
Industrial Computers and Subsystems. In the quarter ended April 30, 1999,
Industrial Computers and Subsystems sales increased $3.8 million, or 33.4%, to
$15.1 million from $11.3 million in the third quarter of last fiscal year.
U.S. sales in this business segment are made principally to OEM customers and
are primarily derived from the shipment of industrial computers and subsystems
that are "designed-in" to the OEM's products. In the third quarter of fiscal
1998, Maxwell acquired a company in the United Kingdom that focuses on lower
priced standard products, with an emphasis on catalog sales. With the
addition of operations in both France and Germany this year which also focus
on lower priced standard products, the Company continues to expand both its
presence in Europe and its standard product customer base. The increase in
sales for the quarter is attributable both to the increase in European sales,
as well as new design wins for the customized OEM products, including firm
orders under two programs approaching a total of $30 million. Partially
offsetting these increases was the curtailment at the end of last fiscal year
of the Company's program with Digital Equipment Corporation due to its
acquisition by Compaq Corporation. Even with the increase in the sale of
standard products, sales under large OEM programs remain a critical element
of this business, and the Company expects to expand its sales under OEM
programs in the European market over time. With additional orders received
under the programs referred to above and other firm orders received during
the quarter, I-Bus maintained a record backlog level for the second
consecutive quarter.
Sales for the nine months ended April 30, 1999 increased $6.7 million, or
21.7%, to $37.4 million from $30.7 million for the prior year's first nine
months. For the nine-month period, the sales increase is attributable to the
increased presence and sales in Europe.
Space and Technology Products and Programs. In the quarter ended April
30, 1999, sales in the Space and Technology Products and Programs segment
increased $6.3 million, or 45.9%, to $20.1 million from $13.7 million in the
third quarter of last fiscal year. The Company has both enhanced and re-
profiled this business segment with its acquisitions of the primarily
Government-funded pulsed power research and simulation business of Physics
International in April 1998, and the primarily commercial radiation-tolerant
satellite computer components business of Space Electronics Incorporated in
January 1999. In addition, this business segment includes the Company's
Government contracting software product line that, prior to a reorganization
last year, was included in a separate business segment. These operations
accounted for substantially all of the increase in revenue in this segment
compared to last year. The software business recorded significantly increased
sales of its new web-based time card and expense reporting products in this
year's third quarter, including the sale of a license to a large defense-
oriented company and license fees under a source-code license directed to the
professional services market not currently served by the Company. Offsetting
these increases were the wind-down or completion of several Government programs
for which replacement or follow-on contracts may not be available or awarded to
the Company. Government contracts are subject to such decreases, as well as to
increases and to periodic Government funding provisions. The level of future
DOD expenditures in the Company's research and development areas and the
related impact on funding for the Company's contracts are therefore not
predictable, and previously reported results are not necessarily indicative
of those to be expected in the future.
Sales for the nine months ended April 30, 1999 increased $19.3 million, or
54.7%, to $54.6 million from $35.3 in the prior year. For the nine months, the
increase was primarily attributable to the same factors as described above for
the third quarter.
Gross Profit
In the quarter ended April 30, 1999, the Company's gross profit was $16.5
million, or 35.2% of sales, compared to $11.5 million, or 32.2% of sales, in
the third quarter of last fiscal year. For the current year's nine-month
period, gross profit was $45.1 million, or 34.7% of sales, compared to $34.4
million, or 34.2% of sales in the first nine months of the prior year. Gross
profit is discussed by business segment in the sections that follow.
Power Conversion Products. In the quarter ended April 30, 1999, Power
Conversion Products gross profit decreased by $0.9 million, or 21.8%, to $3.2
million from $4.1 million in the third quarter of last fiscal year. In the
nine months ended April 30, 1999, Power Conversion Products gross profit
increased $1.3 million, or 10.9%, to $13.3 million from $12.0 million for the
same period last year. As a percentage of sales, gross profit declined to
27.5% in this year's third quarter from 39.2% in the third quarter of the
prior year. Gross profit as a percentage of sales for the nine-month period
decreased to 35.1% from 40.1% in the prior year. The decrease in gross profit
as a percentage of sales for both the three and nine month periods reflects a
lower margin mix of products and services, including decreased ultracapacitor
development funding and technology license fees. In addition, as the Company
introduces its PowerCache ultracapacitor products, it is pursuing aggressive
pricing to gain market penetration and making required infrastructure and
other investments. As product sales ramp up, on-going gross margins will
likely continue to be impacted until the Company reaches full production
volumes. Further, the completion of a high-margin long-term contract for
switch components for a National Laboratory pulsed power system contributed
to the gross margin decline.
Industrial Computers and Subsystems. In the quarter ended April 30, 1999,
Industrial Computers and Subsystems gross profit increased $0.8 million, or
21.4%, to $4.6 million from $3.8 million in the third quarter of last fiscal
year. For the year-to-date, gross profit increased $0.5 million, or 4.5%, to
$11.5 million from $11.0 million one year ago. As a percentage of sales, gross
profit declined to 30.3% in this year's third quarter from 33.4% in the third
quarter of the prior year. For the nine months ended April 30, 1999, gross
profit as percentage of sales was 30.8%, down from 35.9% for the same period
last year. The decrease in gross profit as a percentage of sales as compared
to the prior year three and nine-month periods is primarily due to a sales mix
which in the prior fiscal year included certain higher margin products for an
OEM that were near the end of their product and sales life cycle, with no such
sales in the current year. In addition, the Company now has lower priced
standard products, particularly in Europe, as well as contracts which include
full systems with greater third party content that have reduced gross profit
margins. With these factors, along with the increasing competition for OEM
design-in programs and increasing foreign competition, the Company does not
expect future gross profit margins as a percent of sales to be as high as those
experienced in last year's first nine months.
Space and Technology Products and Programs. In the quarter ended April 30,
1999, Space and Technology Products and Programs gross profit increased $5.1
million, or 142.7%, to $8.7 million from $3.6 million in the third quarter of
last fiscal year. In the nine months ended April 30, 1999, Space and
Technology Products and Systems gross profit increased $11.2 million, or
123.8%, to $20.2 million from $9.0 million for the same period last year. As
a percentage of sales, gross profit increased to 43.3% in this year's third
quarter from 26.0% in the third quarter of the prior year. Gross profit as a
percentage of sales for the nine-month period increased to 37.1% from 25.6% in
the prior year. The primary factors in the increase in gross profit, both as a
dollar amount and as a percentage of sales, in the three and nine month periods
ended April 30, 1999 as compared to the same periods last year are the higher
margin software sales now included in this business segment, including the
large defense-oriented company license and the source code license fees
received in the third quarter of this fiscal year, as previously described,
and the inclusion of SEi, which had improved gross margins in this year's third
quarter as compared to last year's comparable three month period. Future gross
profit margins may not be maintained at the level reached in this year's third
quarter in light of the significant contribution of software license sales in
the quarter. However, the commercial space business of SEi and the software
product lines added to this business segment have the potential, if their
respective growth and business objectives are achieved, to produce higher
gross profit margins as a percent of sales than this segment's traditional
Government-focused programs.
Selling, General and Administrative Expenses
In the quarter ended April 30, 1999, the Company's selling, general and
administrative expenses increased $2.6 million, or 35.5%, to $9.8 million from
$7.2 million in the third quarter of last fiscal year. For the nine months
ended April 30, 1999, selling, general and administrative expenses increased
$4.6 million, or 19.8%, to $27.5 million from $22.9 million in the prior year.
As a percentage of total sales, selling, general and administrative expenses
increased slightly to 20.9% in this year's third quarter from 20.4% in the
third quarter of the prior year. For the nine month period, selling, general
and administrative expenses as a percentage of sales decreased to 21.1% from
22.8% in the prior year. The increase in the dollar amount of these expenses
is primarily in support of the Company's growth, including businesses
acquired in fiscal 1998, and expansion in Europe which is primarily related
to the industrial computer business area. The decrease in selling, general
and administrative expenses as a percentage of sales for the comparable year-
to-date periods reflects a decrease in expenses attributable to the Company's
incentive plans in the current fiscal year as compared to last year, as well as
the absorption of selling, general and administrative costs over the expanded
level of sales.
Research and Development Expenses
The Company's research and development expenses reflect only internally
funded research and development programs. Costs associated with United States
Government and other customer funded research and development contracts are
included in cost of sales. The level of internally funded research and
development expenses reflects the Company's ability to obtain customer funding
to support a significant portion of its research and product development
activities. Internally funded research and development expenses were $3.1
million and $2.8 million for the three months ended April 30, 1999 and 1998,
respectively. For the nine months, research and development expenses were $8.1
million and $7.0 million in 1999 and 1998, respectively. The increase in these
expenses for both the three and nine month periods as compared to the same
periods last year is primarily due to development efforts on new products at
SEi in order to continue the growth of the commercial satellite market for the
Company.
Acquisition and Special Charges
Acquisition and related charges during the nine months ended April 30,
1999 totaled $1.6 million, and consisted primarily of direct acquisition costs
for pooling-of-interests combinations completed during the second quarter. As
a result of the acquisition of new businesses and the reorganization of the
Information Products and Services business segment in last year's third
quarter, the Company recorded charges totaling $8.9 million during the three
months ended April 30, 1998. Approximately $6.3 million of that charge was
acquisition related, and approximately $2.6 million related to the Information
Products and Services business segment.
Interest Income and Other-net and Income Tax Expense
Interest income and other-net decreased to $86,000 for the three months
ended April 30, 1999 from $598,000 in the third quarter of the prior year. For
the nine months ended April 30, 1999, interest income and other-net decreased
to $585,000 from $1,099,000 in the prior year's nine-month period. These
decreases are primarily due to a reduction in interest earned on cash
investments in the current year. At the beginning of last year's second
quarter, the Company completed its follow-on offering of common stock, and on
average had a greater amount of cash available for investment in fiscal 1998
than in fiscal 1999 due to the use of cash in the intervening months. The
Company has net operating loss carryforwards which offset the majority of the
Company's provision for U.S. income taxes in the three and nine month periods
of both the current and prior fiscal years. Income tax expense in the first
nine months of this fiscal year is primarily due to foreign taxes on the
profits of the Company's European operations.
Liquidity and Capital Resources
Net cash used in operations in the current year's first nine months was
$8.9 million, of which about $5.0 million occurred in the third quarter. The
use of cash in the current quarter was attributable to capital expenditures
and acquisition-related costs, as well as increases in receivables and
inventory reflecting the higher quarterly sales volume. The Company's capital
expenditures during the first nine months amounted to $5.7 million, and
primarily consisted of production and other capital assets in the Power
Conversion Products business segment, and additions at the newly acquired SEi
operation. These outlays are part of the Company's budgeted capital
expenditures for fiscal 1999 totaling approximately $9 million. The Company
may address future high volume or other manufacturing requirements as the year
progresses. Alternatively, the Company may consider leasing facilities or
manufacturing equipment or both or may satisfy additional manufacturing
requirements through outsourcing or under licensing arrangements with third
parties. If the Company decides to internally finance construction of such
facilities, a significant amount of capital would be required.
Maxwell has an unsecured bank line of credit of $20.0 million, under which
the Company has borrowings outstanding of approximately $2.5 million as of
April 30, 1999.
The Company believes that funds on-hand, together with cash generated from
operations and funds available under its bank line of credit, will be
sufficient to finance its operations and budgeted capital expenditures through
fiscal 1999. In addition to addressing manufacturing requirements, the Company
may also from time to time consider acquisitions of complementary businesses,
products or technologies, which may require additional funding. Sources of
additional funding for these purposes could include one or more of the
following: cash, cash equivalents and short-term investments on hand; cash
flow from operations; borrowings under the existing bank line of credit;
investments by strategic partners and additional debt or equity financings.
There can be no assurance that the Company will be able to obtain additional
sources of financing on favorable terms, if at all, at such time or times as
the Company may require such capital.
Software Compatibility with Year 2000 Date Processing
The Year 2000 issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Computer systems
utilizing such programs may be unable to interpret dates beyond the year 1999,
which could cause a system failure or other computer errors, leading to
disruptions in operations. This issue is often referred to as "Y2K" or a
"Y2K" issue or problem. In fiscal 1998, the Company developed a three-phase
program for Y2K information systems compliance. Phase 1 is to identify and
solve Y2K issues in the Company's significant information systems
infrastructure and enterprise business applications, including
telecommunications and networking systems as well as accounting and
manufacturing software. Phase 2 is to identify and plan for Y2K issues that
are specific to the Company's business units, including local software,
product matters, facilities related systems and vendor and key partner
concerns. Phase 3 is the final testing of each major area of exposure to
ensure compliance, and the development of contingency plans for unsolved Y2K
deficiencies, such as key vendors failing to adequately address their Y2K
problems. The Company has identified four major areas determined to be
critical for successful Y2K compliance: (1) networking and telecommunications,
(2) financial and manufacturing informational systems applications, (3)
products and (4) third-party relationships.
In Phase 1 of the program, the Company has completed its review of
company-wide and large systems, several of which have been identified as
being Y2K compliant due to their recent implementation or upgrade. Such
installations were unrelated to the Y2K concern, but rather were needed as
part of the ordinary course of business. For certain accounting and
manufacturing systems, upgrades were needed; all required upgrades are
available from the third party suppliers. Some of these upgrades have been
installed, and the remaining upgrades are either in process or planned.
Implementation of all the updated systems is expected by the middle of the
calendar year. Identified upgrades of the system infrastructure, such as
telephone and networking equipment, are largely completed. Final testing and
documentation under Phase 1 is currently anticipated in the summer 1999 time
frame. Under Phase 2, the Company has nearly completed identifying and
evaluating business unit exposures. In the third-party area, the Company has
contacted its significant third parties, primarily key vendors and customers,
regarding their Y2K readiness. Responses are currently being evaluated. As
to products, initial findings indicate that most Company products will not be
impacted by the Y2K problem and most of those that are impacted appear to be
Y2K compliant. For several of those products that are not Y2K compliant, the
Company has made upgrades available via the Company's Internet web site. For
other products, the Company is still evaluating its Y2K compliance plans. The
testing and contingency plan development under Phase 3 will begin in mid-1999,
and is expected to be completed in the September to October time frame.
The Company believes it will cost approximately $200,000 to complete the
replacement of network, telecommunications, local software and facilities
infrastructure requiring Y2K upgrades, and to complete the documentation of its
Y2K readiness and compliance efforts. The Company is still evaluating what
costs will be incurred in connection with the third party area, but at this
time does not believe that such costs will be material.
The anticipated costs relating to resolving Y2K issues are based on
estimates which were derived utilizing assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and, as
additional Y2K remediation activities are developed and planned, that actual
results will not differ materially from those in the current estimate.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the completion of the Company's Y2K investigations, the ability to locate and
correct all relevant computer codes, and similar uncertainties. In addition,
there can be no assurance that Y2K compliance problems will not be revealed in
the future which could have a material adverse affect on the Company's
business, financial condition and results of operations. Many of the Company's
customers and suppliers may be affected by Y2K issues that may require them to
expend significant resources to modify or replace their existing systems, which
may result in those customers having reduced funds to purchase the Company's
products or those suppliers experiencing difficulties in producing or shipping
key components to the Company on a timely basis or at all. Such third party
issues could have a material adverse affect on the Company's business,
financial condition and results of operations. This discussion of the
Company's Y2K status constitutes a "Year 2000 Readiness Disclosure" as that
item is defined in the Year 2000 Information and Readiness Disclosure Act,
and also contains forward-looking statements (see "Forward-Looking Statements"
below).
Forward-Looking Statements
To the extent that the above discussion goes beyond historical information
and indicates results or developments which the Company plans or expects to
achieve, these forward-looking statements are identified by the use of terms
such as "expected," "anticipates," "believes," "plans" and the like. Readers
are cautioned that such future results are uncertain and could be affected by
a variety of factors that could cause actual results to differ from those
expected, and such differences could be material. The Company undertakes no
obligation to publicly release the result of any revisions to these forward-
looking statements that may be made to reflect any future events or
circumstances. Readers are referred to item 1 of the Company's Annual Report
on Form 10-K for fiscal 1998 for a discussion of certain of those factors.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
27 - Financial Data Schedule
(b) Reports on Form 8-K
-------------------
On February 12, 1999, the Company filed a report on
Form 8-K to report that the Company completed its
acquisition of all the outstanding capital stock of
Space Electronics Incorporated ("SEi") on January
29, 1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
MAXWELL TECHNOLOGIES, INC.
June 14, 1999 /s/ Thomas L. Horgan
- --------------------------------- --------------------------
Date Thomas L Horgan, Chief Executive
Officer and Authorized Officer
June 14, 1999 /s/ William A. Long
- --------------------------------- --------------------------
Date William A. Long, Corporate Manager
of Financial Reporting and Chief
Accounting Officer