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 June 30, 1995 Commission File No. 0-18106
EXIDE ELECTRONICS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2231834
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
8521 Six Forks Road, Raleigh, North Carolina 27615
(Address of principal executive offices and zip code)
(919) 872-3020
(Registrant's telephone number, including area code)
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 July 31, 1995, 8,373,165 shares of the Registrant's $0.01 par value common
stock were outstanding.
EXIDE ELECTRONICS GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------- ---------------------
1995 1994 1995 1994
---- ---- ---- ----
Revenues
Products $ 68,614 $ 68,379 $ 192,919 $ 182,911
Services 30,232 23,385 89,261 76,541
------ ------ ------ ------
Total revenues 98,846 91,764 282,180 259,452
------ ------ ------- -------
Cost of revenues
Products 50,715 50,643 145,754 133,800
Services 20,713 16,317 61,421 53,248
------ ------ ------ ------
Total cost of revenues 71,428 66,960 207,175 187,048
------ ------ ------- -------
Gross profit 27,418 24,804 75,005 72,404
Selling, general and administrative expense 17,194 15,867 51,269 47,692
Research and development expense 2,397 2,695 7,386 7,582
Litigation expense - - 700 4,997
Merger expense - - 5,500 -
----- ----- ----- -----
Income from operations 7,827 6,242 10,150 12,133
Interest expense 1,373 1,303 3,915 3,818
Interest income (131) (122) (359) (363)
Other (income) expense 170 (114) (568) (21)
--- ---- ---- ---
Income before income taxes 6,415 5,175 7,162 8,699
Provision for income taxes 2,322 1,999 3,394 3,114
----- ----- ----- -----
Net income $ 4,093 $ 3,176 $ 3,768 $ 5,585
========= ========= ========= =========
Preferred stock dividends 197 197 592 593
Net income applicable to common shareholders $ 3,896 $ 2,979 $ 3,176 $ 4,992
========= ========= ========= =========
Per Share Amounts
Primary
Net income $ 0.49 $ 0.38 $ 0.40 $ 0.64
========= ========= ========= =========
Weighted average number of common and equivalent
shares outstanding 7,903 7,846 7,845 7,803
===== ===== ===== =====
Fully diluted
Net income $ 0.44 $ 0.35 $ 0.40 $ 0.62
========= ========= ========= =========
Weighted average number of common and equivalent
shares outstanding 9,768 9,389 7,986 8,989
===== ===== ===== =====
<FN>
The accompanying notes are an integral part of these financial statements,
which have been restated to reflect the merger with International Power Machines
on a pooling-of-interests basis.
</FN>
EXIDE ELECTRONICS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(unaudited; dollars in thousands)
June 30, September 30, June 30,
1995 1994 1994
---- ---- ----
Assets
Current assets
Cash and cash equivalents $ 2,019 $ 5,886 $ 3,277
Accounts receivable 94,072 105,712 86,596
Inventories 74,611 55,529 60,186
Other current assets 12,826 12,081 11,380
------ ------ ------
Total current assets 183,528 179,208 161,439
------- ------- -------
Property, plant, and equipment
Land, buildings, and leasehold improvements 8,960 8,809 8,851
Machinery and equipment 59,958 51,653 48,797
------ ------ ------
68,918 60,462 57,648
Accumulated depreciation 36,136 32,250 30,815
------ ------ ------
32,782 28,212 26,833
Other assets 17,043 17,256 12,511
------ ------ ------
$ 233,353 $ 224,676 $ 200,783
========= ========= =========
Liabilities, Redeemable Preferred Stock, & Common Shareholders' Equity
Current liabilities
Short-term debt $ 5,649 $ 5,802 $ 3,277
Accounts payable 48,024 44,958 38,047
Deferred revenues 15,242 16,577 13,868
Other accrued liabilities 19,104 18,534 17,793
------ ------ ------
Total current liabilities 88,019 85,871 72,985
------ ------ ------
Long-term debt 47,300 43,400 36,900
------ ------ ------
Convertible subordinated notes 15,000 15,000 15,000
------ ------ ------
Deferred liabilities 2,926 2,943 3,026
----- ----- -----
Redeemable preferred stock 10,000 10,000 10,000
------ ------ ------
Common shareholders' equity
Common stock, $0.01 par value, 30,000,000
shares authorized; shares issued - 7,776,692
at June 30, 1995, 7,735,165 at September 30,
1994, and 7,698,050 at June 30, 1994 78 77 77
Additional paid-in capital 48,274 48,223 47,198
Retained earnings 28,818 26,870 23,576
Cumulative translation adjustments (1,496) (1,757) (2,105)
------ ------ ------
75,674 73,413 68,746
Less: Notes receivable from shareholders (5,444) (5,951) (5,874)
Treasury stock (122) - -
---- ---- ----
70,108 67,462 62,872
------ ------ ------
$ 233,353 $ 224,676 $ 200,783
========= ========= =========
<FN>
The accompanying notes are an integral part of these financial statements, which
have been restated to reflect the merger with International Power Machines on a
pooling-of-interests basis.
</FN>
EXIDE ELECTRONICS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited; in thousands)
Nine Months Ended
June 30,
-------------------
1995 1994
---- ----
Cash flows from operating activities
Net income $ 3,768 $ 5,585
Adjustment to conform fiscal year of IPM 49
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation expense 4,684 4,494
Amortization expense 1,896 1,511
Litigation and merger provisions 2,200 3,750
Decrease in accounts receivable 11,614 10,646
(Increase) in inventories (21,829) (8,571)
(Increase) in other current assets (218) (1,712)
Increase (decrease) in accounts payable 3,066 (2,314)
(Decrease) in other current liabilities (1,266) (4,151)
Other, net 58 (1,977)
---- ------
Net cash provided by operating activities 3,973 7,310
----- -----
Cash flows from investing activities
Acquisitions of property, plant, and equipment (9,428) (5,657)
Other, net (503) (1,145)
---- ------
Net cash used in investing activities (9,931) (6,802)
------ ------
Cash flows from financing activities
Proceeds from bank credit facilities 92,800 64,704
Payments of bank credit facilities (85,200) (65,297)
Increase in short-term debt 534 -
Payment on industrial revenue bonds (4,600) (3,500)
Decrease in funds held for construction - 2,600
Issuances of common stock 1,159 974
Purchases of treasury stock (625) -
Preferred stock dividends of Exide Electronics (789) (839)
Preferred stock dividends of IPM (1,232) (400)
Payments of notes receivable from shareholders 112 276
Other, net (68) (263)
---- ----
Net cash provided by (used in) financing activities 2,091 (1,745)
----- ------
Net (decrease) in cash and cash equivalents (3,867) (1,237)
Cash and cash equivalents, beginning of period 5,886 4,514
----- -----
Cash and cash equivalents, end of period $ 2,019 $ 3,277
======== ========
Supplemental cash flow disclosures
Interest paid, net of amounts capitalized $ 3,758 $ 4,278
Income taxes paid $ 1,855 $ 8,525
<FN>
The accompanying notes are an integral part of these financial statements, which
have been restated to reflect the merger with International Power Machines on a
pooling-of-interests basis.
</FN>
EXIDE ELECTRONICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and the rules and
regulations of the Securities and Exchange Commission for interim financial
statements. Certain information and footnote disclosures required for complete
financial statements have been condensed or omitted. These financial statements
should be read in conjunction with the financial statements presented in the
company's 1994 Annual Report to Shareholders.
In the opinion of management, the accompanying consolidated financial statements
include all adjustments (which consist of normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows as of and for the periods ended June 30, 1995 and 1994. The results
of operations for the quarter and nine months ended June 30, 1995 are not
necessarily indicative of the results to be expected for the full year.
Note 2 - Merger with IPM
On February 8, 1995, the company completed the merger of International Power
Machines Corporation (IPM) with and into a newly-formed subsidiary of the
company. IPM develops, manufactures, sells, and services uninterruptible power
systems, and is very similar to Exide Electronics in terms of products and
services provided and its channels of distribution. The company exchanged
approximately 1,510,000 newly registered shares of Exide Electronics' common
stock for all of the outstanding shares of IPM's common stock, Series A
preferred stock, and Series B convertible preferred stock. The merger was
structured as a tax-free exchange and was accounted for as a pooling-of-
interests. Accordingly, the accompanying unaudited consolidated financial
statements have been restated to include the accounts and results of operations
of IPM for all periods presented.
Historically, IPM prepared its financial statements on a December 31 fiscal year
end. As of September 30, 1994, IPM's fiscal year was changed to September 30 to
conform to Exide Electronics' September 30 year end. In accordance with the
accounting rules prescribed or permitted for pooling-of-interests, the restated
statement of operations for the fiscal year ended September 30, 1993 (which is
not presented herein) combines the historical consolidated results of
operations of Exide Electronics for the year then ended with IPM's historical
consolidated results of operations for the calendar year ended December 31,
1993. The restated balance sheet as of September 30, 1993 combines Exide
Electronics' historical consolidated balance sheet as of September 30, 1993 with
IPM's historical consolidated balance sheet as of December 31, 1993. Therefore,
an adjustment to conform IPM's fiscal year end is shown in the accompanying
statement of cash flows for the nine months ended June 30, 1994 to account for
IPM's change in cash for the three months ended December 31, 1993.
Combined and separate results of Exide Electronics and IPM during the periods
preceding the merger were as follows (in thousands):
Exide
Electronics IPM Adjustments Combined
----------- ---------- ----------- ----------
Three months ended
December 31, 1994
Revenues $ 81,264 $ 10,802 $ 92,066
Net income $ 1,746 $ 537 $ (35) $ 2,248
Three months ended
June 30, 1994
Revenues $ 82,835 $ 8,929 $ 91,764
Net income $ 2,952 $ 254 $ (30) $ 3,176
Nine months ended
June 30, 1994
Revenues $ 232,736 $ 26,716 $ 259,452
Net income $ 4,514 $ 1,163 $ (92) $ 5,585
The combined financial results presented above and the accompanying consolidated
financial statements include adjustments to conform the accounting methodology
of IPM for reserving for excess and obsolete service inventories to the
accounting methodology used by Exide Electronics.
In connection with the merger, the company recorded a nonrecurring pretax charge
of $5.5 million in the quarter ended March 31, 1995. This charge included
approximately $3 million for legal, accounting, financial advisory, and other
costs. The company also expensed approximately $2.5 million for the estimated
costs of closing a duplicate operating facility and discontinuing certain
duplicate product lines manufactured at that facility.
Note 3 - Inventories
Inventories, which include materials, labor, and manufacturing overhead, are
stated at the lower of cost or market, and consist of the following (in
thousands):
June 30, Sept. 30, June 30,
1995 1994 1994
---- ---- ----
Raw materials and supplies $26,654 $20,149 $21,597
Work in process 7,840 7,288 8,144
Finished goods 25,976 14,805 19,145
Service parts 14,141 13,287 11,300
------ ------ ------
$74,611 $55,529 $60,186
======= ======= =======
Note 4 - Redeemable Preferred Stock
On July 1, 1995, all outstanding shares of Series D and Series E Convertible
Preferred Stock were converted into 595,273 shares of the company's common stock
at conversion prices of $13.08 and $23.86 per share, respectively.
Note 5 - Litigation
In January 1989, a case was filed by a former manufacturer's representative of
the company, alleging that the company failed to pay commissions owed to him on
certain sales. In April 1990, a jury awarded the plaintiff damages of
approximately $14.9 million. The company appealed the decision, and in September
1992, the appellate court reversed the judgment against the company. In response
to various motions filed by the plaintiff, a new trial was granted, and in March
1994, the jury in the new trial awarded damages of $3.75 million to the
plaintiff. While the company continued to believe that it should have no
liability in this matter and announced its intention to appeal, it recorded a
one-time charge in the second quarter of fiscal 1994 of $4,997,000 ($2,936,000
after tax) for the jury verdict and for the costs of the trial.
On July 20, 1994, the company announced that this litigation had been settled.
Following agreement among the parties to settle, the District Court vacated the
jury award of $3.75 million previously entered and determined that the vacated
judgment cannot be used against the company in the future. To avoid further
litigation including post-trial motions and appeals, the company settled the
case by making payments to the plaintiff and his attorneys. The parties
thereafter stipulated that the entire action was dismissed with prejudice. Since
the total value of the settlement payments was less than the one-time charge for
the jury verdict recorded by the company in the second quarter of fiscal 1994,
no further charges were necessary in this matter. By agreement with the
plaintiff, the terms of the confidential settlement were not disclosed.
In May 1990, Exide Electronics was served with a complaint in the Delaware Court
of Chancery and in May 1991, a related case was filed in Federal Court in New
York. These complaints alleged, among other things, that Exide Electronics'
description of the case involving the manufacturer's representative in its
prospectus dated December 21, 1989 was false and misleading. In April 1995,
Exide Electronics announced that it had settled both the Delaware and New York
suits. The Delaware action had been dismissed once for failure to state a claim,
but was reinstated following an appeal and was in the discovery process prior to
the settlement. The company recorded a pretax charge of $700,000 for the
settlement of the two related lawsuits in the quarter ended March 31, 1995. The
settlement agreements are subject to court approval, after notice to affected
shareholders. While the company believed that neither suit had merit, it decided
to settle as the suits were taking valuable corporate time and attention and
would have involved significant legal costs to pursue further.
Exide Electronics Group, Inc.
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Overview
Exide Electronics (the company) provides strategic power management solutions to
a broad range of businesses and institutions worldwide. The company's products
are used for financial, medical, industrial, telecommunications, military, and
aerospace applications -- wherever continuous power is essential to daily
operations. Several factors had a significant impact on the company's results of
operations during the first nine months of fiscal 1995 compared to the first
nine months of fiscal 1994. These factors include acquiring International Power
Machines Corporation (IPM), accounting for the acquisition as a
pooling-of-interests, and expensing certain costs associated with the
acquisition; the settlement of litigation; the continued success of the
company's Powerware (R) Prestige family of products, particularly in
international markets; the decline of Federal government product sales as the
company completes shipments under its program with the Federal Aviation
Administration (FAA); and the overall strong growth in international markets.
The impact of these and other factors on fiscal 1994 is discussed in more depth
in "Management's Discussion and Analysis of Results of Operations and Financial
Condition" presented in the company's 1994 Annual Report to Shareholders.
During the second quarter of fiscal 1995, the company completed its acquisition
of IPM, a manufacturer of UPS products headquartered in Dallas, Texas. IPM is
very similar to Exide Electronics in terms of products and services provided and
its channels of distribution. In accordance with the merger agreement, the
company acquired all of the capital stock of IPM for approximately 1,510,000
newly registered shares of the company's common stock. The acquisition was
accounted for as a pooling-of-interests. Accordingly, the financial statements
and related information for all periods presented have been restated to reflect
the merger with IPM. This merger is discussed more fully in Note 2 of the notes
to consolidated financial statements.
The company's product and service offerings and its marketing, manufacturing,
and research and development functions are organized into three business units:
the Small Systems Group (SSG) for all products below 50 kilovolt amperes (kVA);
the Large Systems Group (LSG) for products of 50 kVA and above; and the
Worldwide Services Group (WSG) for all services provided by the company. (A
kilovolt ampere is a commonly-used unit of measure for electricity supplied
using alternating current.)
The following table summarizes the contribution to total revenues of the company
by business unit for the quarter and nine months ended June 30, 1995 and 1994
(in millions):
Three Months Nine Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
---- ---- ---- ----
Small Systems Group $37.7 $ 28.1 $104.0 $ 83.4
Large Systems Group 30.9 40.3 88.9 99.6
Worldwide Services Group 30.2 23.4 89.3 76.5
---- ---- ---- ----
$98.8 $ 91.8 $282.2 $259.5
===== ====== ====== ======
Results of Operations
The following table presents, for the periods ended June 30, 1995 and 1994, the
percentage relationship which certain items in the company's unaudited
consolidated statement of operations bear to total revenues:
Three Months Ended Nine Months Ended
June 30, June 30,
1995 1994 1995 1994
---- ---- ---- ----
Revenues
Products 69.4% 74.5% 68.4% 70.5%
Services 30.6 25.5 31.6 29.5
---- ---- ---- ----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues
Products 51.3 55.2 51.6 51.6
Services 21.0 17.8 21.8 20.5
---- ---- ---- ----
Total cost of revenues 72.3 73.0 73.4 72.1
---- ---- ---- ----
Gross profit (1)
Products 26.1 25.9 24.4 26.8
Services 31.5 30.2 31.2 30.4
---- ---- ---- ----
Total gross profit 27.7 27.0 26.6 27.9
Selling, general and administrative 17.4 17.3 18.2 18.4
expense
Research and development expense 2.4 2.9 2.6 2.9
Litigation expense - - 0.2 1.9
Merger expense - - 2.0 -
---- ---- ---- ----
Income from operations 7.9 6.8 3.6 4.7
Interest expense 1.4 1.4 1.4 1.5
Interest income (0.1) (0.1) (0.1) (0.2)
Other (income) expense 0.1 (0.1) (0.2) -
--- ---- ---- ---
Income before income taxes 6.5 5.6 2.5 3.4
Provision for income taxes 2.4 2.1 1.2 1.2
--- --- --- ---
Net income 4.1% 3.5% 1.3% 2.2%
=== === === ===
<FN>
(1) Product and service gross profit margins are expressed as a percentage of
their respective revenues, not as a percentage of total revenues.
</FN>
Three months ended June 30, 1995 versus June 30, 1994
Revenues
For the fiscal quarter ended June 30, 1995, total revenues were $98.8 million,
an increase of approximately 8% compared to the same period in the prior year.
Product sales were flat, although the product mix changed as SSG product sales
increased by approximately $9.6 million or 34% and LSG product sales declined
by approximately $9.4 million or 23%, as compared to the third quarter of
fiscal 1994. WSG revenues increased by approximately $6.8 million or 29% as
compared to the same period last year.
The 34% growth in SSG product revenues resulted from continuing strong sales of
the new Powerware Prestige product line and healthy overall growth in the
entire SSG product line. Sales of the new Powerware Prestige product line were
approximately $11.2 million higher than in the prior year, while products being
phased out with the introduction of these new products declined by about $5.0
million, for a net increase of approximately $6.2 million. Overall SSG product
revenues, excluding sales of Powerware Prestige products and sales of products
being phased out, were 26% higher than in the same period of the prior year. The
increase in revenues occurred primarily in the company's international channels
as a result of the company's expansion efforts in these markets. Total SSG
international sales were up about 48% over the same period in the prior year.
The majority of the increase in international sales was attributable to sales by
the company's affiliates in Europe and Japan, which accounted for over 90% of
the total increase in international revenues over the prior year. Domestic
revenues increased by approximately 16% during the quarter. The number of SSG
units sold during the third quarter of 1995 increased by approximately 10% as
compared to the third quarter of 1994. Average selling prices increased, as the
proportion of sales of larger kVA models to total SSG sales rose this quarter
over the same period in the prior year.
The $9.4 million revenue decrease for LSG resulted primarily from declining
Federal product revenue, partially offset by increasing commercial revenues
occurring primarily in the company's domestic sales channels. Federal product
revenues declined by approximately $12.9 million as the company has completed
the shipment of most of the systems and related ancillary products to the
various FAA sites. The company has previously disclosed that LSG sales would
decline by 15% to 20% from fiscal 1994 levels due to completion of the FAA
shipments. Commercial domestic sales revenues increased by approximately 25%,
while sales in the international channels increased by about 12%. The number of
LSG UPS systems sold increased by over 30% versus the prior year, while the
average sales price per system declined, due to decreased sales of ancillary
equipment and spare parts and an increase in sales of UPS systems in the smaller
kVA range, which generally are lower-priced than the larger UPS products.
WSG's total revenues increased by approximately 29% in the third quarter of 1995
as compared to the third quarter of 1994. Commercial revenues were up by about
15%, with strong growth occurring in most channels and service categories.
Service revenue growth was especially strong in Canada and Europe as a result of
the company's three sales and service acquisitions in the fourth quarter of
fiscal 1994. Federal service revenues were up by approximately 49% due to strong
sales in the company's Federal government systems implementation business. The
company continues to provide the FAA with design and site implementation
services at several locations under a multi-year program for the Air Route
Traffic Control Center Modernization Program (ARTCC). The company provided a
significantly higher level of services this quarter at the eleven FAA sites
currently in the installation phase. The company is also developing the
engineering design for seven sites, versus thirteen in the prior year, and is
scheduled to provide site services to the FAA under this program through fiscal
1997. Federal service revenues will begin to decline in fiscal 1996 as the FAA
site services are completed; see the Government Contract Matters section which
follows for additional information. WSG revenue increases were a result of a
greater amount of services provided rather than an increase in the price of the
services.
Gross Profit
Gross profit increased by $2.6 million in the third quarter of fiscal 1995
versus 1994, an increase of about 11%. Federal site service margins improved in
the current quarter because of increased content of professional services, which
increased service margins to 31.5% from 30.2% percent in the third quarter of
1994. Product margins were up slightly from the prior year, improving to 26.1%
from 25.9%. LSG product margins were improved, as sales of ancillary equipment
and spare parts, which have lower gross profit margins, declined significantly
over the prior year; this was partially offset by a decline in SSG gross profit
margins over the prior year, which occurred primarily as a result of low
margins on 1995 sales of products being phased out. SSG margins were improved
over the second quarter of 1995, reflecting the operational progress made on
the Powerware Prestige family as well as a more favorable product mix.
Selling, General and Administrative Expense
Selling, general and administrative expense increased by approximately $1.3
million over the prior year and increased slightly as a percentage of sales to
17.4% from 17.3% in the prior year. Selling and marketing expenses rose as the
company continued its investment in international markets and strengthened its
global sales force by reorganizing its North American sales operation along
customer groups and reinforcing its regional sales management teams. As a
result of revenue growth, especially in international markets, selling and
marketing expenses declined slightly as a percentage of sales versus the prior
year. General and administrative expense increased as a percentage of sales
compared with the prior year, as the company invested in leadership training
for managers in the company.
Research and Development Expense
Research and development expense declined by approximately $298,000 versus the
third quarter of the prior year, and decreased as a percentage of revenue to
2.4% from 2.9% in 1994. The decrease was related to a variety of factors,
including the ability of the company to charge certain custom engineering costs
to specific customer job orders in the Small Systems Group, ongoing cost control
efforts by the company, and lower research and development expenses at IPM, as
significant expenses were incurred in fiscal 1994 in the development of a new
product that were not required in fiscal 1995. The company expects research and
development expenditures to remain constant or decline slightly as a percentage
of revenues as the company takes advantage of synergies between Exide
Electronics and IPM in the development of new products.
Other (Income) Expense
Other expense was $170,000 for the third quarter of 1995 as compared to other
income of $114,000 for the same period of fiscal 1994. The majority of the
increase in expense of $284,000 is attributable to unfavorable changes in
foreign exchange rates, partially offset by an increase in royalty income.
Net Income
Net income for the third quarter of fiscal 1995 was $4,093,000, an increase of
$917,000 from the third quarter of 1994. Primary earnings per share were $.49,
as compared with $.38 a year ago, and fully diluted earnings per share were $.44
versus $.35 in the prior year.
Nine months ended June 30, 1995 versus June 30, 1994
Revenues
For the nine months ended June 30, 1995, total revenues were $282.2 million, an
increase of approximately 9% compared to the same period in the prior year.
Product sales grew by about 5% to $192.9 million. SSG product sales experienced
an increase of approximately $20.6 million or 25%, while LSG product sales
declined by approximately $10.7 million or 11% as compared to the first nine
months of fiscal 1994. WSG revenues increased by approximately $12.8 million or
17% as compared to the same period last year.
SSG revenues for the first nine months of fiscal 1995 increased by approximately
$20.6 million or 25% over the prior year. The majority of this increase was in
international sales channels, which experienced growth of about 42% over the
prior year. This growth was primarily the result of strong sales growth by the
company's affiliates in Europe and Japan, which accounted for over 85% of the
total growth in international sales. Domestic revenues were approximately 6%
higher than in the prior year. Growth in SSG product revenues resulted primarily
from continuing strong sales of the new Powerware Prestige product line, which
were approximately $31.2 million higher than in the prior year, while products
being phased out with the introduction of these new products declined by about
$17.9 million, for a net increase of approximately $13.3 million. In the first
nine months of fiscal 1995, the Prestige product line was expanded with the
addition of the 650VA and 2000VA models, additional accessories for the Prestige
3000 and 6000 models were introduced, and new versions of software and network
communications products were incorporated. The number of SSG units sold
increased by about 28% as compared to the first nine months of fiscal 1994.
Average selling prices were slightly lower than in the prior year, reflecting
the industry trend of declining UPS prices.
LSG revenues for the first nine months of fiscal 1995 were 11% lower than
revenues in the first nine months of fiscal 1994. The decrease was primarily due
to a decrease of 24% in Federal product sales. Product revenues under the FAA
contract have been declining as the company has completed the shipment of most
of the systems and related ancillary products to the various FAA sites. The
company has previously disclosed that LSG sales would decline by 15%-20% from
fiscal 1994 levels due to the completion of the FAA shipments. Domestic
commercial revenues increased by approximately 3% during the first nine months,
while international revenues were flat, with an increase in sales by the
company's European affiliates being offset by a decline in sales by the
company's Canadian and Japanese affiliates. The number of LSG UPS systems sold
remained constant compared to the same period in the prior year, while the
average sales price per system decreased as sales of the smaller kVA models,
which are generally lower-priced than the larger kVA models, represented a
larger percentage of total LSG revenues than in the prior year.
WSG revenues grew by approximately $12.8 million or 17% over the same period in
the prior year. WSG's commercial domestic revenues grew by about 9%, with strong
growth occurring in most service categories. International revenues were up by
about 58%, which was primarily attributable to the three sales and service
acquisitions in the fourth quarter of fiscal 1994 in Canada and Europe. Federal
service revenues increased over the prior year by approximately 16%. WSG revenue
increases were a result of a greater amount of services provided rather than an
increase in the price of the services.
Gross Profit
Gross profit grew by approximately $2.6 million to $75.0 million in the first
three quarters of fiscal 1995, an increase of 3.6% over the prior year. Gross
profit margins decreased to 26.6% in 1995 from 27.9% in 1994. Product gross
profit margins fell from 26.8% in 1994 to 24.4% in 1995, while service margins
increased from 30.4% to 31.2% during that same period. LSG gross profit margins
declined, as LSG had a higher proportion of sales in 1995 in channels with lower
gross profit margins. SSG margins were also lower than in the prior year, as a
result of lower margins on products being phased out and a higher proportion of
sales in channels with lower profit margins. The company also incurred higher
than normal costs related to increased production volumes for its new Powerware
Prestige product lines. Service margins increased principally due to changes in
the mix of services provided.
Selling, General and Administrative
Selling, general and administrative expense increased by approximately $3.6
million over the prior year, but decreased as a percentage of revenues to 18.2%
in fiscal 1995 from 18.4% in fiscal 1994. General and administrative expense
declined from the prior year due primarily to lower legal expenses as a result
of the settlement of certain litigation. Selling and marketing expenses
increased primarily as a result of the company's continued efforts to expand its
worldwide marketing, distribution, and support capabilities, especially in
international markets. International selling and marketing expenses accounted
for over 50% of the increase in total selling and marketing expenses over the
prior year.
Research and Development Expense
Research and development expense decreased by approximately $196,000 over the
prior year, and decreased as a percentage of revenue to 2.6% in fiscal 1995 from
2.9% in fiscal 1994. Contributing to the decrease were lower research and
development expenses at IPM, as significant expenses were incurred in fiscal
1994 in the development of a new product that were not required in fiscal 1995,
and lower SSG research and development costs. The company expects research and
development expenditures to remain constant or decline slightly as a percentage
of revenues as the company takes advantage of synergies between Exide
Electronics and IPM in the development of new products.
Litigation Expense
Litigation expense decreased by $4,297,000 in the first nine months of fiscal
1995 as compared to the prior year. The company recorded a $700,000 pretax
charge for the settlement of two related lawsuits in 1995. Although the company
believed that neither suit had merit, they were consuming valuable corporate
time and attention and would have involved significant legal costs to pursue
further. In the first nine months of fiscal 1994, the company recorded a charge
of $4,997,000 for the settlement of the Hendry litigation. These lawsuits are
discussed in more detail in Note 5 of the notes to consolidated financial
statements and in the Litigation section below.
Merger Expense
During the second quarter of 1995, the company completed its acquisition of IPM,
a manufacturer of UPS products headquartered in Dallas, Texas. With the
consummation of the acquisition, which was accounted for as a
pooling-of-interests, the company recorded a nonrecurring pretax charge of $5.5
million. This charge included approximately $3 million for legal, accounting,
financial advisory, and other costs related to the merger. The company also
expensed approximately $2.5 million for the estimated costs of closing a
duplicate operating facility and discontinuing certain duplicate product lines
manufactured at that facility.
Interest/Other
Interest expense increased by about $97,000 over the first nine months of fiscal
1994, but declined as a percentage of revenues from 1.5% in 1994 to 1.4% in
1995. The company expensed $233,000 in the write-off of remaining debt issuance
costs and a redemption premium related to the payoff of its Industrial Revenue
Bonds (IRBs) in the first quarter of fiscal 1995. Without this one-time charge,
interest expense would have been 4% less than fiscal 1994. Other (income)
expense improved by approximately $547,000. The increase is primarily due to
improved results for the company's Japanese joint venture and an increase in
royalty income.
Net Income
Net income for the first nine months of fiscal 1995 was $3,768,000 or $.40 per
primary share, as compared to net income of $5,585,000, or $.64 per primary
share, for the first nine months of fiscal 1994. Excluding the litigation and
merger charges in the second quarter of fiscal 1995 and 1994, net income would
have been $8,516,000 or $1.01 per primary share for the first nine months of
fiscal 1995, and $8,521,000 or $1.02 per primary share in 1994.
Quarterly Operating Results
The company's quarterly operating results have fluctuated significantly.
Quarterly results depend upon the timing of product shipments and major systems
implementation services, which can be influenced by a number of factors. Some of
these factors are beyond the company's control, particularly for large,
customized systems. The company has experienced seasonal fluctuations in
revenues and operating results on a quarter-to-quarter basis. The fourth quarter
typically has produced the largest portion of the company's revenues and income.
The company believes that the fourth quarter results reflect increased shipments
resulting from management incentives that are tied to annual sales performance,
and increased sales prompted by weather-related power disturbances during the
spring and summer months. The first quarter has typically produced the smallest
portion of the company's revenues and income, so that there has been a
historical reduction in the company's first quarter results as compared to the
previous fiscal year's fourth quarter. During fiscal years 1994 and 1993,
revenues increased for each quarter within the applicable year, but revenues for
the first quarter were lower than revenues for the fourth quarter of the prior
year.
Selling, general and administrative, and research and development expenditures
are incurred to support projected annual sales. These expenses do not
necessarily vary proportionately with revenues on a quarterly basis. As a
result, variations in quarterly revenues may not be accompanied by an equivalent
change in expenses; therefore, operating margins can vary significantly between
quarters.
Liquidity and Financial Condition
As of June 30, 1995, the company had $95.5 million of working capital, as
compared to $93.3 million at September 30, 1994, and $88.5 million at June 30,
1994. The increase of approximately $7 million in working capital, as compared
to June 30, 1994, is primarily the result of higher levels of inventory to
support the increased levels of revenues and to transition the company through
the phase-in of the Powerware Prestige product family. Accounts receivable
balances rose as a result of the higher sales levels, which were more than
offset by the increase in accounts payable balances necessary to support the
increased sales and inventory levels. The $2.2 million increase in working
capital between September 30, 1994 and June 30, 1995 is primarily the result of
an increase in inventory levels, partially offset by a decline in accounts
receivable due to increased collections on receivable balances and higher
accounts payable balances. Receivable balances are typically at their highest
level at year-end, due to the higher level of fourth quarter sales. The
increased levels of working capital have been financed primarily using the
company's revolving credit facilities.
During the first nine months of 1995, the company invested approximately $9.4
million in capital expenditures and used $4.6 million to redeem the company's
IRB's. Capital expenditures for fiscal 1995 are expected to approximate $11-12
million. The company believes that its cash flow from operations and its
existing bank facilities will be sufficient to meet its short-term requirements
for working capital and capital expenditures.
In November 1994, the Board of Directors authorized the repurchase of up to 5%
of the company's outstanding stock. The company plans to continue repurchasing
its outstanding stock, depending on current market conditions and other factors.
Contingencies
Litigation
In May 1990, Exide Electronics was served with a complaint in the Delaware Court
of Chancery and in May 1991, a related case was filed in Federal Court in New
York. These complaints alleged, among other things, that Exide Electronics'
description of a lawsuit in its prospectus dated December 21, 1989 was false
and misleading. Exide Electronics recorded a charge in connection with the
lawsuit of $4,997,000 ($2,936,000 after tax) in its operating results for the
second quarter of fiscal 1994, and reached a settlement in July 1994. See Note
5 of the notes to consolidated financial statements for additional information.
In April 1995, Exide Electronics announced that it had settled the suits in
Delaware and New York. The Delaware action had been dismissed once for failure
to state a claim, but was reinstated following an appeal and was in the
discovery process prior to the settlement. The company recorded a pretax charge
of $700,000 for the settlement of these two related lawsuits in the quarter
ended March 31, 1995. The settlement agreements are subject to court approval,
after notice to affected shareholders. While the company believed that neither
suit had merit, it decided to settle as the suits were consuming valuable
corporate time and attention and would have involved significant legal costs to
pursue further.
Government Contract Matters
Sales to the United States Federal government accounted for approximately 28%
and 33% of total revenues for the nine months ended June 30, 1995 and 1994,
respectively, and approximately 33%, 35% and 19% of total revenues for the years
ended September 30, 1994, 1993 and 1992, respectively. A significant portion of
the company's sales to the Federal government in recent years have been under a
five-year contract awarded to the company by the Air Force Logistics Command in
May 1988 following a competitive procurement. As of June 30, 1995, a significant
portion of the company's backlog relates to orders received under this contract
from the Federal Aviation Administration. The period during which orders could
be placed under this contract expired in May 1993. Expiration of this contract
does not affect orders received prior to expiration, and delivery on the
remainder of such orders, which consists primarily of site implementation
services for the FAA, is currently planned through fiscal 1997.
During the third quarter, the company received an additional $50 million of
supplemental time and materials funding from the FAA under the multi-year ARTCC
Modernization program. To date, Exide Electronics has received approximately
$350 million of funding under this program. The company was also awarded a
large requirements contract with the Air Force Air Logistics Command during
this time period, which has an evaluated value of more than $600 million over a
five year period. Actual revenues under this contract will depend on the
specific purchases, if any, of the Air Force and other governmental agencies
which can use the contract during the contract period. The company is currently
awaiting the completion of the post-award process, including the resolution of
protests of the award by competitors. There can be no guarantee that the
company will prevail in defending the award. However, the company can sell its
products and services to the Federal government through its four existing Navy
contracts, through its General Services Administration Schedule, and
potentially in a subcontractor capacity or through the award of other new
contracts.
The company's contracts with the Federal government have no significant minimum
purchase commitments, and the government may cease purchases under these
contracts at any time for any reason. These contracts are subject to
termination for the convenience of the government pursuant to the terms of the
contracts. The company's compliance with government contract regulations is
audited or reviewed from time to time by government auditors, who have the
right to audit the company's records and the records of its subcontractors
during and after completion of contract performance. Under Federal government
regulations, certain costs are not allowable as costs for which the government
will reimburse the company. Government auditors may recommend that certain
charges be treated as unallowable and reimbursement be made to the government.
In addition, as part of the company's internal control practices, the company
performs regular internal reviews of its charges to the government. In
connection with such reviews, the company may make voluntary refunds to the
government for certain unallowable or inadvertent charges, which are brought to
the government's attention by the company. The company provides for estimated
unallowable charges and voluntary refunds in its financial statements, and
believes that its provisions are adequate as of June 30, 1995.
Pending Acquisition
In June 1995, Exide Electronics executed a definitive agreement for the company
to acquire all of the capital stock of Lectro Products, Inc., headquartered in
Athens, Georgia, for approximately $14 million, subject to certain adjustments.
The combination with Lectro Products will enable Exide Electronics to expand its
worldwide offering of power management and power protection hardware, software,
and services into the rapidly expanding cable television and telecommunications
marketplaces which are both experiencing significant growth. The transaction is
subject to the completion of due diligence and is expected to close in August
1995.
Redeemable Preferred Stock
On July 1, 1995, the company signed an agreement with Japan Storage Battery Co.,
Ltd. (JSB), whereby JSB converted its shares of the company's Series D and
Series E Convertible Preferred Stock into Exide Electronics' common stock. This
conversion will increase the company's common equity by approximately $10
million and will reduce its annual cash dividend payments by approximately
$790,000. See Note 4 of the notes to consolidated financial statements for
additional information.
Foreign Currency Exposures
International sales accounted for approximately 32% and 26% of total revenues
for the nine months ended June 30, 1995 and 1994, respectively, and
approximately 25%, 22% and 30% of total revenues for the years ended September
30, 1994, 1993 and 1992, respectively. The company's international sales include
sales to Latin America, which accounted for about 24% and 28% of total
international sales for the nine months ended June 30, 1995 and 1994. Those
sales have been affected by economic conditions, which have not always been
stable in this region. Continuing unfavorable economic conditions could
adversely impact results in this region.
A significant portion of the company's international sales are denominated in
foreign currencies. As of June 30, 1995, approximately 18% of the company's
total assets were located outside the United States, primarily in Canada and
Europe. Significant fluctuations in foreign currency exchange rates can result
in gains or losses on foreign currency transactions, which are recorded in the
consolidated statement of operations. Fluctuations in the recorded value of the
company's net investment in its international subsidiaries resulting from
changes in foreign exchange rates are recorded in the cumulative translation
adjustments component of common shareholders' equity. The company hedges these
risks using a combination of natural hedges such as foreign currency denominated
borrowings and, from time to time, foreign currency financial instruments.
European, Canadian, and Japanese currencies have been especially volatile over
the last two years. As of June 30, 1995, the company had accounts receivable and
accounts payable totaling approximately $8 million that were exposed to
fluctuations in exchange rates, and had two foreign currency financial
instruments, which are described below, covering approximately 50% of these
balances. These balances are spread among various currencies, primarily the
French franc.
As of June 30, 1995, the company had two outstanding foreign currency contracts
which were entered into to reduce the potential loss from a significant decline
in the value of the French franc: a forward contract obligating the company to
sell 10 million French francs at predetermined exchange rates; and a foreign
currency option which gives the company the right to sell at predetermined
exchange rates approximately 10 million French francs. The forward contract
was settled in July 1995 at a loss of approximately $22,000. The foreign
currency option lapses in August 1995. Potential gains on that option would be
recognized in income and offset the foreign currency exchange losses on the
related transactions.
For the first nine months of fiscal 1995, the company had foreign exchange
transaction gains of approximately $79,000, as compared to gains of
approximately $17,000 in the same period of fiscal 1994, and the change in the
cumulative translation adjustments account increased the recorded value of
common shareholders' equity by $267,000 from September 30, 1994 to June 30,
1995. For fiscal 1994, the company had foreign exchange transaction losses of
approximately $257,000, as compared to losses of approximately $221,000 in 1993,
and the change in the cumulative translation adjustments account increased the
recorded value of common shareholders' equity by $154,000 from September 30,
1993 to September 30, 1994.
PART II - OTHER INFORMATION
June 30, 1995
ITEM 1. Legal Proceedings
See Note 5 of the Notes to Consolidated Financial Statements.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description
P Contract, dated June 5, 1995, between the United States Air
Force Sacramento Air Logistics Command and Exide Electronics
Corporation(filed on Form SE in paper format, and incorporated
by reference herein).
11 Statement of Computation of Per Share Earnings.
27 Financial Data Schedule.
EXIDE ELECTRONICS GROUP, INC.
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.
EXIDE ELECTRONICS GROUP, INC.
(Registrant)
Date: August 10, 1995 By:
Marty R. Kittrell
Marty R. Kittrell
Vice President and
Chief Financial Officer
EXIDE ELECTRONICS GROUP, INC.
EXHIBIT INDEX - FORM 10-Q
JUNE 30, 1995
Exhibit
Number Description
P Contract, dated June 5, 1995, between the United States Air
Force Sacramento Air Logistics Command and Exide Electronics
Corporation(filed on Form SE in paper format, and incorporated
by reference herein).
11 Statement of Computation of Per Share Earnings.
27 Financial Data Schedule.