Power-One begins another round of layoffs, closings. (Up Front).

With the timetable for recovery in the telecom industry moved back yet again, one local company is making a second aggressive round of cost cuffing, closing facilities and slashing staff to make up for anticipated revenue shortfalls.

Power-One Inc., a Camarillo-based maker of power conversion products for the telecommunications industry, is shuttering facilities in the U.S., Mexico and Puerto Rico and cutting 24 percent of its 2,600-employee workforce, including about 30 workers in its Camarillo headquarters.

The moves, which some analysts said lead the industry both in timing and degree, come as the telecom industry faces its second year of recession and prognosticators extend the timeline for recovery to 2004.

"In essence, our goals are to reduce excess manufacturing capacity and dispose of excess inventory," said Martin Goeller, vice president of finance and corporate controller for Power-One. "The second major objective was to resize key front office operations."

Power-One's earnings and sales had climbed steadily since 1997, when the company earned $.19 per share on revenues of $91.5 million, peaking in 2000 at earnings of $.56 per share on revenues of $511 million.

But those fortunes began to reverse in 2001 as oversupply and an abrupt slowdown in demand for telecom products took hold of the industry. In 2001, Power One lost $2.36 per share as revenues tumbled to $364 million.

For the company's fiscal third quarter ended Sept. 30, Power-One expects to lose $0.06 to $0.08 per share on revenues of $56 million to $59 million. That would compare with a loss of $.55 on revenues of $53 million in the comparable period of 2001.

Power-One will report its final third quarter 2002 results later this month.

While the first round of spending cuts helped stem the losses, the continuing bleak outlook persuaded Power-One to take additional steps to bring costs in line with revised sales projections and a revised timeline which could see the recession in the industry extended to three years and beyond.

"If you look at the leading companies (in the industry), Power-One probably has been a little early and they've been more aggressive, which is positive," said Andrew Huang, director at CIBC World Markets Corp., who covers the company. (Huang does not own any Power-One shares.)

So dramatic has the sales downturn been that many telecom suppliers have been hard pressed to keep up. Believing that the slump would last only a short while, many moved too late to cut expenses in 2001, when the downturn began, with devastating results to their bottom lines.

"Twelve months ago, people were anticipating this would last 12 months," said Huang. "No one anticipated this."

Power-One, ranked No. 8 in the electronic components industry worldwide, expects its latest measures to shave $25 million in expenses beginning next year, and to move its EBITDA break-even point to under $55 million, from $65 million to $70 million currently.

On the manufacturing side, Power-One will close its operations in Mexico and consolidate that plant's activities with its facility in the Dominican Republic. An assembly plant in Puerto Rico will also be closed and those operations transferred to the Dominican Republic.

"If you look at basic hourly labor, it's fairly competitive (in Mexico)," Goeller said. "Where the cost advantage comes in is management, supervisors and engineers. Their salaries (in Mexico) are almost as much as they are here. Somehow the cost structure has crept up."

Power-One, like a number of manufacturers in the industry, also outsources some manufacturing in Asia, where costs are lower. But Goeller points out that the Dominican Republic is still about six or seven years behind Mexico in its economic development.

"The Dominican Republic is still a place where we can manufacture relatively cost-effectively," Goeller said.

Business functions now handled in Costa Mesa will be moved to the company's sales and marketing offices in Dallas where, Goeller said, they will also be closer to many of the original equipment manufacturers that are Power-One's customers.

Remaining will be a manufacturing plant in Slovakia (an operation that was moved from Switzerland last year) in addition to the Dominican Republic, assembly facilities in Asia and Norway and research and development operations in Andover, Mass., Ireland and Camarillo.

The latest round of reductions in manufacturing and assembly bring Power-One "down to bare bones," Huang said, without significant risk should an upturn in the industry demand more manufacturing capacity.

"They're not really dependent on their internal manufacturing capability," Huang said. "Going forward, if there's a need to increase capacity they can just increase contract work."

Staff cuts are coming from all segments of the workforce except for research and development.

"If anything, we're investing more in R&D going forward," said Goeller, "so when the recession ends, we'll be in a great position to take market share from the competition."

Ironically, the telecom recession has been something of a boon to R&D efforts at PowerOne, as well as others.

"If we were growing like we were in 2000, it would be hard to focus sufficient management bandwidth on R&D," Goeller said. "Now, R&D is in the front seat and gets all the focus."

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