Advanced Energy Industries, Inc. — Q2 2016 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and six months ended June 30, 2016. Advanced Energy designs, manufactures, sells, and services power-conversion and related products used in semiconductor, industrial, and other manufacturing markets. The company discontinued its inverter product line in December 2015; those results are reported as discontinued operations.
Financial performance and liquidity
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Sales | $118.8 | $108.7 | $221.8 | $218.2 |
| Gross profit / margin | $62.0 / 52.2% | $56.5 / 52.0% | $115.5 / 52.1% | $115.6 / 53.0% |
| Operating income | $30.3 | $28.8 | $54.0 | $60.3 |
| Continuing-operations income | $27.3 | $23.0 | $47.5 | $48.7 |
| Continuing-operations diluted EPS | $0.68 | $0.56 | $1.19 | $1.18 |
| Net income (loss), including discontinued operations | $30.5 | $(232.5) | $52.8 | $(211.2) |
- Q2 sales rose 9.3% year over year, led by semiconductor-market growth; first-half sales increased 1.7%. Semiconductor sales were up 12.0% in Q2 and 3.4% for the first half. First-half industrial power sales fell 7.0%; global service sales rose 4.9%.
- Q2 operating margin was 25.5%, versus 26.4% a year earlier. First-half operating margin declined to 24.3% from 27.6%, as operating expenses increased faster than sales. First-half R&D and SG&A expenses were $22.0 million and $37.4 million, respectively.
- Q2 continuing-operations income improved year over year; first-half continuing-operations income was slightly lower. The effective tax rate was 12.5% in Q2 and 13.9% for the first half, compared with 20.8% in both 2015 periods. Management attributed lower rates primarily to earnings in lower-tax foreign jurisdictions.
- First-half cash provided by operating activities was $43.0 million, compared with $53.8 million in 2015. Continuing operations provided $47.5 million, partly offset by $4.6 million used by discontinued operations. Management cited higher inventory and receivables as drivers of the decline.
- At June 30, cash and cash equivalents were $209.3 million and marketable securities were $5.8 million. Total cash, equivalents, and securities were $215.1 million; $140.6 million of cash was held outside the United States. The company had no debt outstanding and $15.5 million available on its revolving facility, which matures October 2017. Management said liquidity should cover anticipated needs and obligations for the next 12 months.
- Backlog was $54.3 million at June 30, up from $43.7 million at December 31, 2015. Total assets were $505.0 million and stockholders’ equity was $321.8 million. The company had $51.3 million in firm supplier purchase commitments.
Material changes, outlook, and risks
- The large year-over-year improvement in reported net income primarily reflects the absence of the prior-year inverter discontinued-operations loss: discontinued operations produced $3.3 million of income in Q2 2016 versus a $255.5 million loss in Q2 2015, and $5.3 million for the first half versus a $259.9 million loss in 2015. The 2016 discontinued-operation income included recovery of previously reserved receivables and reductions in warranty liabilities following warranty expirations.
- Management cited semiconductor program wins in etch applications, including advanced memory and 3D NAND, and reported that Q2 semiconductor sales increased 12.7% sequentially. No specific revenue or earnings guidance was provided in the supplied filing text.
- The company completed a $50 million accelerated share repurchase, receiving 1.7 million shares at an average price of $28.99. As of July 31, $100 million remained available under the $150 million repurchase authorization.
- Key exposures include cyclical end markets, reliance on purchase orders rather than long-term customer commitments, pricing pressure, and customer concentration. Applied Materials and Lam Research together represented 55.8% of first-half sales; at June 30, they represented 37.2% and 25.0% of accounts receivable, respectively.
- Other disclosed risks include supplier and inventory commitments, foreign-exchange volatility, international operations and Brexit uncertainty, legacy inverter warranty obligations, and reliance on manufacturing sites that are not interchangeable. The Shenzhen facility lease was due to expire in July 2017; the company said it was working on an extension and expected to extend it. The HiTek pension plan carries a $16.3 million liability, with approximately $1.0 million in annual funding commitments through 2024.
- Management reported effective disclosure controls as of June 30, 2016, and no material change in internal control over financial reporting during the quarter. It reported no material developments in legal proceedings.
Important facts for investors to verify
- Whether semiconductor demand and the higher backlog convert into sales, given the lack of long-term customer purchase commitments.
- Whether customer concentration, especially Applied Materials and Lam Research, remains elevated and how receivables are collected.
- Whether gross and operating margins stabilize as R&D, selling, and administrative expenses rise.
- The future cash cost of legacy inverter warranties, including whether recoveries and warranty-liability reductions are repeatable.
- Progress on the Shenzhen lease extension, and exposure to supplier commitments, foreign exchange, and pension funding.