Advanced Energy Industries, Inc. — Q1 2018 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited results are compared with Q1 2017 unless otherwise noted. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context and results
Advanced Energy designs, manufactures, sells, and services power-conversion and control products used in semiconductor, industrial, and other manufacturing processes. Solar inverter production and sales were discontinued in 2015; remaining inverter warranty activity is reported as discontinued operations.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $195.6 | $149.4 |
| Gross profit / margin | $103.6 / 53.0% | $78.8 / 52.8% |
| Operating income / margin | $56.1 / 28.7% | $43.3 / 29.0% |
| Continuing-operations income | $46.4 | $35.4 |
| Net income attributable to Advanced Energy | $46.5 | $37.5 |
| Diluted EPS | $1.16 | $0.93 |
| Operating cash flow, continuing operations | $34.9 | $42.7 |
Semiconductor revenue rose 30.0% to $136.0 million; industrial power revenue increased 45.6% to $35.2 million; global support revenue grew 18.9% to $24.4 million. Applied Materials represented 35.7% of sales and Lam Research 20.3%.
Financial position and liquidity
- At March 31, cash and cash equivalents were $413.9 million, marketable securities $3.2 million, and total assets $813.7 million. Current assets were $650.6 million and current liabilities $126.6 million.
- Total liabilities were $236.5 million and stockholders’ equity $577.2 million. The filing reports $150.0 million of availability under its revolving credit facility, expiring July 2022, and compliance with its covenants; no outstanding borrowing is reported in the supplied filing text.
- Cash provided by operations, including discontinued operations, was $33.1 million, down from $40.2 million. The company attributed the decline chiefly to working-capital investment, including increases in receivables and inventory. Investing used $10.0 million, including $6.1 million for the Trek acquisition; financing used $16.8 million, including $12.8 million of share repurchases.
- Inventory rose to $96.8 million from $78.5 million at year-end 2017; accounts and other receivables rose to $116.9 million from $87.4 million.
Material changes and unusual items
- Revenue increased 31.0% year over year, supported by semiconductor demand—particularly etch applications—and growth in industrial markets. Management also cited production ramp-ups from customer program wins. Revenue was up 9.2% from Q4 2017.
- Backlog increased to $145.7 million from $131.3 million at December 31, 2017. Management said demand in semiconductor and industrial thin-film markets supported the backlog.
- On February 1, the company acquired Trek for $6.1 million net of acquired cash. Q1 sales included $7.9 million from Trek and Excelsys combined. The purchase-price allocation was preliminary.
- ASC 606 was adopted using the modified retrospective method. Adoption increased reported Q1 2018 sales by $1.5 million and net income by $0.7 million versus results without adoption; prior-year figures were not recast. The filing notes that ASC 606 changes revenue timing for inventory-stocking agreements.
- The effective tax rate was 17.4%, versus 11.5% a year earlier. Q1 2018 included $1.9 million of tax expense related to a revised estimate of U.S. transition tax; the company said its Tax Act accounting remained provisional pending further analysis.
- Non-GAAP diluted EPS was $1.34 versus $1.04. The company’s non-GAAP adjustments included stock compensation, intangible amortization, acquisition and facility costs, and a Tax Act impact; these measures are not U.S. GAAP results.
Outlook, risks, and contingencies
- No quantified revenue or earnings guidance is provided in the filing. Management said available cash, credit, and expected operating cash flows should cover anticipated working capital, capital expenditures, acquisitions, and contractual obligations for the next 12 months. It expects continued R&D investment.
- Key operating risks include semiconductor and industrial market cyclicality, reliance on a small number of customers, and supplier constraints. The ten largest customers represented 69.6% of sales; Applied Materials and Lam Research together represented 56.0%.
- The company said it must relocate its Shenzhen manufacturing facility by July 2020. It also cited longer delivery times and delayed shipments for certain high-demand products from its Littlehampton, U.K. site.
- Firm supplier purchase commitments were approximately $177.4 million. If demand falls or forecasts prove inaccurate, commitments and customer inventory requirements could contribute to excess inventory and losses.
- Potential U.S. tariffs on goods and parts from China could raise costs. Other disclosed exposures include foreign exchange, international tax changes, acquisition integration, product and legacy inverter warranty claims, and pension obligations.
- Legacy inverter warranty liabilities included $20.9 million current and non-current at March 31, 2018. The company reported no material developments in its legal proceedings during the quarter, while noting ongoing claims and litigation involving the legacy inverter line.
Important facts for investors to verify
- Whether backlog converts to revenue on expected timing, and whether semiconductor and industrial demand remains strong.
- Customer concentration, particularly exposure to Applied Materials and Lam Research, and the collectability of growing receivables.
- Working-capital trends, inventory quality, and the company’s ability to meet its $177.4 million of supplier commitments.
- Execution and costs of the Shenzhen relocation, site delivery constraints, and integration of Trek and Excelsys.
- Final Tax Act accounting, future effective tax rates, and the adequacy of legacy inverter warranty reserves.