Advanced Energy Industries, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate. The company designs and sells precision power-conversion, thermal-instrumentation and related service products. Solar inverter operations are reported as discontinued operations.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Sales | $165.9m | $118.8m | $315.2m | $221.8m |
| Gross profit / margin | $87.1m / 52.5% | $62.0m / 52.2% | $166.0m / 52.7% | $115.5m / 52.1% |
| Operating income / margin | $47.8m / 28.8% | $30.3m / 25.5% | $91.0m / 28.9% | $54.0m / 24.3% |
| Continuing-operations income, after tax | $45.9m | $27.3m | $81.3m | $47.5m |
| Net income, including discontinued operations | $46.1m | $30.5m | $83.6m | $52.8m |
| Diluted EPS, continuing operations | $1.14 | $0.68 | $2.02 | $1.19 |
- Q2 sales increased 39.7% year over year and 11.1% sequentially. First-half sales increased 42.1% year over year.
- Q2 sales by market: semiconductor capital equipment $117.0m, industrial power $26.3m, and global service $22.6m. Year-over-year growth was 48.9%, 18.5%, and 25.4%, respectively.
- Management attributed growth mainly to stronger semiconductor demand, particularly etch applications, advanced memory and 3D NAND, as well as program wins entering production. Industrial growth reflected advanced coating applications; service growth reflected share gains and a larger installed base.
- Operating expenses rose in dollars but declined as a share of sales to 23.7% in Q2 and 23.8% in the first half. Research and development investment increased; SG&A growth included higher stock compensation, performance bonuses and business-development costs.
Cash, liquidity and balance sheet
- At June 30, cash and cash equivalents were $358.9m and marketable securities were $4.1m; management cited $363.0m in combined cash, cash equivalents and marketable securities. A further $17.7m was held as restricted acquisition escrow. Cash held outside the U.S. was $228.6m.
- First-half operating cash flow was $100.2m, including $106.6m from continuing operations and $6.4m used by discontinued operations; the comparable total in 2016 was $43.5m. Management cited improved earnings and collections, partly offset by inventory investment.
- First-half investing cash use was $23.9m, including restricted escrow cash for the Excelsys acquisition, a $3.5m foreign-exchange hedge and $3.4m of capital expenditures. Financing cash use was $1.9m.
- Total assets were $673.1m and stockholders’ equity $485.4m. The filing does not report outstanding borrowings at June 30. On July 28, after quarter-end, the company entered into an undrawn revolving credit facility of up to $100m, available through July 2022, subject to conditions and covenants.
- Backlog was $106.6m at June 30, up from $69.2m at December 31, 2016; management said it remained strong, particularly in semiconductor and industrial thin-film markets. The filing provides no numerical earnings or revenue guidance.
Material changes, outlook and risks
- The effective tax rate on continuing operations was 3.8% in Q2 and 7.3% for the first half, versus 12.5% and 13.9% in 2016. Management attributed the low rates mainly to foreign earnings taxed at lower rates and 2017 stock-compensation tax benefits.
- First-half other expense included a $3.5m loss on a currency forward contract for a potential offshore acquisition that was not completed. The company acquired Excelsys on July 3, 2017 for $17.7m in cash; the purchase price remained subject to adjustment.
- Customer concentration is material: Applied Materials represented 36.3% of Q2 sales and Lam Research 21.1%. Together they accounted for 57.4% of Q2 sales. Applied Materials represented 42.4% of accounts receivable at June 30.
- Key operating risks include semiconductor-industry cyclicality and reliance on major customers and limited-source suppliers. The company disclosed longer delivery times and delayed shipments for certain high-demand products made in Littlehampton, UK, and said it must relocate its Shenzhen manufacturing facility by July 2020.
- Firm supplier purchase commitments totaled approximately $97.4m. The company also faces legacy solar-inverter warranty obligations: discontinued-operations accrued warranty liabilities totaled $25.8m at June 30, 2017. Continuing-operations pension liability was $19.8m, with required annual plan contributions of $0.8m through April 2024 and $1.8m annually thereafter through November 2033.
- Management said available liquidity and expected operating cash flows should cover anticipated working capital, capital spending and contractual needs for the next 12 months. This is management’s assessment, not a guarantee; demand, production capacity, supplier availability, foreign exchange, trade policy, taxes and acquisition integration remain relevant risks.
- Management concluded disclosure controls were effective as of June 30, 2017; no material change in internal control over financial reporting was reported during the quarter. No material legal-proceeding developments were disclosed.
Important facts for investors to verify
- Whether semiconductor demand, backlog and recent program wins convert into shipments and sustained sales, given the company’s cyclical end markets.
- Customer concentration and collection exposure, especially Applied Materials’ share of sales and receivables.
- Execution of the Excelsys integration and any final purchase-price adjustment; terms, covenants and availability of the post-quarter credit facility.
- Ability to address UK delivery delays, supplier commitments and the Shenzhen relocation without disrupting supply or increasing costs.
- Developments in legacy inverter warranty costs, pension funding obligations and the unusually low effective tax rate.