Advanced Energy Industries, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. Financial amounts are in U.S. dollars.
Business context
Advanced Energy designs, manufactures, sells and supports precision power conversion, measurement and control products and related services. Its markets include semiconductor manufacturing, industrial thin-film equipment, high- and low-voltage applications, and global product support. The company reported as one business unit and had discontinued production, engineering and sales of its solar inverter line in December 2015; remaining legacy inverter warranty and service activity is reported separately as discontinued operations.
In July 2017, the company acquired Excelsys, an Ireland-based power-supply manufacturer, for approximately $17.3 million net of cash acquired. Excelsys contributed $7.6 million of 2017 sales. In February 2018, after year-end, the company acquired Trek for $11.8 million in cash.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Sales | $671.0 million | $483.7 million | +38.7% |
| Gross profit / margin | $356.4 million / 53.1% | $253.1 million / 52.3% | Margin +0.8 percentage points |
| Operating income / margin | $200.8 million / 30.0% | $126.9 million / 26.1% | +58.3% income |
| Income from continuing operations | $136.1 million | $116.9 million | +16.4% |
| Net income, including discontinued operations | $137.9 million | $127.5 million | +8.2% |
| Diluted EPS, continuing operations | $3.39 | $2.92 | — |
| Cash from operating activities | $182.7 million | $119.3 million | +53.2% |
Semiconductor capital-equipment sales rose 41.5% to $461.7 million; industrial capital-equipment sales rose 38.8% to $116.9 million; global support sales rose 26.3% to $92.4 million. Semiconductor sales represented 68.8% of total sales. Backlog increased 89.7% to $131.3 million, although the company cautions that backlog may be delayed or cancelled and is not necessarily predictive of sales.
Year-end cash, cash equivalents and marketable securities totaled approximately $410.4 million, including $288.3 million held by foreign subsidiaries. Continuing-operations cash and cash equivalents were $407.3 million. The company had no reported borrowings and $150 million available under its revolving credit facility, which matures in 2022. Total assets were $733.3 million and total liabilities were $212.7 million. Capital expenditures were $9.0 million; the company repurchased $30.0 million of stock during 2017 and had $70.0 million of authorization remaining.
Operating cash flow increased, primarily reflecting stronger earnings and tax-payment timing, partly offset by working-capital needs, including higher receivables and inventory. Inventory rose to $78.5 million from $55.8 million.
Material changes and unusual items
- Strong semiconductor demand, particularly in etch and CVD applications tied to advanced memory and logic, drove much of the sales and operating-income growth. Management said fourth-quarter semiconductor sales were a record.
- Gross margin improved with higher volume and favorable product mix. Operating expenses rose in dollars, including R&D of $58.0 million and SG&A of $93.3 million, but declined as a share of sales.
- Reported continuing-operations income tax expense was $62.1 million, an effective rate of 31.3%. It included an estimated $61.8 million U.S. transition-tax charge and $11.1 million from remeasuring deferred taxes after the U.S. corporate rate reduction, partly offset by a $33.8 million tax benefit associated with winding down the inverter business. The company said its accounting estimates under the new tax law were provisional and subject to refinement.
- In fourth-quarter 2017, sales were $179.2 million and operating income was $58.1 million, but continuing-operations net loss was $29.0 million; net loss was $29.6 million. The filing’s quarterly table does not clearly isolate the fourth-quarter tax components driving the loss. Full-year results remained profitable.
- Other expense was $2.6 million, principally due to a $3.5 million foreign-exchange hedge purchased for a prospective offshore acquisition that was not completed.
- Legacy inverter discontinued operations contributed $1.8 million of net income in 2017, largely from recoveries and reduced settlements of previously recorded receivables and warranty liabilities. Remaining accrued inverter warranty liabilities were $22.4 million at year-end. The company continues to face inverter-related customer and supplier claims and litigation.
Outlook, risks and contingencies
Management gave no numerical revenue or earnings guidance. For 2018, it said it would pursue revenue growth through new products, design wins, applications and geographic expansion, while emphasizing margin expansion, cash generation and cost improvement. The company described semiconductor demand as strong and cited OLED display capacity and demand for industrial thin-film and specialty-power products as favorable market trends.
- Customer concentration is substantial: Applied Materials and Lam Research accounted for 33.5% and 23.1% of 2017 sales, respectively; the ten largest customers represented 70.4%.
- Manufacturing is concentrated in a few specialized sites. The Shenzhen facility is not interchangeable with other sites and must be relocated by July 2020; the company also cited longer delivery times for certain high-demand products made in Littlehampton.
- Demand is cyclical and forecasts uncertain. Supplier commitments, limited-source components, customer inventory requirements and a rising inventory balance create supply, delivery and obsolescence risks.
- International operations expose the company to trade and tariff changes, currency movements, tax and regulatory uncertainty, and political and operating risks. Management noted possible U.S. tariffs on imports, particularly from China, but final measures were unknown.
- The HiTek pension plan was underfunded by $19.8 million at year-end. The company also disclosed ongoing ordinary-course disputes; it did not identify a current legal action it believed would reasonably have a material adverse impact, while noting adverse outcomes could still be material.
- Thomas Liguori resigned as CFO on January 26, 2018; Thomas McGimpsey was appointed interim CFO. Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- Whether the fourth-quarter tax-related loss is fully explained in the detailed tax disclosures, and how the provisional Tax Act accounting is finalized.
- Whether elevated semiconductor demand and the $131.3 million backlog convert into shipments and sales, given customer cancellation or deferral rights.
- Progress, timing, and cost of relocating Shenzhen manufacturing by July 2020, and resolution of reported Littlehampton delivery delays.
- Trends in customer concentration, receivables, inventory, supplier commitments and gross margin as sales growth continues.
- Cash-tax payments under the transition-tax installment schedule, treatment of foreign cash, and any material changes to tax estimates or uncertain tax positions.
- Future cash costs and legal outcomes for legacy inverter warranty obligations and claims, and integration results from Excelsys and Trek.