Advanced Energy Industries, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. The company designs and sells power conversion, control, thermal instrumentation, and solar inverter products, with Precision Power Products and Inverters segments.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Sales | $141.1 million | $140.9 million |
| Gross profit / margin | $59.7 million / 42.3% | $52.7 million / 37.4% |
| Operating income / margin | $21.9 million / 15.5% | $16.9 million / 12.0% |
| Net income | $21.3 million | $14.7 million |
| Diluted EPS | $0.52 | $0.35 |
| Operating cash flow | $28.6 million | $6.8 million |
- Cash and cash equivalents were $152.8 million and marketable securities were $3.1 million at March 31. The company reported $49.4 million available under its $50 million revolving credit facility and no borrowings under it. Total current assets were $410.2 million versus current liabilities of $115.3 million.
- Cash increased $27.5 million during the quarter. Investing used $0.4 million; financing provided $2.3 million. Operating cash flow improved year over year, primarily with higher net income and changes in receivables and payables, partly offset by increased inventory.
- No material debt balance is reported; the filing states there were no borrowings under the revolving facility. Long-term liabilities include a $19.1 million pension liability and other obligations.
Changes versus the prior comparable period
- Sales were nearly flat overall, but segment mix shifted substantially. Precision Power Products sales rose 27.7% to $105.8 million, while Inverters sales fell 39.3% to $35.3 million.
- Precision Power operating income increased to $31.1 million from $23.2 million, attributed to higher volumes, manufacturing efficiencies, and richer product mix. Inverters’ operating loss widened to $9.2 million from $6.3 million as sales declined.
- Gross margin improved by 4.9 percentage points, largely due to higher-margin product mix. Net income rose 44.6%; the effective tax rate fell to 7.2% from 12.5%, primarily reflecting earnings mix across tax jurisdictions.
- Results are not fully comparable: PCM was acquired in January 2014, and HiTek and UltraVolt were acquired during 2014 and contributed to Q1 2015 results but not to the full Q1 2014 comparison.
Outlook, commentary, and risks
- No quantified company-wide earnings or revenue guidance is provided. Management expected semiconductor investment levels to decrease in Q2 and described uncertainty for the remainder of 2015, dependent partly on 3D NAND and foundry expansion plans.
- The company was evaluating strategic alternatives for its Inverters business and expected to complete the review in Q2 2015; management warned the process could affect customer demand. It anticipated a modest Q2 recovery in the U.S. commercial inverter market, while noting weakness in utility projects and uncertainty around solar tariffs and investment tax credits.
- Backlog fell to $72.7 million at March 31 from $87.9 million at December 31, primarily due to lower Inverters backlog. Inverter sales are seasonal, with installations typically weakest in Q1.
- Key exposures include solar incentive and tax-credit changes, inverter price pressure and market weakness, customer demand concentration, foreign exchange, and manufacturing-footprint changes. Applied Materials and Lam Research represented 25.1% and 15.5% of Q1 sales, respectively.
- The company recorded a $1.9 million potential bad-debt accrual in SG&A. Foreign-currency translation reduced other comprehensive income by $14.9 million, taking accumulated other comprehensive income from $10.8 million to a loss of $4.1 million. The quarter also included a $1.5 million gain on currency forwards, substantially offset by changes in related intercompany debt.
- Firm supplier purchase commitments were approximately $64.7 million. The filing reports no material legal-proceeding developments. Disclosure controls were deemed effective; the former CFO left in March and the Chief Accounting Officer became Principal Financial Officer.
Important facts for investors to verify
- Progress and outcome of the Inverters strategic review, and any impact on customer orders or demand.
- Whether the sharp Inverters sales decline and backlog reduction continue, and whether the expected Q2 market recovery materializes.
- Sustainability of Precision Power growth and margin improvement, including the contribution from acquisitions and semiconductor customers.
- Recoverability of the $1.9 million potential bad-debt balance, inventory levels, and the effect of customer concentration.
- Exposure to foreign exchange, solar incentives, supplier commitments, and pension and warranty obligations.
- Whether operating cash generation remains strong and how management uses its cash and revolving-credit availability.