Advanced Energy Industries, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. The company designs and sells precision power, thermal instrumentation, industrial power-control, high-voltage, and solar-inverter products and related services. Results include PCM from January 27 and HiTek from April 12, 2014; prior-year results include Refusol only from its April 2013 acquisition date.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Sales | $146.3m | $139.7m | $287.2m | $251.5m |
| Gross profit / margin | $52.5m / 35.9% | $53.3m / 38.1% | $105.2m / 36.6% | $95.1m / 37.8% |
| Operating income (loss) | $11.5m | $(11.6)m | $28.4m | $(3.9)m |
| Net income (loss) | $10.6m | $(9.8)m | $25.4m | $(3.0)m |
| Diluted EPS | $0.26 | $(0.24) | $0.61 | $(0.07) |
| Operating cash flow | Not separately provided for Q2 | $47.1m | $(10.0)m |
Q2 sales rose 4.7%, while gross profit declined and gross margin fell 2.2 percentage points, attributed to lower-margin product mix and HiTek. Six-month sales increased 14.2%; the company attributed growth primarily to semiconductor investment and newly added product lines. Operating results improved substantially against 2013, which included $24.2m of restructuring and impairment charges; Q2 2014 included $0.2m of restructuring charges.
Precision Power Products Q2 sales increased 14.1% to $81.8m and segment operating income rose to $18.4m from $14.4m. Inverters Q2 sales declined 5.2% to $64.5m and operating loss widened to $6.6m from $1.8m. Total backlog declined to $93.6m at June 30 from $128.3m at year-end, primarily due to lower inverter backlog.
Liquidity, balance sheet, and capital allocation
- Cash and cash equivalents were $117.5m; marketable securities were $12.6m, for combined cash and securities of $130.2m, versus $149.7m at December 31, 2013.
- Current assets were $398.2m and current liabilities $139.7m. Total assets were $704.1m; total liabilities were $239.2m; stockholders’ equity was $465.0m.
- Cash declined $20.6m during the first half. Investing used $31.5m, including acquisitions; financing used $35.5m, including the $25.0m share repurchase, $11.2m cash settlement of performance stock units, and debt repayments.
- The company reported no borrowing on its $50.0m Wells Fargo revolving facility and $50.0m of availability at June 30. Refusol’s Bayern facility had $4.6m outstanding; its stated maturity was July 31, 2014, and renewal discussions were ongoing. The filing does not provide a clear outcome after that date.
- Purchase commitments were approximately $68.6m. A pension liability of $20.4m was acquired with HiTek. Warranty liabilities rose to $37.6m, including $19.7m of acquired liabilities.
Outlook, risks, and unusual items
- Management expected a slight pause in semiconductor investment after recent strong spending; second-half NAND memory investment remained uncertain amid yield concerns and oversupply.
- Solar inverter markets faced product-mix shifts, project delays, financing challenges, and policy uncertainty. Management expected continued momentum in three-phase string inverters alongside a projected decline in central inverters. Inverters’ losses were affected by lower volume, 3TL ramp-up costs, and sales mix.
- The company planned approximately $2.0m of additional restructuring charges over the six months following the April 2014 plan, which consolidates facilities and realigns the organization around product lines.
- The company cited expanded U.S. duties affecting solar cells manufactured in Taiwan and elsewhere for Chinese modules, which it said were raising customer costs and delaying or potentially cancelling projects. This was identified as a material business risk.
- Acquisitions included PCM for $31.1m total consideration and HiTek, which generated net cash consideration received because cash acquired exceeded cash paid. On August 4, 2014, after quarter-end, the company acquired UltraVolt for $30.2m cash.
- Advanced Energy was in a dispute over Refusol closing-account adjustments and had petitioned a German court after unsuccessful attempts to resolve the matter under the agreement. No material developments in other reported legal proceedings were noted.
- Management said foreign exchange exposure was becoming more significant with European acquisitions. The filing reported no material change in overall market-risk exposure from year-end. Disclosure controls were deemed effective as of June 30.
Most important facts for investors to verify
- Whether the Bayern loan was renewed or repaid after its July 31, 2014 maturity, and the resulting liquidity position.
- Whether inverter backlog, profitability, and solar project delays improve, particularly given tariff and policy uncertainty.
- Whether semiconductor spending pauses as management expected, including the timing of NAND investment and related customer demand.
- The costs, expected savings, and execution progress of restructuring and recent acquisitions; also monitor the acquired HiTek pension and warranty obligations.
- The outcome of the Refusol purchase-price dispute and final purchase-accounting valuations for recent acquisitions.