Advanced Energy Industries, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. The company designs and sells power-conversion, thermal-instrumentation, solar-inverter and related service products. Its two operating segments are Thin Films and Solar Energy. Comparisons below are year over year unless noted.
Financial results and liquidity
- Revenue: $111.8 million, up 5.7% from $105.8 million. Thin Films revenue rose 2.3% to $61.8 million; Solar Energy rose 10.2% to $50.0 million.
- Profit and margins: Gross profit was $41.8 million, with a 37.4% gross margin versus 37.6%. Operating income increased to $7.7 million from $0.6 million; operating margin was 6.9% versus 0.6%. Continuing-operations net income was $6.8 million versus $0.8 million; diluted EPS was $0.17 versus $0.02. Q1 2012 included $2.6 million of restructuring charges, while Q1 2013 included none.
- Segment performance: Thin Films operating income increased to $7.5 million from $3.2 million, reflecting improved gross margins and lower operating expenses. Solar Energy operating income declined to $0.2 million from $0.5 million, primarily due to product mix and lower gross margins.
- Cash flow: Operating cash flow was negative $0.5 million versus positive $34.7 million. The company cited a $13.8 million increase in accounts receivable as a major cash use. Investing activities provided $11.7 million, primarily reflecting marketable-security sales; financing provided $12.1 million, including $13.1 million from stock-option exercises. Cash and cash equivalents increased $23.2 million to $169.7 million.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $182.3 million at quarter-end. There was no debt outstanding. The company had a secured revolving credit facility of up to $50 million, with a 4.25% rate in effect; it made no borrowings under the facility during the quarter. Management said available liquidity and anticipated operating cash flows should cover expected needs for the next 12 months.
- Other balance-sheet measures: Current assets were $389.4 million and current liabilities $82.4 million. Total assets were $551.5 million; stockholders’ equity was $404.8 million. Purchase commitments to suppliers were approximately $62.6 million.
- Non-GAAP results: Management reported adjusted continuing-operations net income of $11.7 million and diluted EPS of $0.29, excluding restructuring, stock compensation, intangible amortization and acquisition-related costs. These non-GAAP measures are not substitutes for GAAP results.
Material changes and business drivers
- Revenue growth was led by solar inverter sales, particularly in utility markets, and by increased non-semiconductor Thin Films sales. Semiconductor capital-equipment sales fell 14.7% to $32.7 million amid weak customer capital spending, although management noted sequential improvement and expected stronger spending into Q2.
- Non-semiconductor capital-equipment sales increased 65.0%, supported by flat-panel-display investment; thin-film solar-panel sales remained very low amid industry overcapacity. Global support revenue rose 4.1% to $12.5 million.
- Solar Energy sales benefited from continued growth in Canada. The company cited seasonal softness in first-quarter solar installations and customer project delays related to permitting and financing. Backlog declined to $86.9 million from $92.7 million at year-end, primarily due to lower Solar Energy orders.
- Operating expenses fell to $34.1 million from $39.1 million, reflecting lower R&D and SG&A costs and the absence of prior-year restructuring charges. Amortization expense rose to $2.2 million from $1.4 million.
- The effective tax rate was 9.2% versus 25.9%, including a $1.4 million discrete benefit from reinstatement of the 2012 U.S. R&D tax credit, as well as lower-tax foreign earnings.
- Q1 2013 included Solvix, acquired in November 2012; it contributed $1.2 million in sales and a $0.2 million net loss in the quarter. The gas-flow-control business was reported as discontinued operations; Q1 2012 included $0.3 million of discontinued-operations income.
Outlook, transactions and risks
- After quarter-end, on April 8, 2013, the company acquired RefuSol, a photovoltaic-inverter business. The seller received €59 million in cash; the company assumed €9 million of debt, with a €1.8 million working-capital reduction. Additional cash and stock earn-out consideration of up to €10 million may be payable based on performance. RefuSol’s results are not included in Q1.
- In connection with the RefuSol acquisition, management committed to a restructuring expected to be carried out over nine months. Estimated charges are $30–$35 million, including approximately $7–$15 million of cash expenditures; expected annual savings are $70–$75 million. Planned actions include facility consolidation, moving manufacturing and supply-chain activities, and rationalizing inverter products. Timing, charges, savings and execution remain uncertain.
- Management expected Solar Energy sales to increase in Q2 following the RefuSol acquisition. It also expected stronger flat-panel-display investment through the first half of 2013, low thin-film solar-panel sales through that period, and stable global support revenue as utilization improved.
- Key exposures include semiconductor capital-spending cycles, solar-market overcapacity and project delays, customer concentration, foreign-exchange movements, acquisition integration and realization of restructuring savings. Applied Materials accounted for 16.7% of Q1 sales and Fluor Enterprises for 12.1%.
- The company reported no material legal-proceeding developments, no off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2013. It cautioned that forward-looking statements are subject to risks and actual outcomes may differ.
Important facts for investors to verify
- Whether semiconductor utilization and capital spending continued to improve after Q1, and whether the expected Q2 strength materialized.
- Solar Energy backlog conversion, customer permitting and financing delays, and the effect of seasonality and customer concentration.
- RefuSol’s final purchase-price adjustment, integration progress, earn-out conditions and contribution to Solar Energy results.
- Actual restructuring charges and cash outlays, timing of implementation, and whether projected annual savings are achieved.
- Operating cash conversion, particularly receivables and tax-related cash movements, alongside liquidity needs after the acquisition.
- The sustainability of reported earnings given the R&D tax-credit benefit and the difference between GAAP and management’s adjusted results.