Business context and reporting period
Advanced Energy Industries, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The company sells power-conversion and thermal-instrumentation products for thin-film manufacturing, solar inverters, and related services. Its two segments are Thin Films and Solar Energy. Results include Solvix, acquired in November 2012, and Refusol, acquired April 8, 2013; Refusol’s results are included from the acquisition date.
Financial performance and liquidity
- Second-quarter revenue: $139.7 million, up 20.8% year over year. Gross profit was $53.3 million; gross margin was 38.1%, versus 37.8%.
- Second-quarter earnings: Operating loss was $11.6 million and net loss was $9.8 million, or diluted loss per share of $0.24. Results included $24.2 million of restructuring and impairment charges. Excluding specified items, management reported non-GAAP net income of $13.9 million and diluted EPS of $0.35; these are non-GAAP measures.
- Six-month results: Revenue was $251.5 million, up 13.6%. Gross margin was 37.8%, compared with 37.7%. Operating loss was $3.9 million and net loss was $3.0 million, versus prior-year operating income of $11.9 million and net income of $10.0 million.
- Segments: Q2 Thin Films revenue rose 10.6% to $71.7 million and segment operating income increased to $14.4 million from $8.9 million. Solar Energy revenue rose 33.8% to $68.0 million, while segment operating loss was $1.8 million versus income of $2.7 million, reflecting costs associated with the acquired inverter product line.
- Cash flow: Six-month operating cash flow was negative $10.0 million, compared with positive $64.8 million a year earlier; management cited working-capital use, particularly higher receivables, and increased tax payments. Investing cash flow was negative $67.5 million, including $77.2 million paid for Refusol. Cash and equivalents declined by $59.5 million to $87.1 million.
- Liquidity and debt: Cash, cash equivalents, and marketable securities totaled $99.1 million at June 30. Current assets were $373.9 million and current liabilities $137.3 million. Notes payable to banks were $13.4 million, primarily assumed with Refusol. The company reported no borrowings on its $50 million revolving facility at June 30; the Refusol, Inc. $1.5 million line was repaid and canceled July 1.
Changes versus the prior comparable period
- Revenue growth reflected stronger Thin Films markets and the acquired three-phase inverter product line. Refusol contributed $19.8 million in sales and a $5.4 million operating loss from April 8 through June 30.
- Operating results deteriorated despite higher sales, chiefly because of the 2013 restructuring and impairment charges. The largest single component was a $17.7 million impairment of intangible assets.
- Solar Energy’s share of revenue increased, but its operating performance weakened due to acquired-product-line expenses. Thin Films benefited from higher sales and improved manufacturing efficiencies.
- Cash generation shifted substantially: operating cash flow moved from positive to negative, and investing outflows rose due to the Refusol acquisition. Unlike the first half of 2012, the company made no share repurchases in the first half of 2013.
Outlook, management commentary, and risks
- Management expected an industry pause to leave semiconductor-market sales flat to slightly lower in the second half of 2013. It also expected lower flat-panel-display demand after first-half investment activity; thin-film solar-panel sales were expected to remain historically low. Global support revenue was expected to be stable to higher.
- The company anticipated $11–$13 million of additional restructuring charges over the next six months, including approximately $1.5–$3 million of cash expenditures. Estimated total plan expenses were $35–$37 million, with expected annual savings of approximately $70–$75 million. Management expected restructuring benefits to begin affecting Solar Energy results in Q3.
- Backlog was $87.8 million at June 30, versus $92.7 million at December 31. Management said backlog would have been $123.7 million had a large solar order received in the final week of Q2 been confirmed before quarter-end.
- Management said current liquidity and expected operating cash flows should cover anticipated working capital, capital expenditures, and contractual obligations for the next 12 months. No specific revenue or earnings guidance was provided.
- Risks include acquisition integration and realization of expected synergies; execution of restructuring and greater reliance on operations in China and India; market cyclicality and solar-sector oversupply; foreign-exchange exposure; and customer concentration. Applied Materials represented 16.4% of Q2 sales.
- Other notable items: firm supplier purchase commitments were approximately $72 million. The filing reported no material developments in ongoing ordinary-course legal matters. Disclosure controls were assessed as effective; the company was still reviewing Refusol’s controls and intended to exclude Refusol from its year-end 2013 internal-control assessment.
Important facts for investors to verify
- Whether the solar order described by management was subsequently confirmed and converted into revenue.
- Whether restructuring charges, cash costs, timing, and projected annual savings track management’s estimates.
- Whether Refusol integration improves Solar Energy profitability and whether assumed debt or contingent acquisition consideration changes.
- Whether working-capital demands—especially receivables and inventory—recover sufficiently to restore operating cash flow.
- Whether market pauses, customer concentration, and the company’s planned manufacturing transfers affect sales, margins, or execution.