Business context and reporting period
Advanced Energy Industries, Inc. filed this Form 10-K for the fiscal year ended December 31, 2012; it is an annual report, not a standalone fourth-quarter filing. The company makes power-conversion and thermal-instrumentation products for thin-film manufacturing, solar inverters for commercial and utility-scale projects, and related support services. Its two reportable businesses are Thin Films and Solar Energy.
In November 2012, the company acquired Swiss power-supply maker Solvix for approximately $21.2 million, including contingent consideration. It also completed the transition of its former gas-flow-control contract manufacturing work to Hitachi in 2012; that business is reported as discontinued operations.
Financial performance
Amounts below are in millions of dollars except per-share data. Full-year results are compared with 2011; the final row gives selected fourth-quarter figures.
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $451.9 | $516.8 |
| Gross profit / margin | $167.7 / 37.1% | $205.2 / 39.7% |
| Operating income / margin | $27.4 / 5.9% | $49.3 / 9.5% |
| Continuing-operations income | $20.2 | $36.9 |
| Net income | $20.6 | $36.3 |
| Diluted EPS, continuing operations | $0.51 | $0.84 |
| Operating cash flow | $110.8 | $38.1 |
Revenue declined 12.6%. Thin Films sales fell 28.4% to $235.3 million, while Solar Energy sales rose 15.1% to $216.6 million. Thin Films operating income was $22.8 million versus $68.2 million in 2011; Solar Energy operating income improved to $14.0 million from $4.3 million. Fourth-quarter 2012 revenue was $113.0 million, gross profit $38.5 million, operating income $5.5 million, and continuing-operations income $4.9 million. In Q4 2011, those figures were $112.5 million, $38.9 million, an operating loss of $3.1 million, and a continuing-operations loss of $2.6 million, respectively.
Cash and cash equivalents were $146.6 million and marketable securities $25.7 million at year-end, totaling $172.2 million. The company reported no debt outstanding and had an undrawn secured revolving credit facility of up to $50.0 million. Current assets were $370.5 million and current liabilities $88.6 million. Total assets were $538.2 million; total liabilities $150.5 million; stockholders’ equity $387.6 million. Operating cash flow increased chiefly because of collections of accounts receivable. Investing cash outflow was $24.5 million and financing cash outflow was $54.9 million, including $57.1 million of share repurchases.
Material changes versus the prior comparable period
- Thin Films was affected by weak semiconductor demand and sharp declines in flat-panel-display and thin-film-renewables spending. Non-semiconductor capital-equipment sales fell 60.9%; thin-film-renewables sales fell 90.6%.
- Solar Energy growth, driven by Canadian expansion and large utility-scale project wins, partly offset the Thin Films contraction. Solar Energy grew to 47.9% of company revenue, from 36.4%.
- Gross margin fell 2.6 percentage points, which management attributed largely to the product mix shift toward Solar Energy, which has lower gross margins, and lower Thin Films sales.
- Operating expenses declined to $140.4 million from $155.9 million, but remained higher as a share of sales. Restructuring charges were $7.5 million in 2012, following $7.3 million in 2011; the plan reduced headcount by approximately 16.4% and was substantially complete.
- Year-end backlog increased 20.5% to $92.7 million, primarily due to inverter orders and utility-scale wins. The filing cautions that backlog may be delayed or cancelled and is not necessarily predictive of sales.
Outlook, risks and unusual items
Management expected 2013 Thin Films semiconductor revenue to remain largely flat, with potential improvement in the second half; it anticipated improving flat-panel-display sales through much of the year, but continued low thin-film-renewables sales. Solar Energy was expected to grow for the year, although management expected first-quarter sales to be flat. Industrial thin-film demand was expected to continue improving. These are management expectations, not guarantees.
Key risks include cyclical and uncertain customer capital spending; changing solar incentives and access to project financing; customer concentration (the ten largest customers represented 47.7% of 2012 sales, and Applied Materials 14.1%); supplier constraints and $54.4 million of purchase commitments; reliance on manufacturing sites, particularly Shenzhen; competition and pricing pressure; warranty, reliability and potential performance-guarantee exposure on solar inverters; and foreign-exchange, tax, acquisition-integration and intellectual-property risks. Solar inverter installations are seasonal, typically weakest in the first quarter.
Unusual or important items include a $1.9 million gain on sale of manufacturing assets to Hitachi, $14.8 million in cumulative restructuring charges through 2012, and the Solvix acquisition, which contributed $0.5 million in revenue from acquisition through year-end. Management expected a roughly $1.5 million discrete tax benefit in Q1 2013 from retroactive reinstatement of the federal R&D credit. The company had $12.8 million of uncertain tax positions and $84.1 million of foreign earnings treated as indefinitely reinvested. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification points
- Confirm whether Solar Energy growth and project wins can offset ongoing Thin Films weakness, and track actual 2013 segment sales and margins.
- Assess the sustainability of 2012 operating cash flow, particularly the benefit from receivables collections, and monitor receivables, inventory and customer credit quality.
- Review backlog conversion, cancellations or delivery delays, customer concentration, and exposure to large utility-scale projects.
- Track restructuring savings, remaining charges, Solvix integration and contingent consideration, and any impairment indicators for goodwill or intangible assets.
- Monitor the $54.4 million supplier commitments, manufacturing transition and supply-chain concentration, solar warranty claims, and any performance-guarantee obligations.
- Verify tax-credit effects, uncertain tax positions, foreign cash availability, and the terms and covenant requirements of the undrawn credit facility.