Business Context and Reporting Period
Company: Advanced Energy Industries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: The company designs, manufactures, and sells industrial power conversion products for semiconductor, flat panel display, solar, and architectural glass markets. Operations are conducted globally with significant presence in the United States, Asia, and Europe.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2009 |
Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
|---|---|---|---|
| Sales | $35,567 | $68,194 | $176,883 |
| Gross Profit | $7,931 | $14,319 | $71,124 |
| Gross Margin % | 22.2% | 21.0% | 40.2% |
| Net Income (Loss) | $(16,034) | $(95,797) | $11,829 |
| Diluted EPS | $(0.38) | $(2.28) | $0.27 |
| Cash and Equivalents (Balance Sheet) | $137,416 (as of June 30, 2009) | ||
| Operating Cash Flow (6 months) | $(1,052) used |
Material Changes vs. Prior Period
- Revenue Decline: Sales for the six months ended June 30, 2009, dropped 61.4% to $68.2 million from $176.9 million in the prior year period. This was driven by a 73.5% decline in semiconductor capital equipment sales and a 52.9% decline in non-semiconductor sales due to the global economic crisis and reduced factory utilization.
- Goodwill Impairment: The company recorded a non-cash goodwill impairment charge of $63.3 million in the first quarter of 2009. This charge was the primary driver of the net loss for the six-month period.
- Margin Compression: Gross margin fell from 40.2% in the prior year to 21.0% due to reduced production volumes and an inability to fully absorb fixed manufacturing costs.
- Restructuring: The company reduced its global workforce by approximately 26.1% since the beginning of 2008. Restructuring charges totaled $4.1 million for the six months ended June 30, 2009.
- Inventory and Receivables: Accounts receivable decreased significantly to $32.3 million from $56.5 million at year-end 2008, reflecting lower sales volume. Inventory levels also declined to $39.8 million.
Guidance, Outlook, and Risks
- Outlook: Management expects industry conditions to remain challenging for the remainder of 2009. The company anticipates operating below its breakeven point through the end of the year and expects orders and net sales to be down compared to 2008.
- Liquidity: As of June 30, 2009, the company held $175.3 million in cash, cash equivalents, and marketable securities. This includes $23.1 million in Auction Rate Securities (ARS) which are illiquid but secured by a Put Agreement allowing sale at par starting June 30, 2010. A $21.0 million uncommitted line of credit secured by ARS was established but no advances were drawn.
- Tax Position: The company recorded a valuation allowance of $34.4 million against deferred tax assets. To fully utilize these assets, the company would need to generate approximately $95.1 million in pre-tax income in the U.S. prior to expiration of carryforwards.
- Legal Contingencies: A dispute with the Customs Office of Taipei, Taiwan regarding product imports remains pending. The company has accrued $0.3 million, with a maximum potential penalty of $2.3 million, though management views the likelihood of the maximum penalty as remote.
- Customer Concentration: Applied Materials, Inc. accounted for 16.8% of sales in the quarter and 16.7% for the six-month period. The top ten customers accounted for 47% of sales for the six months ended June 30, 2009.
Investor Verification Checklist
- Goodwill Impairment: Verify the assumptions used in the fair value calculation that led to the $63.3 million non-cash charge.
- Auction Rate Securities (ARS): Confirm the status of the Put Agreement with the financial institution and the liquidity risk associated with the $23.1 million ARS holding until June 2010.
- Deferred Tax Assets: Assess the feasibility of generating the required $95.1 million in U.S. pre-tax income to reverse the $34.4 million valuation allowance.
- Customer Concentration: Monitor the financial health and order volumes of Applied Materials, Inc., which represents a significant portion of revenue.
- Inventory Reserves: Review the adequacy of the $12.0 million excess and obsolete inventory reserve given the continued weakness in end-market demand.