Advanced Energy Industries, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Financial amounts below are in millions of dollars unless stated otherwise. The company designs, manufactures, sells, and supports power conversion, thermal instrumentation, and specialty power products. Its solar inverter business was discontinued in December 2015 and is reported as discontinued operations.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Sales | $126.6 | $109.8 | $348.4 | $327.9 |
| Gross profit / margin | $66.1 / 52.2% | $58.5 / 53.3% | $181.6 / 52.1% | $174.2 / 53.1% |
| Operating income / margin | $34.4 / 27.1% | $30.2 / 27.5% | $88.3 / 25.3% | $90.5 / 27.6% |
| Continuing-operations net income | $29.0 | $23.3 | $76.5 | $72.0 |
| Net income (loss), including discontinued operations | $30.4 | $16.4 | $83.2 | $(194.8) |
| Diluted EPS, continuing operations | $0.73 | $0.56 | $1.91 | $1.76 |
- Q3 comparison: Sales rose 15.3%; operating income increased 13.9% and continuing-operations net income rose 24.6%. Gross margin declined 1.1 percentage points, primarily due to product mix; operating margin was down 0.4 points.
- Nine-month comparison: Sales grew 6.2%, but operating income declined 2.4%; gross and operating margins fell 1.0 and 2.3 points, respectively. Continuing-operations net income increased 6.3%. The large year-over-year swing in total net income reflects the 2015 discontinued-operations loss, not comparable continuing business performance.
- Q3 sales growth spanned semiconductor equipment (+11.4%), industrial power (+23.9%), and global service (+21.8%). Management cited semiconductor program wins, including demand associated with advanced memory and 3D NAND, and service share gains and installed-base growth. Backlog was $56.4 million at quarter-end, versus $43.7 million at December 31, 2015.
Cash flow, balance sheet, and liquidity
- Continuing-operations operating cash flow for the first nine months was $82.0 million, down from $109.5 million. Total operating cash flow, including discontinued operations, was $77.5 million versus $72.1 million. Management attributed weaker continuing cash generation mainly to working-capital use, including accounts receivable and inventory.
- At September 30, cash and cash equivalents were $244.3 million and marketable securities were $5.5 million. Total cash, equivalents, and marketable securities were $249.8 million. Current assets were $420.9 million and current liabilities were $95.5 million.
- The company had no debt outstanding. It terminated its secured revolving credit facility, which had provided up to $50 million, on September 9, 2016 because management considered it unnecessary and not cost-beneficial.
- Stockholders’ equity was $354.8 million, compared with $263.6 million at December 31, 2015. The company repurchased $50 million of shares under an accelerated repurchase arrangement, receiving 1.7 million shares at an average $28.99 per share. $100 million remained available under its repurchase authorization as of October 28, 2016.
Outlook, risks, and notable items
- No specific revenue or earnings guidance is provided. Management said current liquidity and expected operating cash flows should cover anticipated working capital, capital expenditures, and contractual obligations for the next 12 months. It described backlog as strong, primarily due to semiconductor demand.
- Customer concentration is significant: Applied Materials accounted for 36.2% of Q3 sales and 42.3% of receivables at quarter-end; Lam Research accounted for 19.2% of Q3 sales and 14.4% of receivables. The filing also says the top ten customers represented 65.6% of nine-month sales.
- Key disclosed risks include cyclical end markets and purchase-order-based demand, pricing and competitive pressure, dependence on major customers and design wins, supply commitments and sole-source components, foreign-exchange and international-operating exposure, and manufacturing concentration. The Shenzhen lease was due to expire in July 2017; the company said it was working to extend it and expected an extension.
- Legacy inverter warranty obligations remain after the product-line wind-down. Discontinued operations produced $1.3 million of Q3 income and $6.7 million for the first nine months of 2016; the filing attributes 2016 operating results in part to recovery of previously reserved warranty-related receivables. Future warranty costs could differ from estimates.
- Firm supplier purchase commitments were approximately $54.4 million. The HiTek defined-benefit pension liability was $17.2 million; the company committed to contribute approximately $1.0 million annually through 2024.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material legal-proceeding developments were reported.
Important facts for investors to verify
- Whether semiconductor demand, program wins, and the $56.4 million backlog convert to sustained sales, given the absence of long-term customer purchase commitments.
- Whether margin pressure from product mix, pricing, and higher operating expenses persists as sales grow.
- Receivables, collections, and exposure to Applied Materials and Lam Research, alongside the working-capital demands reflected in cash flow.
- The adequacy of legacy inverter warranty reserves and the ability to support existing service obligations profitably.
- Progress extending the Shenzhen facility lease and managing the $54.4 million of supplier commitments and other supply-chain risks.
- Potential effects of foreign exchange, international cash concentrations, and pension funding assumptions on future results and liquidity.