Advanced Energy Industries, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2017, Advanced Energy designed, manufactured, sold, and supported power-conversion, thermal-instrumentation, and specialty-power products and related services. Its largest market was semiconductor capital equipment. The solar-inverter business, wound down in 2015, is reported as discontinued operations.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Sales | $149.4 million | $103.0 million |
| Gross profit / margin | $78.8 million / 52.8% | $53.5 million / 51.9% |
| Operating income from continuing operations | $43.3 million | $23.6 million |
| Continuing-operations net income | $35.4 million | $20.2 million |
| Net income, including discontinued operations | $37.5 million | $22.3 million |
| Diluted EPS, continuing operations / total | $0.88 / $0.93 | $0.50 / $0.56 |
| Operating cash flow | $40.2 million | $11.9 million |
Sales increased 44.9%. Semiconductor capital equipment sales rose 50.0% to $104.6 million; industrial capital equipment sales rose 46.1% to $24.2 million; and global service sales rose 22.5% to $20.5 million. Operating margin increased to 29.0% from 22.9%; operating expenses rose to $35.6 million, but declined as a share of sales to 23.8% from 29.0%. The continuing-operations effective tax rate was 11.5%, versus 15.7%.
Continuing-operations cash and cash equivalents were $317.9 million, with $4.8 million of marketable securities; management reported $322.7 million in cash, cash equivalents, and marketable securities. Total current assets were $482.8 million and current liabilities $99.1 million. The balance sheet reports no debt balance. Cash from continuing operations increased year over year, partly offset by higher inventory to support growth. Capital expenditures were $1.4 million. Cash paid for interest was zero.
Changes versus the prior comparable period
Revenue growth and higher volume, particularly in semiconductor applications, lifted gross profit and operating income. Operating expenses increased by $5.7 million, including higher R&D investment and SG&A costs related to stock compensation, performance bonuses, and business development; their share of sales fell. Other expense was $3.2 million, compared with $0.4 million of other income in Q1 2016, primarily because of a $3.5 million currency option purchased for a potential offshore acquisition that the company decided not to complete. The option expired and its cost was expensed.
Operating cash flow increased by $28.3 million, primarily reflecting improved earnings, partially offset by inventory investment. Backlog was $91.9 million at quarter-end, up from $69.2 million at December 31, 2016. The company attributed demand strength to semiconductor etch, advanced memory and 3D NAND, logic technology, and growth in advanced coating and services.
Outlook, risks, contingencies, and unusual items
The filing provides no specific numerical earnings or revenue guidance. Management said backlog remained strong and believed available liquidity and expected operating cash flows were adequate for anticipated working capital, capital expenditures, and contractual obligations over the next 12 months. The company expected to continue investing in R&D.
- Customer concentration is substantial: Applied Materials represented 36.5% of sales and 46.5% of receivables; Lam Research represented 21.4% of sales. The two together accounted for 57.9% of quarterly sales.
- The company had approximately $92.5 million of firm supplier purchase commitments. Inventory increased to $64.6 million from $55.8 million.
- Continuing-operations warranty accruals rose to $4.1 million from $2.3 million at year-end. Discontinued inverter operations generated $2.1 million of net income, reflecting recovery of previously reserved receivables and release of warranty liability; related warranty obligations remain.
- The acquired HiTek pension plan had a $18.8 million liability. The company committed to annual fixed payments of $0.8 million through April 2024 and $1.7 million from May 2024 through November 2033.
- Risks include semiconductor and industrial market cyclicality, dependence on a few customers and suppliers, manufacturing concentration in Shenzhen, China, trade and tax-policy changes, currency movements, product warranty exposure, and competition and pricing pressure. A significant portion of cash was held outside the United States ($239.6 million).
- ASC 606 adoption was expected to affect revenue timing for some contracts and balance-sheet line items; the company had not selected a transition method or determined the full impact. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether semiconductor demand and the elevated backlog convert into sustained shipments and margins, given industry cyclicality.
- Exposure to Applied Materials and Lam Research, including collection of receivables and any customer ordering changes.
- Inventory levels, supplier commitments, and supply availability as production scales.
- Future costs and cash requirements for legacy inverter warranties and the HiTek pension plan.
- Effects of the unconsummated acquisition-related currency option, foreign-currency movements, and future tax or trade-policy changes.
- The eventual quantified impact and transition method for ASC 606.