Advanced Energy Industries, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. The company designs and supplies precision power conversion, control, high-voltage and thermal instrumentation products, as well as related services. Inverter operations were discontinued in December 2015 and are presented as discontinued operations.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Sales | $103.0 million | $109.5 million | Down 5.9% |
| Gross profit / margin | $53.5 million / 51.9% | $59.1 million / 54.0% | Margin down 2.1 percentage points |
| Operating income from continuing operations | $23.6 million | $31.5 million | Down $7.9 million |
| Continuing-operations net income | $20.2 million | $25.7 million | Down 21.2% |
| Discontinued-operations result, net of tax | $2.1 million income | $4.4 million loss | Improved |
| Total net income / diluted EPS | $22.3 million / $0.56 | $21.3 million / $0.52 | Net income up 4.7% |
| Operating cash flow, continuing operations | $12.4 million | $38.8 million | Down $26.4 million |
Operating expenses rose to $29.8 million from $27.6 million, or 29.0% of sales versus 25.2%. R&D expense increased to $10.8 million, reflecting investment in new programs; SG&A increased to $18.0 million. The continuing-operations effective tax rate was 15.7%, compared with 20.8%, primarily reflecting earnings in lower-tax foreign jurisdictions.
Liquidity, debt and cash flow
- At March 31, cash and cash equivalents were $176.3 million and marketable securities were $7.7 million. Management reported $184.0 million of cash, cash equivalents and marketable securities available to the continuing business.
- Total assets were $478.3 million and total liabilities were $189.1 million. The company had no debt outstanding. Its $50 million secured revolving facility had $14.2 million available, subject to borrowing-base limits, and a 4.25% rate in effect; maturity is October 2017.
- Operating cash flow from continuing operations was $12.4 million; total operating cash flow, including discontinued operations, was $11.6 million. Management attributed the lower year-over-year cash generation primarily to increased inventory and accounts receivable as semiconductor demand rebounded.
- Cash from continuing operations increased from $158.4 million at year-end 2015 to $176.3 million. The company held $121.0 million of cash in banks outside the United States.
Business trends and outlook
- Semiconductor capital-equipment sales decreased 4.7% year over year to $69.7 million; industrial precision-power sales fell 18.8% to $16.5 million. Global service sales increased 5.3% to $16.8 million.
- Management said semiconductor market conditions had strengthened since the second half of 2015, supported by advanced-memory/3D NAND and logic technology investment. It expected investment levels in the second quarter of 2016 to increase from current levels; this was not presented as quantified company revenue or earnings guidance.
- Backlog rose to $56.5 million at March 31 from $43.7 million at December 31, 2015, primarily reflecting anticipated semiconductor demand.
- The $2.1 million after-tax discontinued-operations income included recoveries of items previously expensed. No inverter sales were reported in Q1 2016, but substantial legacy warranty obligations remained: discontinued-operations accrued warranty liabilities totaled approximately $38.0 million, current and non-current combined.
- The company completed its $50 million accelerated share repurchase on April 11, 2016, with total repurchases of 1.7 million shares. The board’s authorization was up to $150 million over 30 months.
Risks, commitments and other matters
- Customer and market concentration are significant: Applied Materials and Lam Research represented 32.8% and 21.4% of Q1 sales, respectively; the ten largest customers accounted for 66.4%.
- Key risks include semiconductor-industry cyclicality, customer pricing pressure, forecast and inventory risk, dependence on a limited number of suppliers and manufacturing sites, foreign-exchange exposure, and legacy inverter warranty costs. The filing reports approximately $52.3 million of firm supplier purchase commitments.
- The company committed to contribute $1.0 million annually to its defined-benefit pension obligation through 2024; the reported pension liability was $17.5 million.
- Management stated that available liquidity and expected operating cash flows should meet anticipated working-capital needs, capital expenditures and contractual obligations for the next 12 months. No material legal-proceeding developments or material changes in market-risk exposure were reported. Disclosure controls were concluded to be effective as of March 31, 2016.
Important facts for investors to verify
- Whether semiconductor demand and the higher backlog convert into shipments and revenue, and whether industrial-market weakness persists.
- How much of the year-over-year decline in operating cash flow reflects temporary working-capital investment versus ongoing cash-generation trends.
- The adequacy and timing of the discontinued inverter warranty reserves and whether future recoveries or claims materially affect results.
- Exposure to major customers, supplier commitments, foreign-held cash and the borrowing-base-dependent availability under the revolver.
- Whether rising R&D and other operating expenses support future growth without further margin deterioration.