Advanced Energy Industries, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; comparisons are to the same 2014 periods unless noted. The company designs and sells power conversion, control, and instrumentation products. Following a strategic review, it announced on June 29, 2015 that it would wind down its solar Inverters business and focus on Precision Power.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Sales | $130.8 million | $143.1 million | $408.7 million | $430.4 million |
| Gross profit / margin | $53.0 million / 40.5% | $47.9 million / 33.5% | $153.1 million / 37.4% | $153.2 million / 35.6% |
| Operating income (loss) | $9.7 million | $9.2 million | ($153.1 million) | $37.7 million |
| Net income (loss) | $16.4 million | $12.3 million | ($194.8 million) | $37.7 million |
| Diluted EPS | $0.40 | $0.30 | ($4.76) | $0.92 |
| Operating cash flow | Not separately provided for the quarter | $72.1 million | $57.3 million |
- Q3 revenue declined 8.6%, as Inverters sales fell 55.8% to $22.9 million; core business sales increased 18.3% to $107.9 million, led by semiconductor equipment demand.
- For the first nine months, core business sales rose 24.4% to $318.3 million, while Inverters sales declined 48.2% to $90.4 million. Gross margin improved mainly from a mix shift toward higher-margin core products; Inverter inventory impairments partly offset the benefit.
- Nine-month results included $182.3 million of restructuring charges, including $149.9 million of Inverters goodwill impairment. Other Inverter-related items included $18.4 million of inventory impairment and a $13.6 million bad-debt accrual. The filing attributes the large reported loss to restructuring and related charges; reported tax expense was also affected by nondeductible charges and deferred-tax-asset judgments.
- Management-reported non-GAAP diluted EPS was $0.51 for Q3 2015 versus $0.42 in Q3 2014, and $1.51 for the first nine months versus $1.23. These measures exclude specified items and are not GAAP results.
Financial position and liquidity
- At September 30, 2015, cash and cash equivalents were $184.3 million and marketable securities were $14.7 million, totaling $199.0 million. Cash at non-U.S. banks was $99.3 million.
- Current assets were $393.4 million and current liabilities were $142.7 million. Total liabilities were $238.3 million; stockholders’ equity was $275.4 million.
- The company had no borrowings under its Wells Fargo revolving facility and reported $21.1 million of availability; the facility’s stated maximum was $50 million, subject to borrowing-base and other conditions. The facility matures October 2017. A $2.0 million letter of credit was issued during Q3.
- Nine-month investing cash outflow was $15.0 million, versus $53.1 million in 2014, when acquisitions drove cash use. Financing provided $4.1 million, compared with $38.4 million of outflow in 2014. Cash increased $59.0 million during the 2015 period.
Outlook, material items, and risks
- Management expected Q4 2015 core-business sales to be lower, in line with the semiconductor market, and expected to substantially complete the Inverters wind-down by year-end 2015.
- The company estimated total pre-tax charges for the Inverters restructuring plan of approximately $260 million to $290 million, with most recorded in Q2 and Q3. It expected another $15 million to $20 million over the following three months, mainly asset and inventory write-downs, employee termination costs, and facility-exit costs.
- Management expected a significant Q4 tax benefit under the annual effective tax-rate method and estimated a full-year effective tax rate of approximately 1% to 2%.
- Backlog fell to $51.4 million at September 30 from $87.9 million at December 31, 2014, reflecting lower Inverters backlog and reduced orders tied to the forecast semiconductor slowdown.
- Customer concentration is material: Applied Materials and Lam Research accounted for 25.8% and 17.4% of Q3 sales, respectively. The ten largest customers represented 63.6% of nine-month sales.
- Other risks include uncertainty in wind-down costs and continuing Inverters warranty obligations; semiconductor-market cyclicality; $55.3 million in supplier purchase commitments; foreign-exchange exposure; and manufacturing and supplier concentration. The filing reported no material developments in legal proceedings and no material change in market-risk exposure.
- The board authorized a $150 million share-repurchase program in September for a 30-month period; no shares had been repurchased under it by September 30. The company’s capital-deployment strategy also cited organic investment, acquisitions, repurchases, and possible use of debt.
Key facts for investors to verify
- Whether the Inverters wind-down meets management’s timeline and stays within the $260 million to $290 million estimated charge range, including residual warranty and exit costs.
- Whether core-business demand, backlog, and margins withstand the anticipated semiconductor-market slowdown.
- Collectability of Inverters-related receivables and adequacy of inventory, warranty, and other reserves.
- Liquidity and capital deployment plans, including potential repurchases, acquisitions, or debt use, given cash held overseas and credit-facility restrictions.
- Effects of customer concentration, supplier commitments, foreign-exchange movements, and the expected Q4 tax benefit on subsequent results.