Advanced Energy Industries, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Unaudited financial statements; amounts below are in millions of U.S. dollars except per-share data. The company designs, manufactures, sells, and services power-conversion and thermal-instrumentation products for thin-film manufacturing, and solar inverters for commercial and utility-scale projects. Its two segments are Thin Films and Solar Energy.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Sales | $142.9 | $117.5 | $394.4 | $339.0 |
| Gross profit / margin | $56.2 / 39.3% | $45.7 / 38.9% | $151.3 / 38.4% | $129.2 / 38.1% |
| Operating income (loss) | $(1.5) | $9.9 | $(5.4) | $21.9 |
| Net income (loss) | $0.7 | $5.7 | $(2.3) | $15.7 |
| Diluted EPS | $0.02 | $0.15 | $(0.06) | $0.40 |
- Segment sales: Q3 Thin Films $75.4 million, up 32.8%; Solar Energy $67.5 million, up 11.1%. Nine-month sales were $208.9 million for Thin Films, up 14.8%, and $185.5 million for Solar Energy, up 18.2%.
- Segment operating income: Thin Films earned $18.2 million in Q3 and $40.1 million year to date. Solar Energy earned $0.2 million in Q3 but recorded a $1.4 million loss year to date, versus $7.4 million and $10.6 million of income, respectively, in 2012.
- Cash flow: Nine-month operating cash flow was negative $4.6 million, versus positive $92.3 million in 2012. Investing cash outflow was $68.6 million, including the Refusol acquisition; financing provided $18.4 million. Cash and equivalents fell $54.1 million to $92.4 million. Cash, equivalents, and marketable securities totaled $104.7 million at September 30.
- Balance sheet and debt: Current assets were $400.8 million and current liabilities $130.2 million. Notes payable to banks were $11.4 million, principally Refusol borrowings. The company’s separate $50 million secured revolving facility had no company borrowings; it matures in October 2017. Total assets were $627.7 million, including $148.4 million of goodwill.
- Backlog: $135.4 million at September 30, compared with $92.7 million at December 31, 2012, largely reflecting utility-scale solar contracts.
Material changes and unusual items
- Sales rose 21.6% in Q3 and 16.4% for the first nine months. Management attributed growth chiefly to semiconductor and non-semiconductor thin-film demand and, in Solar Energy, the acquired inverter product line.
- Q3 operating results included $19.9 million of restructuring and impairment charges; nine-month charges were $44.1 million. A $36.2 million impairment of technology-related intangible assets was the largest component. The charges drove the reported operating losses despite higher sales and gross profit.
- Refusol was acquired on April 8, 2013, for approximately $87.2 million in total consideration, including assumed debt. Its April-to-September results contributed about $43.8 million of sales and a $3.1 million operating loss, including restructuring and acquired-intangible amortization.
- The Q3 income tax benefit was $2.1 million, including $4.9 million in net discrete tax benefits. The nine-month tax benefit was $3.5 million and included $6.1 million of net discrete benefits. Reported effective tax rates were affected by foreign earnings, restructuring, and discrete tax items.
- Accounts receivable and inventory increased materially from year-end, contributing to the operating cash outflow. Management cited sales growth, preparation for expected Q4 demand and initial one-megawatt solar product shipments, restructuring payments, and taxes as cash-flow factors.
Outlook, management commentary, and risks
- Management expected stronger end-user capital spending to support higher Thin Films sales in Q4 2013 and into 2014. It expected the AMOLED-related flat-panel investment cycle to taper, potentially reducing that market’s Q4 sales, while architectural-glass demand was expected to grow into 2014.
- Management anticipated stable-to-higher global support revenue, with a seasonal Q4 slowdown. It expected utility-application sales to increase over the following three to six months as shipments of its one-megawatt offering began.
- The April 2013 restructuring plan was estimated to cost $44.6–$44.9 million in total, with approximately $0.5 million of additional charges anticipated over the next three months. Management forecast annual savings of approximately $70–$75 million; these are forward-looking estimates, not guaranteed outcomes.
- Management said cash and expected operating cash flows should cover anticipated working-capital needs, capital expenditures, and contractual obligations for the next 12 months. The filing does not provide formal consolidated revenue or earnings guidance.
- Key risks include acquisition integration and realization of expected synergies; execution of facility consolidation and transfers of activities to China and India; rapid technological change and product competition; solar-inverter installation, maintenance, and warranty exposure; foreign-exchange movements; and customer and market concentration. Applied Materials represented 16.9% of Q3 sales and 16.5% of nine-month sales.
- The company had $59.4 million of firm supplier purchase commitments. It reported no material developments in its legal proceedings and no off-balance-sheet arrangements. Disclosure controls were deemed effective; Refusol was expected to be excluded from the company’s December 2013 internal-control assessment while integration work continued.
Most important facts for investors to verify
- Whether the restructuring delivers the stated $70–$75 million of annual savings, and whether remaining charges stay within the estimated total.
- Whether Refusol integration, product rationalization, final purchase accounting, and contingent or post-closing adjustments affect future costs, goodwill, or cash flows.
- Whether backlog converts to revenue as expected, particularly utility-scale solar contracts and one-megawatt product shipments, and whether the expected Thin Films demand persists.
- Whether Solar Energy profitability improves from the reported mix shift toward lower-margin commercial applications.
- Whether working-capital growth, especially receivables and inventory, reverses into operating cash generation; and how the $11.4 million of acquired bank debt and available credit capacity evolve.
- Whether tax benefits are recurring: reported earnings included material discrete tax benefits, and the filing does not establish that these benefits will continue.
- Whether customer concentration, warranty claims, currency exposure, supplier commitments, and the planned geographic transfers create material operating or financial effects.