Advanced Energy Industries, Inc. — Q3 2011 Form 10-Q
Business context and reporting period. The unaudited quarter and nine months ended September 30, 2011. Advanced Energy designs power-conversion, thermal-instrumentation and solar-inverter products. It reports two segments: Thin Films and Solar Energy. The gas flow control business, sold in October 2010, is reported as discontinued operations; PV Powered, acquired in May 2010, is included in Solar Energy.
Financial performance
Dollar amounts below are in millions unless stated otherwise.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Sales | $128.5 | $141.0 | $404.3 | $310.8 |
| Gross profit / margin | $48.8 / 38.0% | $60.7 / 43.1% | $166.3 / 41.1% | $134.5 / 43.3% |
| Operating income | $10.7 | $22.3 | $52.3 | $41.2 |
| Continuing-operations net income | $7.2 | $17.6 | $39.4 | $33.9 |
| Net income, including discontinued operations | $6.6 | $19.9 | $39.1 | $39.8 |
| Diluted continuing-operations EPS | $0.16 | $0.40 | $0.90 | $0.78 |
- Cash flow: Nine-month operating cash flow was $26.7, versus cash used of $16.6 in 2010. Investing used $27.6, largely reflecting $14.6 of property and equipment purchases and net purchases of securities. Financing provided $1.1. Cash increased $1.3 to $132.3.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $154.9 at September 30; $45.2 was held in banks outside the U.S. Current assets were $406.4 and current liabilities $96.6. The balance sheet reports no borrowings; capital-lease payments were $0.1 during the nine-month period. Management said available liquidity and expected operating cash flows should cover anticipated needs and obligations for the next 12 months.
- Other balance-sheet items: Total assets were $553.4; total liabilities $128.3; stockholders’ equity $425.1. Inventory was $92.8, up from $77.6 at year-end 2010. Firm supplier purchase commitments were approximately $65.4.
Material changes versus prior comparable periods
- Q3 sales fell 8.8% year over year as Thin Films revenue declined 25.9% to $76.8, more than offsetting Solar Energy growth of 38.5% to $51.7. Nine-month sales rose 30.1%, led by Solar Energy, up 140.8% to $130.1, partly reflecting the prior-year comparison before PV Powered was acquired.
- Thin Films Q3 semiconductor-capital-equipment sales fell 40.1%; non-semiconductor capital-equipment sales fell 17.9%. Nine-month Thin Films revenue increased 6.8% to $274.2.
- Q3 gross margin declined 5.1 percentage points. Management cited a greater Solar Energy sales mix, lower Solar Energy inverter pricing and weakening revenue. Q3 operating income also included $3.1 of restructuring expense.
- Nine-month continuing-operations income rose to $39.4 from $33.9, but reported net income declined slightly to $39.1 from $39.8, as discontinued-operations income shifted to a $0.4 loss from $5.9 income.
- Backlog was $95.4 at September 30, down from $102.9 at June 30 and up from $93.1 at December 31, 2010. Management attributed the quarterly decline to uncertainty, shorter lead times and fewer long-term orders.
Outlook, management commentary and risks
- Management expected semiconductor-market revenue to decline in Q4 2011, with continuing weakness in thin-film solar-panel and flat-panel-display markets. It also expected gross profit to decline in dollars and as a percentage of sales for the rest of 2011, partly due to lower revenue and Solar Energy mix.
- Management anticipated a moderate Q4 increase in Solar Energy sales, potentially supported by year-end activity ahead of expiring government incentives. It noted project delays related to uncertainty about incentives and falling solar-panel prices. Global support was expected to remain strong over time, though management anticipated a possible near-term decline; SG&A was expected flat to lower in Q4.
- Restructuring initiatives aim to realign manufacturing and R&D and reduce Solar Energy product costs. The company recorded $3.1 of Q3 charges, including $2.8 severance and $0.4 asset impairments; approximately 159 employees, or 9.8% of the workforce, were reduced. Management estimated annual savings of about $6.3 and total plan costs of $12–$16 over 12–18 months, of which approximately $9–$13 was expected to be cash expenditures.
- The company planned to repatriate approximately $30.0 from Japan in Q4 for U.S. working capital and capital investment. It had previously recorded $2.1 of deferred tax expense related to this planned repatriation.
- Key risks include global economic uncertainty and cyclical customer capital spending; solar-panel overcapacity, pricing and project-financing delays; changes to government incentives; competitive pricing; supplier and component disruption, including Japan-related risks; and potential performance guarantees or liquidated damages on large solar projects. Solar service agreements may be subject to annual renewal.
- Other items: the company used $22.0 notional foreign-exchange forward contracts, whose fair value was immaterial; contract losses were offset by gains on related intercompany debt. No material legal-proceeding developments were reported. Management stated disclosure controls were effective as of September 30, 2011.
Important facts for investors to verify
- Whether Q4 Thin Films weakness, particularly in semiconductor, solar-panel and display markets, materialized and how it affected revenue and margins.
- Whether Solar Energy project delays eased and anticipated year-end incentive-driven demand occurred; monitor inverter pricing and segment profitability.
- Actual restructuring charges, cash costs, timing of facility actions and realization of the estimated $6.3 annual savings.
- Whether backlog converted to sales and whether working capital, especially inventory and supplier commitments, remained aligned with demand.
- Completion and tax consequences of the planned $30.0 repatriation, and ongoing liquidity and cash generation.