Advanced Energy Industries, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited results; amounts below are in millions of U.S. dollars except per-share data.
Business context
Advanced Energy designs and sells power-conversion, control, high-voltage, thermal-instrumentation and related service products. It reported two segments: Precision Power and Inverters. On June 29, 2015, after a strategic review yielded no satisfactory offers, the company announced it would wind down its solar Inverter business and focus on Precision Power.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Sales | $136.8 | $146.3 | $277.9 | $287.2 |
| Gross profit / margin | $40.3 / 29.4% | $52.5 / 35.9% | $100.0 / 36.0% | $105.2 / 36.6% |
| Operating income (loss) | $(184.6) | $11.5 | $(162.7) | $28.4 |
| Net income (loss) | $(232.5) | $10.6 | $(211.2) | $25.4 |
| Diluted EPS | $(5.68) | $0.26 | $(5.17) | $0.61 |
| Operating cash flow | Not separately provided | Not separately provided | $53.8 | $47.1 |
Q2 GAAP results included $168.4 million of restructuring and asset-impairment charges, a $17.7 million receivables allowance for potential Inverter bad debts, and $15.0 million of Inverter inventory impairment. The company also reported $17.7 million of Q2 non-GAAP net income, or $0.43 per diluted share; this measure excludes specified charges and tax items and is not a substitute for GAAP results.
At June 30, cash and cash equivalents were $169.7 million and marketable securities were $13.5 million, totaling $183.2 million. The company had no borrowings under its revolving credit facility and reported $25.4 million of availability. Current assets were $389.9 million versus current liabilities of $154.2 million. Total liabilities were $251.6 million; the filing reports no debt outstanding under the facility. Management said available liquidity and expected operating cash flows should meet anticipated needs and obligations for the next 12 months.
First-half operating cash flow increased to $53.8 million from $47.1 million. The cash-flow statement includes substantial noncash adjustments, notably $168.3 million of restructuring and impairment charges, $19.5 million for potential bad debts, and $15.0 million of inventory impairment. Cash and cash equivalents increased by $44.4 million during the half.
Changes versus prior comparable periods
- Q2 sales declined 6.5%; first-half sales declined 3.2%. Precision Power sales rose 27.8% in both the quarter and first half, while Inverter sales fell 50.1% in Q2 and 44.9% in the first half.
- Precision Power Q2 operating income increased to $28.6 million from $18.4 million. Inverters reported a Q2 operating loss of $44.8 million versus $6.6 million, reflecting weaker sales and wind-down-related write-offs.
- Gross margin fell 6.5 percentage points in Q2, principally reflecting the $15.0 million inventory impairment, partly offset by a higher-margin product mix.
- Goodwill declined from $203.3 million at year-end 2014 to $43.5 million at June 30, primarily after a $149.9 million Inverter goodwill impairment; currency translation also reduced the balance.
Outlook, commentary and risks
- The company expected to complete the Inverter wind-down by the end of 2015. It estimated total pre-tax wind-down charges of approximately $260–$290 million, with most recognized in Q2 and the remainder expected over the following six to nine months. Additional wind-down costs, customer disruption, asset-sale proceeds and continuing warranty expenses remain uncertain.
- Management expected semiconductor investment levels to decrease in Q3 2015 and described the remainder of the year as uncertain, dependent on 3D NAND and foundry expansion plans.
- Management anticipated a significant tax benefit in later 2015 interim periods and estimated full-year 2015 GAAP tax expense to range from zero to a slight benefit. Q2 tax expense was $48.0 million despite the pre-tax loss, in part because certain restructuring charges were nondeductible and some tax benefits were not recognized.
- Key exposures include customer concentration (Applied Materials and Lam Research represented 21.1% and 18.5% of Q2 sales), semiconductor-industry cyclicality, pricing pressure, foreign-exchange movements, supplier availability, and execution of the Inverter wind-down. Firm supplier purchase commitments totaled approximately $74.4 million.
- Inverter warranty obligations may persist after operations are wound down. Total accrued warranty expense was $31.2 million at June 30, 2015, including $18.7 million classified as long term. The company also reported a $20.0 million net pension liability and a $0.8 million annual funding commitment through 2024.
- The filing reported no material developments in legal proceedings during the quarter. Management concluded disclosure controls were effective as of June 30, 2015.
Important facts for investors to verify
- Reconcile the estimated $260–$290 million total wind-down charge with charges recorded to date, remaining expected charges, and the individual cost categories described in the filing.
- Track actual wind-down cash costs, asset dispositions, customer and supplier settlements, warranty claims, and whether the wind-down finishes by year-end 2015.
- Assess the collectability of Inverter receivables and the adequacy of remaining asset, inventory, warranty and tax valuations.
- Monitor Precision Power demand and margins, particularly semiconductor investment levels and the outlook for 3D NAND and foundry spending.
- Review liquidity and facility availability against supplier commitments, customer concentration, pension funding and continuing wind-down obligations.