Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________
FORM 10-Q
________________________________________________
|
| | |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
| | For the quarterly period ended September 30, 2017 |
or |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
| | For the transition period from to . |
Commission file number: 000-26966
ADVANCED ENERGY INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
|
| | |
Delaware | | 84-0846841 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1625 Sharp Point Drive, Fort Collins, CO | | 80525 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (970) 221-4670
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | | | | | | |
Large accelerated filer þ | | Accelerated filer o | | Non-accelerated filer o (Do not check if a smaller reporting company) | | Smaller reporting company o | | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of October 26, 2017 there were 39,657,315 shares of the registrant's Common Stock, par value $0.001 per share, outstanding.
ADVANCED ENERGY INDUSTRIES, INC.
FORM 10-Q
TABLE OF CONTENTS |
| |
| Page |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
EX-31.1 |
EX-31.2 |
EX-32.1 |
EX-32.2 |
PART I FINANCIAL STATEMENTS
| |
ITEM 1. | UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
ADVANCED ENERGY INDUSTRIES, INC.
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except per share amounts) |
| | | | | | | | |
| | September 30, | | December 31, |
| | 2017 | | 2016 |
ASSETS | | | | |
|
Current assets: | | |
| | |
|
Cash and cash equivalents | | $ | 366,572 |
| | $ | 281,953 |
|
Marketable securities | | 3,046 |
| | 4,737 |
|
Accounts receivable, net of allowances of $2,232 and $1,943, respectively | | 74,993 |
| | 75,667 |
|
Inventories | | 73,520 |
| | 55,770 |
|
Income taxes receivable | | 6,380 |
| | 1,482 |
|
Other current assets | | 8,678 |
| | 9,324 |
|
Current assets of discontinued operations | | 7,770 |
| | 9,401 |
|
Total current assets | | 540,959 |
| | 438,334 |
|
Deposits and other assets | | 2,432 |
| | 1,835 |
|
Property and equipment, net | | 15,736 |
| | 13,337 |
|
Goodwill | | 53,509 |
| | 42,125 |
|
Intangible assets, net | | 34,435 |
| | 28,071 |
|
Deferred income tax assets | | 58,590 |
| | 32,197 |
|
Non-current assets of discontinued operations | | 15,630 |
| | 15,630 |
|
TOTAL ASSETS | | $ | 721,291 |
| | $ | 571,529 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
| | |
|
Current liabilities: | | |
| | |
|
Accounts payable | | $ | 41,275 |
| | $ | 46,255 |
|
Income taxes payable | | 9 |
| | 1,778 |
|
Accrued payroll and employee benefits | | 16,241 |
| | 13,230 |
|
Customer deposits | | 5,410 |
| | 5,774 |
|
Other accrued expenses | | 18,394 |
| | 14,590 |
|
Current liabilities of discontinued operations | | 9,667 |
| | 13,419 |
|
Total current liabilities | | 90,996 |
| | 95,046 |
|
Deferred income tax liabilities | | 2,049 |
| | 1,008 |
|
Uncertain tax positions | | 4,383 |
| | 2,538 |
|
Long term deferred revenue | | 36,528 |
| | 39,170 |
|
Other long-term liabilities | | 22,662 |
| | 20,536 |
|
Non-current liabilities of discontinued operations | | 16,287 |
| | 21,157 |
|
Total liabilities | | 172,905 |
| | 179,455 |
|
Stockholders’ equity: | | | | |
Preferred stock, $0.001 par value, 1,000 shares authorized, none issued and outstanding | | — |
| | — |
|
Common stock, $0.001 par value, 70,000 shares authorized; 39,624 and 39,712
issued and outstanding, respectively | | 40 |
| | 40 |
|
Additional paid-in capital | | 187,407 |
| | 203,603 |
|
Retained earnings | | 362,815 |
| | 195,364 |
|
Accumulated other comprehensive loss | | (1,876 | ) | | (6,933 | ) |
Total stockholders’ equity | | 548,386 |
| | 392,074 |
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 721,291 |
| | $ | 571,529 |
|
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
ADVANCED ENERGY INDUSTRIES, INC.
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| | | |
Sales: | | | | | | | |
Product | $ | 152,363 |
| | $ | 107,650 |
| | $ | 424,478 |
| | $ | 294,695 |
|
Services | 24,212 |
| | 18,902 |
| | 67,320 |
| | 53,666 |
|
Total sales | 176,575 |
| | 126,552 |
| | 491,798 |
| | 348,361 |
|
Cost of sales: | | | | | | | |
Product | 72,146 |
| | 49,835 |
| | 198,754 |
| | 137,984 |
|
Services | 12,195 |
| | 10,594 |
| | 34,838 |
| | 28,748 |
|
Total cost of sales | 84,341 |
| | 60,429 |
| | 233,592 |
| | 166,732 |
|
Gross profit | 92,234 |
| | 66,123 |
| | 258,206 |
| | 181,629 |
|
Operating expenses: | |
| | |
| | |
| | |
|
Research and development | 14,629 |
| | 11,293 |
| | 41,742 |
| | 33,324 |
|
Selling, general and administrative | 24,692 |
| | 19,421 |
| | 70,580 |
| | 56,814 |
|
Amortization of intangible assets | 1,240 |
| | 1,048 |
| | 3,176 |
| | 3,180 |
|
Total operating expenses | 40,561 |
| | 31,762 |
| | 115,498 |
| | 93,318 |
|
Operating income | 51,673 |
| | 34,361 |
| | 142,708 |
| | 88,311 |
|
Other (expense) income, net | 153 |
| | (55 | ) | | (3,138 | ) | | 1,138 |
|
Income from continuing operations, before income taxes | 51,826 |
| | 34,306 |
| | 139,570 |
| | 89,449 |
|
Provision for income taxes | (31,968 | ) | | 5,268 |
| | (25,538 | ) | | 12,937 |
|
Income from continuing operations, net of income taxes | 83,794 |
| | 29,038 |
| | 165,108 |
| | 76,512 |
|
Income from discontinued operations, net of income taxes | 70 |
| | 1,323 |
| | 2,343 |
| | 6,661 |
|
Net income | $ | 83,864 |
| | $ | 30,361 |
| | $ | 167,451 |
| | $ | 83,173 |
|
| | | | | | | |
Basic weighted-average common shares outstanding | 39,786 |
| | 39,681 |
| | 39,787 |
| | 39,723 |
|
Diluted weighted-average common shares outstanding | 40,172 |
| | 39,967 |
| | 40,207 |
| | 40,015 |
|
| | | | | | | |
Earnings per share: | |
| | |
| | |
| | |
|
Continuing operations: | |
| | |
| | |
| | |
|
Basic earnings per share | $ | 2.11 |
| | $ | 0.73 |
| | $ | 4.15 |
| | $ | 1.93 |
|
Diluted earnings per share | $ | 2.09 |
| | $ | 0.73 |
| | $ | 4.11 |
| | $ | 1.91 |
|
Discontinued operations: | | | | | | | |
Basic earnings per share | $ | — |
| | $ | 0.03 |
| | $ | 0.06 |
| | $ | 0.17 |
|
Diluted earnings per share | $ | — |
| | $ | 0.03 |
| | $ | 0.06 |
| | $ | 0.17 |
|
Net income: | | | | | | | |
Basic earnings per share | $ | 2.11 |
| | $ | 0.77 |
| | $ | 4.21 |
| | $ | 2.09 |
|
Diluted earnings per share | $ | 2.09 |
| | $ | 0.76 |
| | $ | 4.16 |
| | $ | 2.08 |
|
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
ADVANCED ENERGY INDUSTRIES, INC.
Unaudited Condensed Consolidated Statements of Comprehensive Income
(In thousands)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Net income | | $ | 83,864 |
| | $ | 30,361 |
| | $ | 167,451 |
| | $ | 83,173 |
|
Other comprehensive income, net of tax: | | | | | | | | |
Foreign currency translation adjustment | | 807 |
| | 1,125 |
| | 5,333 |
| | 1,389 |
|
Unrealized (loss) gain on marketable securities | | (1 | ) | | (1 | ) | | (22 | ) | | 9 |
|
Minimum benefit retirement liability | | (100 | ) | | (16 | ) | | (254 | ) | | (40 | ) |
Comprehensive income | | $ | 84,570 |
| | $ | 31,469 |
| | $ | 172,508 |
| | $ | 84,531 |
|
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
ADVANCED ENERGY INDUSTRIES, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | |
| | |
|
Net income | | $ | 167,451 |
| | $ | 83,173 |
|
Income from discontinued operations, net of income taxes | | 2,343 |
| | 6,661 |
|
Income from continuing operations, net of income taxes | | 165,108 |
| | 76,512 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | |
| | |
Depreciation and amortization | | 6,792 |
| | 5,938 |
|
Stock-based compensation expense | | 10,707 |
| | 4,299 |
|
Provision for deferred income taxes | | (26,185 | ) | | — |
|
Loss on foreign exchange hedge | | 3,489 |
| | — |
|
Net loss on disposal of assets | | 106 |
| | 259 |
|
Changes in operating assets and liabilities, net of assets acquired: | | | | |
Accounts receivable | | 4,119 |
| | (13,679 | ) |
Inventories | | (15,062 | ) | | (5,261 | ) |
Other current assets | | (430 | ) | | (73 | ) |
Accounts payable | | (5,725 | ) | | 10,619 |
|
Other current liabilities and accrued expenses | | 3,763 |
| | 1,489 |
|
Income taxes | | (6,375 | ) | | 2,562 |
|
Net cash provided by operating activities from continuing operations | | 140,307 |
| | 82,665 |
|
Net cash used in operating activities from discontinued operations | | (7,293 | ) | | (4,538 | ) |
Net cash provided by operating activities | | 133,014 |
| | 78,127 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | |
| | |
Purchases of marketable securities | | (86 | ) | | (745 | ) |
Proceeds from sale of marketable securities | | 1,883 |
| | 7,161 |
|
Acquisition, net of cash acquired | | (17,347 | ) | | — |
|
Purchase of foreign exchange hedge | | (3,489 | ) | | — |
|
Purchases of property and equipment | | (5,646 | ) | | (4,524 | ) |
Net cash (used in) provided by investing activities from continuing operations | | (24,685 | ) | | 1,892 |
|
Net cash used in investing activities from discontinued operations | | — |
| | — |
|
Net cash (used in) provided by investing activities | | (24,685 | ) | | 1,892 |
|
CASH FLOWS FROM FINANCING ACTIVITIES: | | |
| | |
|
Purchase and retirement of common stock | | (24,998 | ) | | — |
|
Net (payments) proceeds related to stock-based award activities | | (1,904 | ) | | 1,753 |
|
Other financing activities | | 2 |
| | (3 | ) |
Net cash (used in) provided by financing activities from continuing operations | | (26,900 | ) | | 1,750 |
|
Net cash used in financing activities from discontinued operations | | — |
| | (24 | ) |
Net cash (used in) provided by financing activities | | (26,900 | ) | | 1,726 |
|
EFFECT OF CURRENCY TRANSLATION ON CASH | | 1,138 |
| | (550 | ) |
INCREASE IN CASH AND CASH EQUIVALENTS | | 82,567 |
| | 81,195 |
|
CASH AND CASH EQUIVALENTS, beginning of period | | 289,517 |
| | 169,720 |
|
CASH AND CASH EQUIVALENTS, end of period | | 372,084 |
| | 250,915 |
|
Less cash and cash equivalents from discontinued operations | | 5,512 |
| | 6,623 |
|
CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS, end of period | | $ | 366,572 |
| | $ | 244,292 |
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | |
| | |
|
Cash paid for interest | | $ | 27 |
| | $ | 173 |
|
Cash paid for income taxes | | 4,599 |
| | 4,930 |
|
Cash received for refunds of income taxes | | 1,153 |
| | 444 |
|
Cash held in banks outside the United States | | 271,777 |
| | 176,815 |
|
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
| |
NOTE 1. | BASIS OF PRESENTATION |
Advanced Energy Industries, Inc., a Delaware corporation, and its wholly-owned subsidiaries ("we," "us," "our," "Advanced Energy," or the "Company") design, manufacture, sell, and support power conversion products that transform electrical power into various usable forms. Our products enable manufacturing processes that use thin films for various products, such as semiconductor devices, flat panel displays, solar cells, architectural glass, optical coating and decorative and functional coating for consumer products. We also supply thermal instrumentation products for advanced temperature control in the thin film process for these same markets. Our power control modules provide power control solutions for industrial applications where heat treatment and processing are used such as glass manufacturing, metal fabrication and treatment, and material and chemical processing. Our high voltage power supplies and modules are used in applications such as semiconductor ion implantation, scanning electron microscopy, chemical analysis such as mass spectrometry and various applications using X-ray technology and electron guns for both analytical and processing applications. Our network of global service support centers provides a recurring revenue opportunity as we offer repair services, conversions, upgrades, and refurbishments and sales of used equipment to companies using our products. As of December 31, 2015, we discontinued the production, engineering, and sales of our solar inverter product line. As such, all solar inverter revenues, costs, assets and liabilities are reported in Discontinued Operations for all periods presented herein. See Note 3. Discontinued Operations.
In the opinion of management, the accompanying Unaudited Condensed Consolidated Financial Statements contain all adjustments, consisting of normal, recurring adjustments, necessary to present fairly the financial position of the Company as of September 30, 2017, the results of our operations for the three and nine months ended September 30, 2017 and 2016, and cash flows for the nine months ended September 30, 2017 and 2016.
The Unaudited Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and other financial information filed with the SEC.
ESTIMATES AND ASSUMPTIONS
The preparation of our Unaudited Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We believe that the significant estimates, assumptions, and judgments when accounting for items and matters such as allowances for doubtful accounts, excess and obsolete inventory, warranty reserves, acquisitions, asset valuations, goodwill, asset life, depreciation, amortization, recoverability of assets, impairments, deferred revenue, stock option and restricted stock grants, taxes, and other provisions are reasonable, based upon information available at the time they are made. Actual results may differ from these estimates.
CRITICAL ACCOUNTING POLICIES
Our accounting policies are described in our audited Consolidated Financial Statements and Notes contained in our Annual Report on Form 10-K for the year ended December 31, 2016.
NEW ACCOUNTING STANDARDS
From time to time, the Financial Accounting Standards Board ("FASB") or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through issuance of an Accounting Standards Update (“ASU”). Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on the Consolidated Financial Statements upon adoption.
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" and has subsequently issued several supplemental and/or clarifying ASUs (collectively known as "ASC 606"). ASC 606 implements a five step model for how an entity should recognize revenue in order to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for fiscal periods beginning after December 15, 2017 and for the interim periods within that year.
Advanced Energy has established a cross-functional implementation team to analyze its current portfolio of customer contracts. We have completed the disaggregation of the related sales order data and have begun testing contract elements and considering supporting software applications. The implementation team is also responsible for identifying and implementing changes to existing business processes, controls, and systems in order to support revenue recognition and disclosure under the new standard. Based on our preliminary review of our customer contracts, we expect that revenue with the majority of our customers will continue to be recognized at a point in time, generally upon shipment of products, consistent with our current revenue recognition model. Upon adoption of ASC 606, however, we also believe some of our revenue from sales of products to customers will be recognized in advance of actual customer billing, (for example: just in time inventory programs) due to the terms of certain customer contracts. As such, various balance sheet line items will be impacted. Advanced Energy believes the adoption of ASC606 will have an impact on both the timing of revenue recognition and various line items within the Consolidated Balance Sheet.
The standard permits the use of either the retrospective or cumulative effect transition method. Our team is continuing to evaluate the impact that the adoption will have on our Consolidated Financial Statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing reporting.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within the year of adoption. Early adoption is permitted. Advanced Energy is currently assessing and has not yet determined the impact ASU 2016-02 may have on its Consolidated Financial Statements.
In October 2016, the FASB issued ASU 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory.” ASU 2016-16 changes the timing of income tax recognition for an intercompany sale of assets. ASU 2016-16 requires the seller’s tax effects and the buyer’s deferred taxes to be recognized immediately upon the sale instead of deferring accounting for the income tax implications until the assets are sold to a third party or recovered through use. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017 including interim periods within the year of adoption. Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. Early adoption is allowed but only if adopted in the first quarter of fiscal year 2017. Advanced Energy is currently assessing the impact of ASU 2016-16 adoption and while it has not completed the assessment, it has determined the impact of ASU 2016-16 adoption will require the recognition of deferred tax assets totaling approximately $18 million to $22 million with a corresponding increase to Retained Earnings in its Consolidated Financial Statements upon adoption.
| |
NOTE 2. | BUSINESS ACQUISITION |
On July 3, 2017, Advanced Energy acquired all of the issued and outstanding shares of capital stock of Excelsys Holdings Limited (“Excelsys”), an electronics manufacturer in Cork, Ireland. This acquisition is part of Advanced Energy’s strategy to continue to grow and diversify its revenue through organic and inorganic opportunities. The high-efficiency, configurable power supplies that Excelsys manufactures for medical and industrial applications will further enhance Advanced Energy’s product portfolio.
The components of the fair value of the total consideration transferred for the Excelsys acquisition are as follows:
|
| | | |
Cash paid to owners | $ | 18,512 |
|
Cash acquired | (1,165 | ) |
Total fair value of consideration transferred | $ | 17,347 |
|
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)
The following table summarizes estimated fair values of the assets acquired and liabilities assumed as of July 3, 2017:
|
| | | |
Accounts receivable | $ | 1,930 |
|
Inventories | 1,048 |
|
Income taxes receivable | 558 |
|
Other current assets | 47 |
|
Property and equipment | 256 |
|
Deferred income tax asset | 35 |
|
Accounts payable | (1,342 | ) |
Income taxes payable | (34 | ) |
Other accrued expenses | (719 | ) |
Deferred income tax liabilities | (946 | ) |
| 833 |
|
Amortizable intangible assets: | |
Tradename | 182 |
|
Customer relationships | 1,595 |
|
Technology | 5,808 |
|
Total amortizable intangible assets | 7,585 |
|
Total identifiable net assets | 8,418 |
|
Goodwill | 8,929 |
|
Total fair value of consideration transferred | $ | 17,347 |
|
A summary of the intangible assets acquired, amortization method and estimated useful lives as of July 3, 2017 follows :
|
| | | | | | | | |
| | Amount | | Amortization Method | | Useful Life |
Tradename | | $ | 182 |
| | Straight-line | | 5 |
Customer relationships | | 1,595 |
| | Straight-line | | 10 |
Technology | | 5,808 |
| | Straight-line | | 10 |
| | $ | 7,585 |
| | | | |
Goodwill and intangible assets are recorded in the functional currency of the entity and are subject to changes due to translation at each balance sheet date. The goodwill associated with the acquisition is the result of expected synergies and expansion of the technology into adjacent markets we already serve. Advanced Energy is in the process of finalizing the assessment of fair value for the assets acquired and liabilities assumed.
| |
NOTE 3. | DISCONTINUED OPERATIONS |
In December 2015, we completed the wind down of engineering, manufacturing and sales of our solar inverter product line (the "inverter business"). Accordingly, the results of our inverter business have been reflected as “Income from discontinued operations, net of income taxes” on our Unaudited Condensed Consolidated Statements of Operations for all periods presented herein.
The effect of extended inverter warranty sales to our customers continues to be reflected in deferred revenue in our Unaudited Condensed Consolidated Balance Sheets. Deferred revenue for extended inverter warranties and the associated costs of warranty service will be reflected in Sales and Cost of goods sold, respectively, from continuing operations in future periods in our Consolidated Statement of Operations, as the deferred revenue is earned and the associated services are rendered. Extended warranties related to the inverter product line are no longer offered.
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)
The items included in "Income from discontinued operations, net of income taxes" are as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Sales | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Cost of sales | 944 |
| | 3,095 |
| | 47 |
| | 672 |
|
Total operating income (including restructuring) | (441 | ) | | (1,473 | ) | | (1,587 | ) | | (3,759 | ) |
Operating income (loss) from discontinued operations | (503 | ) | | (1,622 | ) | | 1,540 |
| | 3,087 |
|
Other income (loss) | (86 | ) | | (14 | ) | | 291 |
| | 325 |
|
Income (loss) from discontinued operations before income taxes | (589 | ) | | (1,636 | ) | | 1,831 |
| | 3,412 |
|
Provision (benefit) for income taxes | (659 | ) | | (2,959 | ) | | (512 | ) | | (3,249 | ) |
Income from discontinued operations, net of income taxes | $ | 70 |
| | $ | 1,323 |
| | $ | 2,343 |
| | $ | 6,661 |
|
Assets and Liabilities of discontinued operations within the Condensed Consolidated Balance Sheets are comprised of the following:
|
| | | | | | | | |
| | September 30, | | December 31, |
| | 2017 | | 2016 |
Cash and cash equivalents | | $ | 5,512 |
| | $ | 7,564 |
|
Accounts and other receivables, net | | 1,372 |
| | 1,670 |
|
Inventories | | 886 |
| | 167 |
|
Current assets of discontinued operations | | $ | 7,770 |
| | $ | 9,401 |
|
| | | | |
Other assets | | $ | 70 |
| | $ | 70 |
|
Deferred income tax assets | | 15,560 |
| | 15,560 |
|
Non-current assets of discontinued operations | | $ | 15,630 |
| | $ | 15,630 |
|
| | | | |
Accounts payable and other accrued expenses | | $ | 988 |
| | $ | 3,684 |
|
Accrued warranty | | 8,675 |
| | 9,254 |
|
Accrued restructuring | | 4 |
| | 481 |
|
Current liabilities of discontinued operations | | $ | 9,667 |
| | $ | 13,419 |
|
| | | | |
Accrued warranty | | $ | 16,054 |
| | $ | 20,976 |
|
Other liabilities | | 233 |
| | 181 |
|
Non-current liabilities of discontinued operations | | $ | 16,287 |
| | $ | 21,157 |
|
The following table sets out the tax expense and the effective tax rate for our income from continuing operations: |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Income from continuing operations before income taxes | $ | 51,826 |
| | $ | 34,306 |
| | $ | 139,570 |
| | $ | 89,449 |
|
Provision (benefit) for income taxes | (31,968 | ) | | 5,268 |
| | (25,538 | ) | | 12,937 |
|
Effective tax rate | (61.7 | )% | | 15.4 | % | | (18.3 | )% | | 14.5 | % |
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)
The effective tax rates for the three and nine months ended September 30, 2017 differ from the federal statutory rate of 35% due to the benefit of earnings in foreign jurisdictions which are subject to lower tax rates as well as the recognition of excess tax benefits attributable to stock based compensation as a component of tax expense in accordance with ASU 2016-09 “Improvements to Employee Share-Based Payment Accounting” which was implemented in December 2016. In addition, after several attempts by the company to sell its remaining solar businesses, management elected to liquidate its U.S. solar business during the three months ended September 30, 2017 and has accordingly recognized a tax benefit of $40.2 million for a worthless stock tax deduction.
The effective tax rates for the three and nine months ended September 30, 2016 differ from the federal statutory rate of 35% primarily due to the benefit of the earnings in foreign jurisdictions which are subject to lower tax rates.
Our policy is to classify accrued interest and penalties related to unrecognized tax benefits in our income tax provision. The amount of interest and penalties accrued related to our unrecognized tax benefits for the three months ended September 30, 2017 and 2016 was $0.1 million, and for the nine months ended September 30, 2017 and 2016 was $0.2 million and $0.3 million, respectively.
| |
NOTE 5. | EARNINGS PER SHARE |
Basic earnings per share ("EPS") is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. The computation of our diluted EPS is similar to the computation of our basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding (using the if-converted and treasury stock methods), if our outstanding stock options and restricted stock units had been converted to common shares, and if such assumed conversion is dilutive.
The following is a reconciliation of the weighted-average shares outstanding used in the calculation of basic and diluted EPS for the three and nine months ended September 30, 2017 and 2016: |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Income from continuing operations, net of income taxes | $ | 83,794 |
| | $ | 29,038 |
| | $ | 165,108 |
| | $ | 76,512 |
|
| | | | | | | |
Basic weighted-average common shares outstanding | 39,786 |
| | 39,681 |
| | 39,787 |
| | 39,723 |
|
Assumed exercise of dilutive stock options and restricted stock units | 386 |
| | 286 |
| | 420 |
| | 292 |
|
Diluted weighted-average common shares outstanding | 40,172 |
| | 39,967 |
| | 40,207 |
| | 40,015 |
|
Continuing operations: | |
| | |
| | | | |
Basic earnings per share | $ | 2.11 |
| | $ | 0.73 |
| | $ | 4.15 |
| | $ | 1.93 |
|
Diluted earnings per share | $ | 2.09 |
| | $ | 0.73 |
| | $ | 4.11 |
| | $ | 1.91 |
|
The following restricted stock units were excluded in the computation of diluted earnings per share because they were anti-dilutive: |
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Restricted stock units | | — |
| | 1 |
| | 1 |
| | 1 |
|
Stock Buyback
In September 2015, our Board of Directors authorized a program to repurchase up to $150.0 million of our stock over a thirty-month period. In August 2017, we entered into a Fixed Dollar Share Repurchase Agreement to repurchase $25.0 million of shares of our common stock in the open market. A total of 351,292 shares of our common stock was repurchased under the Share Repurchase Agreement at an average price of $71.16 per share. All share repurchases were executed in the open market, and no shares were repurchased from related parties. The $25.0 million share repurchase was recognized as a reduction to
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)
Additional paid-in capital. Repurchased shares were retired and assumed the status of authorized and unissued shares. As of September 30, 2017, we had $75.0 million remaining for the authorized repurchase of shares.
| |
NOTE 6. | MARKETABLE SECURITIES AND ASSETS MEASURED AT FAIR VALUE |
Our investments with original maturities of more than three months at time of purchase and that are intended to be held for no more than 12 months, are considered marketable securities available for sale.
Our marketable securities consist of certificates of deposit. The relative cost and fair value of our marketable securities are as follows:
|
| | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Cost | | Fair Value | | Cost | | Fair Value |
Total marketable securities | $ | 3,044 |
| | $ | 3,046 |
| | $ | 4,735 |
| | $ | 4,737 |
|
The maturities of our marketable securities available for sale as of September 30, 2017 are as follows:
|
| | | | | | |
| | Earliest | | | | Latest |
Certificates of deposit | | 10/10/2017 |
| to |
| 7/28/2018 |
The value and liquidity of the marketable securities we hold are affected by market conditions, as well as the ability of the issuers of such securities to make principal and interest payments when due, and the functioning of the markets in which these securities are traded. As of September 30, 2017, we do not believe any of the underlying issuers of our marketable securities are at risk of default.
The following tables present information about the fair value hierarchy used to measure our marketable securities at fair value, on a recurring basis, as of September 30, 2017 and December 31, 2016. We did not have any financial liabilities measured at fair value, on a recurring basis, as of September 30, 2017 and December 31, 2016.
|
| | | | | | | | | | | | | | | |
September 30, 2017 | Level 1 | | Level 2 | | Level 3 | | Total |
Total marketable securities | $ | — |
| | $ | 3,046 |
| | $ | — |
| | $ | 3,046 |
|
| |
December 31, 2016 | Level 1 | | Level 2 | | Level 3 | | Total |
Total marketable securities | $ | — |
| | $ | 4,737 |
| | $ | — |
| | $ | 4,737 |
|
There were no transfers in or out of Level 1, 2, or 3 fair value measurements during the three and nine months ended September 30, 2017.
| |
NOTE 7. | DERIVATIVE FINANCIAL INSTRUMENTS |
We are impacted by changes in foreign currency exchange rates. We attempt to mitigate these risks through the use of derivative financial instruments, primarily forward currency exchange rate contracts. During the three and nine months ended September 30, 2017 and 2016, we entered into currency exchange rate forward contracts to attempt to mitigate the exchange rate risk associated with intercompany debt denominated in nonfunctional currencies. These derivative instruments are not designated as hedges for accounting purposes; however, they tend to offset the fluctuations of our intercompany debt due to foreign currency exchange rate changes. These forward contracts are typically for one month periods. At September 30, 2017, we had one outstanding Euro forward contract.We did not have any currency exchange rate contracts outstanding as of December 31, 2016.
The notional amount of the exchange contracts at September 30, 2017 was $10.6 million and the fair value of these contracts was not significant at September 30, 2017.
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)
During the three and nine months ended September 30, 2017 and 2016 the gains and losses recorded related to the foreign currency exchange contracts are as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Loss from foreign currency exchange contracts | $ | (469 | ) | | $ | — |
| | $ | (1,096 | ) | | $ | (569 | ) |
These losses were offset by corresponding gains and losses on the revaluation of the underlying intercompany debt and both are included as a component of Other (expense) income, net, in our Unaudited Condensed Consolidated Statements of Operations.
During the first quarter of 2017 we entered into a foreign currency exchange rate forward contract at a cost of $3.5 million, to mitigate the exchange rate risk associated with a planned offshore acquisition which was not consummated. This derivative instrument was designated as a hedge for accounting purposes. The hedge expired upon maturity in the first quarter of 2017. The cost of the forward contract is recorded as a component of Other (expense) income, net in our Condensed Consolidated Statement of Operations.
Our inventories are valued at the lower of cost or market and computed on a first-in, first-out (FIFO) basis. Components of Inventories are as follows: |
| | | | | | | |
| September 30, | | December 31, |
| 2017 | | 2016 |
Parts and raw materials | $ | 52,991 |
| | $ | 43,278 |
|
Work in process | 8,901 |
| | 5,292 |
|
Finished goods | 11,628 |
| | 7,200 |
|
Inventories | $ | 73,520 |
| | $ | 55,770 |
|
| |
NOTE 9. | PROPERTY AND EQUIPMENT |
Property and equipment are as follows: |
| | | | | | | |
| September 30, | | December 31, |
| 2017 | | 2016 |
Buildings and land | $ | 1,656 |
| | $ | 1,581 |
|
Machinery and equipment | 35,270 |
| | 32,743 |
|
Computer and communication equipment | 26,452 |
| | 24,637 |
|
Furniture and fixtures | 1,379 |
| | 1,267 |
|
Vehicles | 340 |
| | 357 |
|
Leasehold improvements | 16,538 |
| | 15,546 |
|
Construction in process | 1,072 |
| | 644 |
|
| 82,707 |
| | 76,775 |
|
Less: Accumulated depreciation | (66,971 | ) | | (63,438 | ) |
Property and equipment, net | $ | 15,736 |
| | $ | 13,337 |
|
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)
Depreciation expense included in our income from continuing operations, is as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Depreciation expense | $ | 1,333 |
| | $ | 845 |
| | $ | 3,616 |
| | $ | 2,758 |
|
The following summarizes the changes in goodwill during the nine months ended September 30, 2017:
|
| | | | | | | | | | | | | | | |
| September 30, 2017 | | Additions | | Effect of Changes in Exchange Rates | | December 31, 2016 |
Goodwill | $ | 53,509 |
| | $ | 8,929 |
| | $ | 2,455 |
| | $ | 42,125 |
|
NOTE 11.INTANGIBLE ASSETS
Intangible assets subject to amortization consisted of the following as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | |
September 30, 2017 | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Technology-based | $ | 18,537 |
| | $ | (5,082 | ) | | $ | 13,455 |
|
Customer relationships | 29,865 |
| | (10,012 | ) | | 19,853 |
|
Trademarks and other | 2,601 |
| | (1,474 | ) | | 1,127 |
|
Total amortizable intangibles | $ | 51,003 |
| | $ | (16,568 | ) | | $ | 34,435 |
|
|
| | | | | | | | | | | |
December 31, 2016 | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Technology-based | $ | 11,643 |
| | $ | (3,673 | ) | | $ | 7,970 |
|
Customer relationships | 26,608 |
| | (7,451 | ) | | 19,157 |
|
Trademarks and other | 2,223 |
| | (1,279 | ) | | 944 |
|
Total amortizable intangibles | $ | 40,474 |
| | $ | (12,403 | ) | | $ | 28,071 |
|
Amortization expense for our intangible assets included in our income from continuing operations is as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Amortization expense | | $ | 1,240 |
| | $ | 1,048 |
| | $ | 3,176 |
| | $ | 3,180 |
|
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)
Amortization expense related to intangible assets for each of the five years 2017 (remaining) through 2021 and thereafter is as follows:
|
| | | |
Year Ending December 31, | |
2017 (remaining) | $ | 1,180 |
|
2018 | 4,842 |
|
2019 | 4,825 |
|
2020 | 4,146 |
|
2021 | 4,043 |
|
Thereafter | 15,399 |
|
| $ | 34,435 |
|
Provisions of our sales agreements include customary product warranties, ranging from 12 months to 24 months following shipment. The estimated cost of warranties is recorded when revenue is recognized and is based upon historical experience by product, configuration and geographic region.
We establish accruals for our warranty obligations that are probable to result in future costs. The warranty accrual is included in our Other accrued expenses in our balance sheet. Changes in our product warranty accrual were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Balances at beginning of period | $ | 3,933 |
| | $ | 1,933 |
| | $ | 2,329 |
| | $ | 1,633 |
|
Increases to accruals | 333 |
| | 789 |
| | 2,722 |
| | 1,726 |
|
Warranty expenditures | (439 | ) | | (197 | ) | | (1,236 | ) | | (811 | ) |
Effect of changes in exchange rates | 6 |
| | (8 | ) | | 18 |
| | (31 | ) |
Balances at end of period | $ | 3,833 |
| | $ | 2,517 |
| | $ | 3,833 |
| | $ | 2,517 |
|
| |
NOTE 13. | PENSION LIABILITY |
In connection with the HiTek acquisition on April 12, 2014, we acquired the HiTek Power Limited Pension Scheme ("HPLPS"). The HPLPS has been closed to new participants and additional accruals since 2006. In order to measure the expense and related benefit obligation, various assumptions are made including discount rates used to value the obligation, expected return on plan assets used to fund these expenses and estimated future inflation rates. These assumptions are based on historical experience as well as current facts and circumstances. An actuarial analysis is used to measure the expense and liability associated with pension benefits. We are committed to make annual fixed payments of $0.9 million into the HPLPS through April 30, 2024, and then $1.8 million from May 1, 2024 through November 30, 2033.
The net pension liability is included in Other long-term liabilities in our balance sheet as follows: |
| | | | | | | |
| September 30, | | December 31, |
| 2017 | | 2016 |
Pension liability | $ | 20,353 |
| | $ | 18,836 |
|
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)
The components of the net periodic pension expense for the three and nine months ended September 30, 2017 and 2016 were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net periodic (benefit) expense: | | | | | | | |
Expected return on plan assets | $ | (128 | ) | | $ | (121 | ) | | $ | (394 | ) | | $ | (385 | ) |
Interest cost | 242 |
| | 235 |
| | 742 |
| | 747 |
|
Amortization of actuarial gains and losses | 64 |
| | 80 |
| | 197 |
| | 255 |
|
Net periodic expense | $ | 178 |
| | $ | 194 |
| | $ | 545 |
| | $ | 617 |
|
| |
NOTE 14. | STOCK-BASED COMPENSATION |
On May 4, 2017, the shareholders approved the Company's 2017 Omnibus Incentive Plan ("the 2017 Plan") and all shares that were then available for issuance under the 2008 Omnibus Incentive Plan are now available for issuance under the 2017 Plan. We have reserved a total of 4,936,598 shares of Advanced Energy’s common stock for issuance under the 2017 Plan. The 2017 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, stock units (including deferred stock units), unrestricted stock, and dividend equivalent rights. Any of the awards issued under the 2017 Plan may be issued as performance based awards to align compensation awards to the attainment of annual or long-term performance goals. As of September 30, 2017, there were 4,189,179 shares available for grant under the 2017 Plan.
Stock option awards are granted with an exercise price equal to the market price of our stock at the date of grant and have either a time based vesting schedule of three or four years, or a performance based vesting schedule based upon achievement of organizational performance goals over a three year period, and a term of 10 years. The fair value of each award was estimated on the date of grant using the Black-Scholes-Merton option pricing model.
Restricted stock units (“RSU’s”) are granted with either a time based vesting schedule of three or four years, or a performance based vesting schedule based upon achievement of organizational performance goals over a three year period. The fair value of each RSU is determined based upon the closing fair market value of our common stock on the grant date.
We recognize stock-based compensation expense based on the fair value of the awards issued and the functional area of the employee receiving the award. Stock-based compensation for the three and nine months ended September 30, 2017 and 2016 is as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Stock-based compensation expense | $ | 3,453 |
| | $ | 1,301 |
| | $ | 10,707 |
| | $ | 4,299 |
|
A summary of activity for stock option awards during the three and nine months ended September 30, 2017 is as follows: |
| | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
| Number of Options | | Weighted-Average Exercise Price per Share | | Number of Options | | Weighted-Average Exercise Price per Share |
Options outstanding at beginning of period | 375 |
| | $ | 17.95 |
| | 474 |
| | $ | 17.47 |
|
Options exercised | (20 | ) | | $ | 14.58 |
| | (114 | ) | | $ | 15.35 |
|
Options forfeited | — |
| | $ | — |
| | (5 | ) | | $ | 18.19 |
|
Options outstanding at end of period | 355 |
| | $ | 18.14 |
| | 355 |
| | $ | 18.14 |
|
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)
A summary of activity for RSU awards for the three and nine months ended September 30, 2017 is as follows: |
| | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
| Number of RSUs | | Weighted-Average Grant Date Fair Value | | Number of RSUs | | Weighted- Average Grant Date Fair Value |
RSUs outstanding at beginning of period | 411 |
| | $ | 49.56 |
| | 354 |
| | $ | 29.60 |
|
RSUs granted | 2 |
| | $ | 74.56 |
| | 250 |
| | $ | 63.59 |
|
RSUs vested | (20 | ) | | $ | 28.99 |
| | (205 | ) | | $ | 30.60 |
|
RSUs forfeited | (1 | ) | | $ | 34.12 |
| | (7 | ) | | $ | 31.73 |
|
RSUs outstanding at end of period | 392 |
| | $ | 50.71 |
| | 392 |
| | $ | 50.71 |
|
| |
NOTE 15. | COMMITMENTS AND CONTINGENCIES |
We have firm purchase commitments and agreements with various suppliers to ensure the availability of components. The obligation as of September 30, 2017 is approximately $95.5 million. Our policy with respect to all purchase commitments is to record losses, if any, when they are probable and reasonably estimable. We continuously monitor these commitments for exposure to potential losses and will record a provision for losses when it is deemed necessary.
We are involved in disputes and legal actions arising in the normal course of our business. There have been no material developments in legal proceedings in which we are involved during the nine months ended September 30, 2017.
| |
NOTE 16. | RELATED PARTY TRANSACTIONS |
Members of our Board of Directors hold various executive positions and serve as directors at other companies, including companies that are our customers. Sales to our related party customers for the three and nine months ended September 30, 2017 and 2016 were as follows: |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Sales to related parties | $ | 648 |
| | $ | 673 |
| | $ | 1,255 |
| | $ | 896 |
|
Number of related party customers | 1 |
| | 2 |
| | 1 |
| | 3 |
|
Our accounts receivable balance from related party customers with outstanding balances as of September 30, 2017 and December 31, 2016 was as follows: |
| | | | | | | |
| September 30, | | December 31, |
| 2017 | | 2016 |
Accounts receivable from related parties | $ | 277 |
| | $ | — |
|
Number of related party customers | 1 |
| | — |
|
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)
| |
NOTE 17. | SIGNIFICANT CUSTOMER INFORMATION |
The following table summarizes sales, and percentages of sales, by customers that individually accounted for 10% or more of our sales for the three and nine months ended September 30, 2017 and 2016: |
| | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2017 | | % of Total Sales | | 2016 | | % of Total Sales |
Applied Materials, Inc. | $ | 50,078 |
| | 28.4 | % | | $ | 45,806 |
| | 36.2 | % |
LAM Research | 46,315 |
| | 26.2 | % | | 24,305 |
| | 19.2 | % |
| | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | % of Total Sales | | 2016 | | % of Total Sales |
Applied Materials, Inc. | $ | 165,239 |
| | 33.6 | % | | $ | 118,364 |
| | 34.0 | % |
LAM Research | 114,325 |
| | 23.2 | % | | 73,319 |
| | 21.0 | % |
The following table summarizes the accounts receivable balances, and percentages of the total accounts receivable, for customers that individually accounted for 10% or more of accounts receivable as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | |
| September 30, | | December 31, |
| 2017 | | 2016 |
Applied Materials, Inc. | $ | 32,681 |
| | 43.6 | % | | $ | 31,078 |
| | 41.1 | % |
LAM Research | 3,550 |
| | 4.7 | % | | 14,317 |
| | 18.9 | % |
Our sales to Applied Materials, Inc. and LAM Research include precision power products used in semiconductor processing and solar and flat panel display. No other customer accounted for 10% or more of our sales or accounts receivable balances during these periods.
On July 28, 2017, the Company entered into a Loan Agreement (the “Loan Agreement”) with Bank of America N.A. ("BA") which provides a revolving line of credit of up to $100.0 million subject to certain funding conditions through July 28, 2022. Interest on amounts drawn shall be paid quarterly based upon the LIBOR Daily Floating Rate then in effect, plus between one and one-quarter (1.25%) and one and three-quarters (1.75%) percentage points depending on the Funded Debt to EBITDA ratio. As of September 30, 2017, the interest rate was 2.49%.The obligations under the Loan Agreement are unsecured until the Funded Debt to EBITDA ratio exceeds 2.0 to 1.0, at which time the Company and certain affiliates’ tangible and intangible personal property will be subject to a first priority, perfected lien and security interest in favor of BA pursuant to a Security Agreement. The Loan Agreement requires us to pay certain fees to the lenders. During the nine months ended September 30, 2017, we had less than $0.1 million of expenses related to interest and unused line of credit fees. Our credit availability under the Loan Agreement was $100.0 million at September 30, 2017.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Special Note on Forward-Looking Statements
The following discussion contains, in addition to historical information, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements in this report that are not historical information are forward-looking statements. For example, statements relating to our beliefs, expectations and plans are forward-looking statements, as are statements that certain actions, conditions or circumstances will continue. The inclusion of words such as "anticipate," "expect," "estimate," "can," "may," "might," "continue," "enables," "plan," "intend," "should," "could," "would," "likely," "potential," or "believe," as well as statements that events or circumstances "will" occur or continue, indicate forward-looking statements. Forward-looking statements involve risks and uncertainties, which are difficult to predict and many of which are beyond our control. Therefore, actual results could differ materially and adversely from those expressed in any forward-looking statements. Neither we nor any other person assumes responsibility for the accuracy and completeness of such forward-looking statements and readers are cautioned not to place undue reliance on forward-looking statements.
For additional information regarding factors that may affect our actual financial condition, results of operations and accuracy of our forward-looking statements, see the information under the caption "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q and, in our Annual Report on Form 10-K for the year ended December 31, 2016. We undertake no obligation to revise or update any forward-looking statements for any reason.
BUSINESS OVERVIEW
We design, manufacture, sell and support precision power products that transform electrical power into various usable forms. Our power conversion products refine, modify and control the raw electrical power from a utility and convert it into power that is predictable, repeatable and customizable. Our products enable thin film manufacturing processes such as plasma enhanced chemical and physical deposition and etch for various semiconductor and industrial products, industrial thermal applications for material and chemical processes, and specialty power for critical industrial applications. We also supply thermal instrumentation products for advanced temperature control in these markets. Our network of global service support centers provides local repair and field service capability in key regions as well as provides upgrades and refurbishment services, and sales of used equipment to businesses that use our products. The markets we serve include:
| |
• | Semiconductor capital equipment market - Customers in the semiconductor capital equipment market incorporate our products into equipment that make integrated circuits. Our power conversion systems provide the energy to enable thin film processes, such as deposition and etch, and high voltage applications such as ion implant, wafer inspection and metrology. |
| |
• | Industrial power capital equipment market - Our industrial power capital market is comprised of products for Thin Films Industrial Power and Specialty Power applications. |
| |
◦ | Thin Films Industrial Power applications include glass coating, glass manufacturing, flat panel displays, solar cell manufacturing, and similar thin film manufacturing, including data storage, hard and optical coating. |
| |
◦ | Specialty Power applications include power control modules for metal fabrication and treatment, and material and chemical processing. Our high voltage industrial applications include scanning electron microscopy, medical equipment, and instrumentation applications such as x-ray and mass spectroscopy, as well as general electron gun sources for scientific and industrial applications. |
| |
◦ | Our thermal instrumentation products measure the temperature of the processed substrate or the process chamber. Our remote plasma sources deliver ionized gases for reactive chemical processes used in cleaning, surface treatment, and gas abatement. Precise control over the energy delivered to plasma-based processes enables the production of integrated circuits with reduced feature sizes and increased speed and performance. |
The analysis presented below is organized to provide the information we believe will be helpful for understanding our historical performance and relevant trends going forward. This discussion should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report, including the notes thereto. Also included in the following analysis are measures that are not in accordance with U.S. GAAP. A reconciliation of the non-GAAP measures to U.S. GAAP is provided below.
Results of Continuing Operations
The following table sets forth certain data, and the percentage of sales each item reflects, derived from our Unaudited Condensed Consolidated Statements of Operations for the periods indicated: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Sales | $ | 176,575 |
| | 100.0 | % | | $ | 126,552 |
| | 100.0 | % | | $ | 491,798 |
| | 100.0 | % | | $ | 348,361 |
| | 100.0 | % |
Gross profit | 92,234 |
| | 52.2 |
| | 66,123 |
| | 52.2 |
| | 258,206 |
| | 52.5 |
| | 181,629 |
| | 52.1 |
|
Operating expenses | 40,561 |
| | 23.0 |
| | 31,762 |
| | 25.1 |
| | 115,498 |
| | 23.5 |
| | 93,318 |
| | 26.8 |
|
Operating income from continuing operations | 51,673 |
| | 29.2 |
| | 34,361 |
| | 27.1 |
| | 142,708 |
| | 29.0 |
| | 88,311 |
| | 25.3 |
|
Other income (expense), net | 153 |
| | 0.1 |
| | (55 | ) | | — |
| | (3,138 | ) | | (0.6 | ) | | 1,138 |
| | 0.3 |
|
Income from continuing operations before income taxes | 51,826 |
| | 29.3 |
| | 34,306 |
| | 27.1 |
| | 139,570 |
| | 28.4 |
| | 89,449 |
| | 25.6 |
|
Provision for income taxes | (31,968 | ) | | (18.2 | ) | | 5,268 |
| | 4.2 |
| | (25,538 | ) | | (5.2 | ) | | 12,937 |
| | 3.7 |
|
Income from continuing operations, net of income taxes | $ | 83,794 |
| | 47.5 | % | | $ | 29,038 |
| | 22.9 | % | | $ | 165,108 |
| | 33.6 | % | | $ | 76,512 |
| | 21.9 | % |
SALES
The following tables set forth sales, and percentage of sales, by product group for the three and nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | |
| 2017 | | % of Total Sales | | 2016 | | % of Total Sales | | Increase/ (Decrease) | | Percent Change |
Semiconductor capital equipment market | $ | 116,468 |
| | 66.0 | % | | $ | 81,157 |
| | 64.1 | % | | $ | 35,311 |
| | 43.5 | % |
Industrial power capital equipment market | 35,895 |
| | 20.3 |
| | 26,493 |
| | 20.9 |
| | 9,402 |
| | 35.5 | % |
Global service | 24,212 |
| | 13.7 |
| | 18,902 |
| | 15.0 |
| | 5,310 |
| | 28.1 | % |
Total sales | $ | 176,575 |
| | 100.0 | % | | $ | 126,552 |
| | 100.0 | % | | $ | 50,023 |
| | 39.5 | % |
| | | | | | | | | | | |
| Nine Months Ended September 30, | | | | |
| 2017 | | % of Total Sales | | 2016 | | % of Total Sales | | Increase/ (Decrease) | | Percent Change |
Semiconductor capital equipment market | $ | 338,136 |
| | 68.8 | % | | $ | 229,486 |
| | 65.9 | % | | $ | 108,650 |
| | 47.3 | % |
Industrial power capital equipment market | 86,342 |
| | 17.6 |
| | 65,209 |
| | 18.7 |
| | 21,133 |
| | 32.4 | % |
Global service | 67,320 |
| | 13.6 |
| | 53,666 |
| | 15.4 |
| | 13,654 |
| | 25.4 | % |
Total sales | $ | 491,798 |
| | 100.0 | % | | $ | 348,361 |
| | 100.0 | % | | $ | 143,437 |
| | 41.2 | % |
Total Sales
Sales increased $50.0 million, or 39.5%, to $176.6 million for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016 and increased $10.7 million, or 6.5%, as compared to the three months ended June 30, 2017. Sales for the nine months ended September 30, 2017 increased $143.4 million, or 41.2%, to $491.8 million from $348.4 million for the nine months ended September 30, 2016. The increase in sales for both periods was primarily due to demand in the semiconductor market driven by accelerated demand and strength in etch applications, as well continued growth in global services. Total sales from Excelsys, which was acquired July 3, 2017, was $4.0 million for the three months ended September 30, 2017.
Sales in the semiconductor market increased $35.3 million, or 43.5%, for the three months ending September 30, 2017 as compared to the three months ended September 30, 2016 and was flat as compared to the three months ended June 30, 2017. Semiconductor market sales for the nine months ended September 30, 2017 increased $108.7 million or 47.3% as compared to the same period in 2016. Our growth in the semiconductor market has been fueled by our leadership in etch applications, specifically related to advanced memory and transition to 3DNAND, along with advances in logic technology. Sales growth in each of the periods is driven primarily by recent program wins which have moved into production and delivery.
Sales in the industrial markets increased $9.4 million, or 35.5%, for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016 and increased $9.6 million, or 36.6%, as compared to the three months ended June 30, 2017. For the nine months ended September 30, 2017, sales increased $21.1 million or 32.4% as compared to the same period in 2016. The increase in sales was primarily due to the expansion in advanced coating applications. The industrial markets we serve include solar panel, flat panel display, power control modules, data storage, architectural glass, high voltage and other industrial manufacturing markets. Our customers in these markets are primarily global and regional original equipment manufacturers. For the three months ended September 30, 2017, sales from Excelsys was $4.0 million.
Global service sales increased $5.3 million, or 28.1%, for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016 and increased $1.6 million, or 7.2%, as compared to the three months ended June 30, 2017. Global service sales for the nine months ending September 30, 2017 increased $13.7 million, or 25.4%, as compared to the same period in 2016. The increase in global service sales in all periods is due to share gains and growth in the installed base.
Backlog
Our backlog was $112.1 million at September 30, 2017 as compared to $69.2 million at December 31, 2016. Backlog remains strong primarily due to increased demand in the semiconductor and industrial thin film markets.
GROSS PROFIT
For the three months ended September 30, 2017, gross profit increased $26.1 million to $92.2 million as compared to gross profit of $66.1 million for the same period in 2016. Gross profit as a percent of sales remained flat between the periods at 52.2%. Gross profit for the nine months ended September 30, 2017 was $258.2 million, or 52.5% of sales, as compared to gross profit of $181.6 million, or 52.1% of sales, for the same period in 2016. The increase in gross profit is primarily attributable to increased volume. For the three months ended September 30, 2017 gross profit from Excelsys was $1.7 million which included$0.1 million associated with a step up in book basis for purchased inventory.
OPERATING EXPENSE
Operating expenses increased $8.8 million to $40.6 million, or 23.0% of sales, for the three months ended September 30, 2017 from $31.8 million, or 25.1% of sales, for the same period in 2016. Operating expenses increased $22.2 million to $115.5 million, or 23.5% of sales, for the nine months ended September 30, 2017, from $93.3 million, or 26.8% of sales, for the same period in 2016. For the three months ended September 30, 2017 operating expenses from Excelsys was $1.6 million which included $0.2 million in amortization for purchased intangibles.
The following table summarizes our operating expenses as a percentage of sales for the periods indicated: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Research and development | $ | 14,629 |
| | 8.3 | % | | $ | 11,293 |
| | 8.9 | % | | $ | 41,742 |
| | 8.5 | % | | $ | 33,324 |
| | 9.6 | % |
Selling, general, and administrative | 24,692 |
| | 14.0 |
| | 19,421 |
| | 15.4 |
| | 70,580 |
| | 14.4 |
| | 56,814 |
| | 16.3 |
|
Amortization of intangible assets | 1,240 |
| | 0.7 |
| | 1,048 |
| | 0.8 |
| | 3,176 |
| | 0.6 |
| | 3,180 |
| | 0.9 |
|
Total operating expenses | $ | 40,561 |
| | 23.0 | % | | $ | 31,762 |
| | 25.1 | % | | $ | 115,498 |
| | 23.5 | % | | $ | 93,318 |
| | 26.8 | % |
Research and Development
We perform research and development of products for new or emerging applications, technological changes to provide higher performance, lower cost, or other attributes that we may expect to advance our customers’ products. We believe that continued development of technological applications, as well as enhancements to existing products to support customer requirements, are critical for us to compete in the markets we serve. Accordingly, we devote significant personnel and financial resources to the development of new products and the enhancement of existing products, and we expect these investments to continue.
Research and development expenses increased $3.3 million to $14.6 million, or 8.3% of sales, for the three months ended September 30, 2017 from $11.3 million, or 8.9% of sales, for the same period in 2016. Research and development expenses increased $8.4 million to $41.7 million, or 8.5% of sales, for the nine months ended September 30, 2017 from $33.3 million, or 9.6% of sales, for the same period in 2016. The increase in research and development expense is due to our investment in new programs to maintain and increase our technological leadership and provide solutions to our customers' evolving needs. For the three months ended September 30, 2017 research and development expense from Excelsys was $0.5 million.
Selling, General and Administrative
Our selling expenses support domestic and international sales and marketing activities that include personnel, trade shows, advertising, third-party sales representative commissions, and other selling and marketing activities. Our general and administrative expenses support our worldwide corporate, legal, tax, financial, governance, administrative, information systems, and human resource functions in addition to our general management, including acquisition-related activities.
Selling, general and administrative expenses increased $5.3 million to $24.7 million, or 14.0%, of sales for the three months ended September 30, 2017 from $19.4 million, or 15.4% of sales, for the same period in 2016. Selling, general and administrative expenses increased $13.8 million to $70.6 million, or 14.4% of sales, for the nine months ended September 30, 2017 from $56.8 million, or 16.3% of sales, for the same period in 2016. The increase in selling, general and administrative expense in both periods is primarily driven by higher stock based compensation, performance bonus, increased headcount and payroll, and costs associated with business development. For the three months ended September 30, 2017 selling, general and administrative expense from Excelsys was $1.1 million.
Other Income (Expense), net
Other income (expense), net consists primarily of interest income and expense, foreign exchange gains and losses, gains and losses on sales of fixed assets, and other miscellaneous items. Other income (expense), net was a gain of $0.2 million for the three months ended September 30, 2017, as compared to a loss of $0.1 million for the same period in 2016. Other income (expense), net was a loss of $(3.1) million for the nine months ended September 30, 2017, as compared to a gain of $1.1 million for the same period in 2016. The loss for the nine months ended September 30, 2017 was primarily the cost of a foreign currency exchange rate forward contract that we entered into for a potential offshore acquisition that we decided not to consummate. See Note 7. Derivative Financial Instruments in Part I, Item 1 "Unaudited Condensed Consolidated Financial Statements" contained herein.
Provision for Income Taxes
For the three and nine months ended September 30, 2017, the effective tax rates were (61.7)% and (18.3)%, respectively, compared to 15.4% and 14.5% for the three and nine months ended September 30, 2016, respectively. The effective tax rates for the three and nine months ended September 30, 2017 reflect the recognition of $40.2 million tax benefit associated with an estimated worthless stock deduction for the liquidation of one of our wholly owned solar inverter entities. The effective tax rates, without the $40.2 million estimated worthless stock benefit, for the three and nine months ended September 30, 2017, were 15.9% and 10.5%, respectively.
The effective tax rates for 2017 and 2016 are lower than the federal statutory rate primarily due to the tax benefit of earnings in foreign jurisdictions which are subject to lower tax rates. Additionally, the effective rates for the three and nine months ended September 30, 2017 were favorably impacted by the implementation of ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payments, and the related impact from the tax benefit derived from the exercise of employee equity incentive instruments.
Our future effective income tax rate depends on various factors, such as changes in tax laws, regulations, accounting principles, or interpretations thereof and the geographic composition of our pre-tax income. We carefully monitor these factors and adjust our effective income tax rate accordingly.
Results of Discontinued Operations
We completed the wind down of our inverter engineering, manufacturing and sales product line in December 2015. Accordingly, the inverter product line is presented as a discontinued operation for all periods presented herein. Extended warranties previously sold for the inverter product line are reflected in deferred revenue from continuing operations on our Unaudited Condensed Consolidated Balance Sheets and will be reflected in continuing operations in future periods as the deferred revenue is earned and the associated services are rendered.
Income from discontinued operations, net of income taxes are as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Sales | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Cost of sales | 944 |
| | 3,095 |
| | 47 |
| | 672 |
|
Total operating expenses | (441 | ) | | (1,473 | ) | | (1,587 | ) | | (3,759 | ) |
Operating income from discontinued operations | (503 | ) | | (1,622 | ) | | 1,540 |
| | 3,087 |
|
Other income | (86 | ) | | (14 | ) | | 291 |
| | 325 |
|
Income from discontinued operations before income taxes | (589 | ) | | (1,636 | ) | | 1,831 |
| | 3,412 |
|
Provision for income taxes | (659 | ) | | (2,959 | ) | | (512 | ) | | (3,249 | ) |
Income from discontinued operations, net of income taxes | $ | 70 |
| | $ | 1,323 |
| | $ | 2,343 |
| | $ | 6,661 |
|
Operating income from discontinued operations for the three and nine months ended September 30, 2017 and 2016 reflects the recovery of accounts receivable previously reserved for and the release of product warranty liability.
Non-GAAP Results
Management uses non-GAAP operating income and non-GAAP EPS to evaluate business performance without the impacts of certain non-cash charges and other charges which are not part of our usual operations. We use these non-GAAP measures to assess performance against business objectives, make business decisions, including developing budgets and forecasting future periods. In addition, management's incentive plans include these non-GAAP measures as criteria for achievements. These non-GAAP measures are not in accordance with U.S. GAAP and may differ from non-GAAP methods of accounting and reporting used by other companies. However, we believe these non-GAAP measures provide additional information that enables readers to evaluate our business from the perspective of management. The presentation of this additional information should not be considered a substitute for results prepared in accordance with U.S. GAAP.
The non-GAAP results presented below exclude the impact of non-cash related charges, such as the amortization of intangible assets, stock-based compensation, and restructuring charges, as well as acquisition-related costs and other nonrecurring costs, as they are not indicative of future performance. The tax effect of our non-GAAP adjustments represents the anticipated annual tax rate applied to each non-GAAP adjustment after consideration of their respective book and tax treatments.
|
| | | | | | | | | | | | | | | |
Reconciliation of Non-GAAP measure - operating expenses and operating income from continuing operations, excluding certain items | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Gross Profit from continuing operations, as reported | $ | 92,234 |
| | $ | 66,123 |
| | $ | 258,206 |
| | $ | 181,629 |
|
Operating expenses from continuing operations, as reported | 40,561 |
| | 31,762 |
| | 115,498 |
| | 93,318 |
|
Adjustments: | | | | | | | |
Stock-based compensation | (3,453 | ) | | (1,301 | ) | | (10,707 | ) | | (4,299 | ) |
Amortization of intangible assets | (1,240 | ) | | (1,048 | ) | | (3,176 | ) | | (3,180 | ) |
Acquisition-related costs | — |
| | — |
| | (150 | ) | | — |
|
Non-GAAP operating expenses from continuing operations | 35,868 |
| | 29,413 |
| | 101,465 |
| | 85,839 |
|
Non-GAAP operating income from continuing operations | $ | 56,366 |
| | $ | 36,710 |
| | $ | 156,741 |
| | $ | 95,790 |
|
|
| | | | | | | | | | | |
Reconciliation of Non-GAAP measure - operating expenses and operating income from continuing operations, excluding certain items | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Gross Profit from continuing operations, as reported | 52.2 | % | | 52.2 | % | | 52.5 | % | | 52.1 | % |
Operating expenses from continuing operations, as reported | 23.0 |
| | 25.1 |
| | 23.5 |
| | 26.8 |
|
Adjustments: | | | | | | | |
Stock-based compensation | (2.0 | ) | | (1.1 | ) | | (2.3 | ) | | (1.3 | ) |
Amortization of intangible assets | (0.7 | ) | | (0.8 | ) | | (0.6 | ) | | (0.9 | ) |
Acquisition-related costs | — |
| | — |
| | — |
| | — |
|
Non-GAAP operating expenses from continuing operations | 20.3 |
| | 23.2 |
| | 20.6 |
| | 24.6 |
|
Non-GAAP operating income from continuing operations | 31.9 | % | | 29.0 | % | | 31.9 | % | | 27.5 | % |
|
| | | | | | | | | | | | | | | |
Reconciliation of Non-GAAP measure - income from continuing operations, excluding certain items | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Income from continuing operations, net of income taxes, as reported | $ | 83,794 |
| | $ | 29,038 |
| | $ | 165,108 |
| | $ | 76,512 |
|
|