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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 1997.
[ ] 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: 0-26966
ADVANCED ENERGY INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 84-0846841
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1625 SHARP POINT DRIVE, FORT COLLINS, CO 80525
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (970) 221-4670
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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 X No .
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As of March 31, 1997, there were 21,277,495 shares of the Registrant's Common
Stock, par value $0.001 per share, outstanding.
1
ADVANCED ENERGY INDUSTRIES, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets-
March 31, 1997 and December 31, 1996 3
Consolidated Statements of Operations-
Three months ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows-
Three months ended March 31, 1997 and 1996 5
Notes to consolidated financial statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 12
ITEM 2. CHANGES IN SECURITIES 12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
ITEM 5. OTHER INFORMATION 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
1997 1996
ASSETS (UNAUDITED)
----------- ------------
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . $ 9,784 $11,231
Accounts receivable. . . . . . . . . . . . . . . . . 18,992 16,116
Inventories. . . . . . . . . . . . . . . . . . . . . 16,197 13,976
Prepaid expenses and other current assets. . . . . . 867 1,013
Deferred income tax benefit. . . . . . . . . . . . . 1,223 1,223
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Total current assets . . . . . . . . . . . . . . . . . 47,063 43,559
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Property and Equipment, net. . . . . . . . . . . . . . 9,191 9,500
Other Assets . . . . . . . . . . . . . . . . . . . . . 2,410 2,972
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Total assets . . . . . . . . . . . . . . . . . . . . . $58,664 $56,031
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . $ 4,553 $ 2,253
Accrued payroll and employee benefits. . . . . . . . 2,590 2,396
Other accrued expenses . . . . . . . . . . . . . . . 756 1,156
Customer deposits. . . . . . . . . . . . . . . . . . 224 166
Accrued income tax payable . . . . . . . . . . . . . 1,396 1,485
Current portion of long-term debt. . . . . . . . . . 785 924
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Total current liabilities. . . . . . . . . . . . . . . 10,304 8,380
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Long-term debt . . . . . . . . . . . . . . . . . . . . 966 1,127
Deferred income tax liability. . . . . . . . . . . . . 28 28
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Total liabilities. . . . . . . . . . . . . . . . . . . 11,298 9,535
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Stockholders' equity . . . . . . . . . . . . . . . . . 47,366 46,496
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Total liabilities and stockholders' equity . . . . . . $58,664 $56,031
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The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
3
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED MARCH 31,
----------------------------
1997 1996
(UNAUDITED) (UNAUDITED)
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Net Sales . . . . . . . . . . . . . . . . . . . . $20,667 $27,166
Cost of Sales . . . . . . . . . . . . . . . . . . 13,158 17,035
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Gross profit . . . . . . . . . . . . . . . . . . 7,509 10,131
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Operating Expenses:
Research and development . . . . . . . . . . . 2,821 3,498
Sales and marketing . . . . . . . . . . . . . 1,799 2,083
General and administrative . . . . . . . . . . 1,248 1,725
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Operating Income . . . . . . . . . . . . . . . . 1,641 2,825
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Other (expense) income, net . . . . . . . . . . . (387) (170)
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Net income before income taxes . . . . . . . . . 1,254 2,655
Provision for income taxes . . . . . . . . . . . 489 982
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Net Income . . . . . . . . . . . . . . . . . . . $ 765 $ 1,673
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Net Income per share . . . . . . . . . . . . . . $ 0.04 $ 0.08
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Weighted average shares outstanding . . . . . . . 21,821 21,794
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The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
4
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
(UNAUDITED) (UNAUDITED)
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . $ 765 $ 1,673
Adjustments to reconcile net income to net cash
(used in ) provideded by operating activities --
Depreciation and amortization . . . . . . . . . . 798 445
Amortization of deferred compensation . . . . . . 12 12
Loss on disposal of property and equipment. . . . -- 39
Changes in operating assets and liabilities --
Accounts receivable, trade. . . . . . . . . . . (2,702) (2,627)
Related parties and other receivables . . . . . (174) 133
Inventories . . . . . . . . . . . . . . . . . . (2,221) (1,487)
Income taxes. . . . . . . . . . . . . . . . . . (89) 661
Other current assets. . . . . . . . . . . . . . 146 126
Deposits and other. . . . . . . . . . . . . . . 21 21
Demonstration and customer service equipment. . 367 (15)
Accounts payable. . . . . . . . . . . . . . . . 2,300 1,372
Accrued payroll and employee benefits . . . . . 194 (63)
Customer deposits and other accrued expenses. . (342) (211)
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Net cash (used in) provided by operating
activities. . . . . . . . . . . . . . . . . (925) 79
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net. . . . . . . (315) (3,126)
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Net cash used in investing activities. . . . (315) (3,126)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and capital lease obligations (300) (234)
Proceeds from sale of common stock . . . . . . . . . 11 110
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Net cash used in financing activities . . . . . . (289) (124)
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EFFECT OF CUMULATIVE TRANSLATION ADJUSTMENT. . . . . . 82 (64)
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DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . (1,447) (3,235)
CASH AND CASH EQUIVALENTS, beginning of period . . . . 11,231 13,332
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CASH AND CASH EQUIVALENTS, end of period . . . . . . . $ 9,784 $10,097
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest . . . . . . . . . . . . . . . $ 39 $ 52
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Cash paid for income taxes . . . . . . . . . . . . . $ 0 $ 290
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The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
5
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND MANAGEMENT OPINION
In the opinion of management, the accompanying unaudited consolidated
balance sheets and statements of operations and cash flows contain all
adjustments, consisting only of normal recurring items, necessary to present
fairly the financial position of Advanced Energy Industries, Inc., a Delaware
corporation, and its wholly owned subsidiaries (the "Company") at March 31,
1997, and the results of their operations and cash flows for the three month
periods ended March 31, 1997 and March 31, 1996.
The unaudited financial statements presented herein have been prepared in
accordance with the instructions to Form 10-Q and do not include all the
information and note disclosures required by generally accepted accounting
principles. The financial statements should be read in conjunction with the
audited financial statements and notes thereto contained in the Company's latest
annual report on Form 10-K for the year ended December 31, 1996.
(2) INITIAL PUBLIC OFFERING
In November 1995, the Company closed on the initial public offering of its
common stock. In connection with the offering, 2,400,000 shares of previously
unissued common shares were sold at a price of $10 per share, providing gross
proceeds of $24,000,000, less $2,790,000 in offering costs.
(3) ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
MARCH 31, DECEMBER 31,
1997 1996
(UNAUDITED)
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(IN THOUSANDS)
Domestic . . . . . . . . . . . . . . . . . . . . . . . $11,220 $ 9,944
Foreign. . . . . . . . . . . . . . . . . . . . . . . . 7,008 5,585
Allowance for doubtful accounts. . . . . . . . . . . . (239) (242)
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Trade accounts receivable. . . . . . . . . . . . . . . $17,989 $15,287
Related parties. . . . . . . . . . . . . . . . . . . . 482 541
Other. . . . . . . . . . . . . . . . . . . . . . . . . 521 288
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Total accounts receivable. . . . . . . . . . . . . . . $18,992 $16,116
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(4) INVENTORIES
Inventories consisted of the following:
MARCH 31, DECEMBER 31,
1997 1996
(UNAUDITED)
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(IN THOUSANDS)
Parts and raw materials . . . . . . . . . . . . . $11,862 $11,149
Work in process . . . . . . . . . . . . . . . . . 1,642 1,122
Finished goods. . . . . . . . . . . . . . . . . . 2,693 1,705
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$16,197 $13,976
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6
(5) NET INCOME PER COMMON SHARE
Net income per share is computed based on results of operations attributable
to common stock and weighted average number of common and common equivalent
shares outstanding during each of the periods. Earnings per share are calculated
by dividing the net earnings by the weighted average of common and common
equivalent shares outstanding during each of the periods.
(6) STOCKHOLDERS' EQUITY
Stockholders' equity consisted of the following:
MARCH 31, DECEMBER 31,
1997 1996
(UNAUDITED)
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(IN THOUSANDS, EXCEPT
PAR VALUE)
Common stock, $0.001 par value, 30,000 shares
authorized; 21,277 and 21,268 shares issued
and outstanding . . . . . . . . . . . . . . . . $ 21 $ 21
Additional paid-in capital. . . . . . . . . . . . 23,085 23,075
Retained earnings . . . . . . . . . . . . . . . . 25,831 25,065
Stockholders' notes receivable. . . . . . . . . . (1,083) (1,083)
Deferred compensation . . . . . . . . . . . . . . (70) (82)
Cumulative translation adjustment . . . . . . . . (418) (500)
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Total stockholders' equity. . . . . . . . . . . . $47,366 $46,496
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7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains, in addition to historical information,
forward-looking statements. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are
not limited to, those discussed below and in the Company's 1996 annual report
on Form 10-K.
In particular, the Company believes that the following factors could impact
forward-looking statements made herein or in future written or oral releases
and by hindsight, prove such statements to be overly optimistic and
unachievable: volatility of the semiconductor and semiconductor equipment
industries, customer concentration, dependence on design wins, rapid
technological change and dependence on new system introduction, competition,
and management of growth.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
SALES
Sales for the first quarter of 1997 were $20.7 million, a decrease of 24%
from first quarter of 1996 sales of $27.2 million. The Company's decrease in
sales between the periods presented has resulted from decreased unit sales of
the Company's systems. A significant part of this unit sales decrease is
attributable to decreased demand by domestic semiconductor equipment
customers, primarily the Company's two largest customers reflecting the
downturn in the entire semiconductor equipment industry. Sales in Europe were
down marginally from the comparable quarter in 1996. Sales in Japan were up
188% from the comparable quarter in 1996 due to increased revenue from the
flat panel display industry.
The Company continues to be cautious about the outlook for future sales to
the semiconductor equipment industry.
GROSS MARGIN
The Company's gross margin for the first quarter of 1997 was 36.3% of
revenue, down from 37.3% of revenue in the comparable period in 1996, and
down from 36.9% in the fourth quarter of 1996. The decline in gross margin
from the first quarter of 1996 to the first quarter of 1997 is due primarily
to higher customer service costs, which increased in total dollars spent and
as a percentage of sales, higher allocations of infrastructure costs to cost
of good sold, and a less favorable absorption of manufacturing overhead
costs. These increases were partially offset by lower material costs. The
Company expects that
8
increased customer service costs and underutilization of manufacturing
capacity will continue to negatively impact gross margin until sales levels
improve.
RESEARCH AND DEVELOPMENT
The Company's research and development costs are incurred researching new
technologies, developing new products and improving existing product designs.
Research and development expenses for the first quarter of 1997 were $2.8
million, down from $3.5 million in the first quarter of 1996, representing a
decrease of 20%. This decrease resulted from lower spending for materials and
supplies, as well as a reduction in allocations of infrastructure costs to
research and development. These decreases reflect a continuation of the
Company's cost containment efforts implemented in the third quarter of 1996.
As a percentage of sales, research and development expenses increased to
13.6% in the first quarter of 1997 from 12.9% in the first quarter of 1996,
primarily as a result of the lower sales base.
The Company believes that continued research and development investment is
essential to ongoing development of new products. Since inception, all
research and development costs have been internally funded and expensed.
SALES AND MARKETING
Sales and marketing expenses support domestic and international sales and
marketing activities that include personnel, trade shows, advertising, and
other marketing activities. Sales and marketing expenses for the first
quarter of 1997 were $1.8 million, compared to expenses of $2.1 million in
the first quarter of 1996, representing a decrease of 14%. This decrease is
primarily a result of lower allocations of general and administrative costs
to the sales and marketing function. As a percentage of sales, sales and
marketing expenses increased to 8.7% in the first quarter of 1997 from 7.7%
in the first quarter of 1996, primarily as a result of the lower sales base.
The Company continues to reorganize its sales and marketing team to better
address the specific needs of its customers. As a result, sales and marketing
expenses are expected to increase as a percentage of sales in future periods.
GENERAL AND ADMINISTRATIVE
General and administrative expenses support the worldwide financial,
administrative, information systems and human resources functions of the
Company. General and administrative expenses for the first quarter of 1997
were $1.2 million, compared to expenses of $1.7 million in the first quarter
of 1996, representing a decrease of 29%. The decrease is primarily a result
of continued lower spending driven by cost containment efforts implemented
during the third quarter of 1996, particularly for payroll costs and
purchased services. As a percentage of sales, expenses decreased to 6.0% in
the first quarter of 1997 from 6.3% in the first quarter of 1996.
9
The Company is in the process of implementing new information management
system software throughout the Company including the replacement of existing
systems in its foreign locations. The Company expects that significant charges
related to training and implementation of the new software will occur during
1997 particularly for the foreign locations.
OTHER INCOME (EXPENSE)
Other income and expense consists primarily of foreign exchange gains and
losses, interest expense and other miscellaneous income and expense items.
Other expense was $0.4 million for the first quarter of 1997, compared to
other expense of $0.2 million in the first quarter of 1996.
The Company has experienced fluctuations in foreign currency exchange rates
during the past few months particularly against the Japanese yen. As a hedge
against currency fluctuations in the Japanese yen, the Company entered into
various forward foreign exchange contracts during the first quarter to lessen
future exposures to foreign exchange losses.
PROVISION FOR INCOME TAXES
The income tax provision of $0.5 million for the first quarter of 1997
represented an estimated effective rate of 39.0% compared to an effective income
tax rate for the year 1996 of 38.1%. The Company adjusts its income taxes
periodically based upon the anticipated tax status of all foreign and domestic
entities.
LIQUIDITY AND CAPITAL RESOURCES
Until the initial public offering of the Company's common stock in November
1995, the Company financed its operations, acquired equipment and met its
working capital requirements through borrowings under its revolving line of
credit, long-term loans secured by property and equipment and cash flow from
operations.
Cash used in operations totaled $0.9 million for the first quarter of 1997
compared to cash provided by operations of $0.1 million for the same period in
1996. Cash used in the first quarter of 1997 was primarily a result of increases
in accounts receivable and inventories offset by net income and increases in
accounts payable. Cash provided in the comparable period in 1996 was primarily a
result of net income and increases in accounts payable, income taxes payable and
other liabilities, offset by increases in accounts receivable and inventories.
Investing activities, consisting primarily of equipment acquisitions, used
cash of $0.3 million in the first quarter of 1997, versus $3.1 million in the
comparable period in 1996. In the first quarter of 1996 the Company equipped and
moved into a new 56,000 square
10
foot building. Financing activities in the first quarter of 1997 consisted
primarily of notes payable and capital lease obligations and used cash of
$0.3 million. In the comparable period in 1996, financing activities
consisted primarily of repayment of notes payable and capital lease
obligations, partially offset by proceeds from the sale of common stock, and
used cash of $0.1 million.
The Company plans to spend approximately $3.5 million through the remainder
of 1997 for the acquisition of manufacturing and test equipment and
furnishings.
As of March 31, 1997, the Company had working capital of $36.8 million. The
Company's principal sources of liquidity consisted of $9.8 million of cash
and cash equivalents and $10.0 million available under a $10.0 million
revolving line of credit that bears interest at the prime rate (8.5% at April
15, 1997). The Company has the option to convert up to $3.0 million of its
revolving line of credit to a 36-month term loan that would bear interest at
prime rate plus 0.50%.
The Company also has a term loan for equipment financing for its US
operations. At March 31, 1997, $1.3 million was outstanding under the term
loan, which bears interest at prime plus 0.25% and is due November 5, 1999.
The Company believes that its cash and cash equivalents, cash flow from
operations and available borrowings, will be sufficient to meet the Company's
working capital needs through at least the end of 1997. After that time, the
Company may require additional equity or debt financing to address its
working capital, capital equipment, or expansion needs. There can be no
assurance that additional funding will be available when required or that it
will be available on terms acceptable to the Company.
11
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ADVANCED ENERGY INDUSTRIES, INC.
/s/ Richard P. Beck
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(Registrant)
Vice President, Chief Financial May 9,1997
Officer, Assistant Secretary and
Director (Principal Financial Officer
and Principal Accounting Officer)
13