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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, 2001.
[ ] 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 (I.R.S. Employer Identification No.)
or organization)
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 X No .
--- ---
As of May 7, 2001, there were 31,724,632 shares of the Registrant's Common
Stock, par value $0.001 per share, outstanding.
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ADVANCED ENERGY INDUSTRIES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
Consolidated Balance Sheets-
March 31, 2001 and December 31, 2000 3
Consolidated Statement of Operations -
Three months ended March 31, 2001 and 2000 4
Consolidated Statement of Cash Flows -
Three months ended March 31, 2001 and 2000 5
Notes to consolidated financial statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 16
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2001 2000
(UNAUDITED) (UNAUDITED)
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................... $ 26,773 $ 31,716
Marketable securities - trading ................................. 130,050 157,811
Accounts receivable, net ........................................ 62,206 76,545
Notes receivable ................................................ 2,472 2,472
Income tax receivable ........................................... 88 74
Inventories ..................................................... 53,018 45,266
Other current assets ............................................ 3,465 2,508
Deferred income tax assets, net ................................. 8,050 7,483
-------- --------
Total current assets ........................................ 286,122 323,875
-------- --------
PROPERTY AND EQUIPMENT, net ....................................... 32,813 24,101
OTHER ASSETS:
Deposits and other .............................................. 874 995
Goodwill and intangibles, net ................................... 31,770 9,890
Investments - available for sale ................................ 2,209 1,824
Demonstration and customer service equipment, net ............... 3,494 2,889
Deferred debt issuance costs, net ............................... 2,138 2,261
-------- --------
Total assets ................................................ $359,420 $365,835
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade ........................................ $ 16,078 $ 18,250
Accrued payroll and employee benefits ........................... 9,134 11,723
Other accrued expenses .......................................... 4,412 4,383
Customer deposits ............................................... 124 104
Accrued income taxes payable .................................... 1,248 7,923
Current portion of capital lease obligations and long-term debt . 1,104 1,337
Accrued interest payable on convertible subordinated notes ...... 1,600 529
-------- --------
Total current liabilities ................................... 33,700 44,249
-------- --------
LONG-TERM LIABILITIES:
Notes payable, net of current portion ........................... 892 1,043
Deferred income tax liabilities, net ............................ 912 --
Convertible subordinated notes payable .......................... 81,600 81,600
-------- --------
83,404 82,643
-------- --------
Total liabilities ........................................... 117,104 126,892
-------- --------
MINORITY INTEREST ................................................. 80 145
-------- --------
STOCKHOLDERS' EQUITY .............................................. 242,236 238,798
-------- --------
Total liabilities and stockholders' equity .................. $359,420 $365,835
======== ========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
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ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
(UNAUDITED) (UNAUDITED)
----------- -----------
SALES ................................................. $ 74,714 $ 75,028
COST OF SALES ......................................... 43,491 38,361
-------- --------
Gross profit ....................................... 31,223 36,667
-------- --------
OPERATING EXPENSES:
Research and development ............................ 12,389 8,113
Sales and marketing ................................. 6,629 5,867
General and administrative .......................... 6,174 5,639
Litigation recovery ................................. (1,500) --
-------- --------
Total operating expenses ........................... 23,692 19,619
-------- --------
INCOME FROM OPERATIONS ................................ 7,531 17,048
OTHER INCOME (EXPENSE) ................................ 187 120
-------- --------
Net income before income taxes and minority interest 7,718 17,168
PROVISION FOR INCOME TAXES ............................ 2,689 5,947
MINORITY INTEREST IN NET LOSS ......................... (65) (17)
-------- --------
NET INCOME ............................................ $ 5,094 $ 11,238
======== ========
BASIC EARNINGS PER SHARE .............................. $ 0.16 $ 0.36
======== ========
DILUTED EARNINGS PER SHARE ............................ $ 0.16 $ 0.35
======== ========
BASIC WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING ...... 31,547 31,161
======== ========
DILUTED WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING .... 32,187 32,512
======== ========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
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ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
(UNAUDITED) (UNAUDITED)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................ $ 5,094 $ 11,238
Adjustments to reconcile net income to net cash provided by operating
activities --
Depreciation and amortization ...................................... 3,982 2,330
Amortization of deferred debt issuance costs ....................... 123 160
Minority interest .................................................. (65) (17)
Provision for deferred income taxes ................................ 73 (103)
Amortization of deferred compensation .............................. 131 64
Earnings from marketable securities, net ........................... (1,565) (2,278)
Changes in operating assets and liabilities --
Accounts receivable-trade, net ................................... 15,449 (6,622)
Related parties and other receivables ............................ 57 (188)
Inventories ...................................................... (6,074) (3,058)
Other current assets ............................................. (868) (362)
Deposits and other ............................................... 120 (44)
Demonstration and customer service equipment ..................... (846) (247)
Accounts payable, trade .......................................... (2,527) (2,526)
Accrued payroll and employee benefits ............................ (2,994) 1,944
Customer deposits and other accrued expenses ..................... 696 1,502
Income taxes payable/receivable, net ............................. (6,770) 5,389
-------- --------
Net cash provided by operating activities ..................... 4,016 7,182
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Marketable securities transactions .................................... 30,000 (10,000)
Proceeds from sale of equipment ....................................... -- 150
Purchase of property and equipment, net ............................... (6,471) (2,016)
Purchase of investments ............................................... (592) --
Acquisition of Engineering Measurements Company, net of cash acquired . (29,932) --
-------- --------
Net cash used in investing activities ......................... (6,995) (11,866)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change from notes payable and capital lease obligations ........... (384) 627
Proceeds from common stock transactions ............................... 199 2,996
-------- --------
Net cash (used in) provided by financing activities ........... (185) 3,623
-------- --------
EFFECT OF CURRENCY TRANSLATION ON CASH .................................. (1,779) (145)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS ................................... (4,943) (1,206)
CASH AND CASH EQUIVALENTS, beginning of period .......................... 31,716 21,043
-------- --------
CASH AND CASH EQUIVALENTS, end of period ................................ $ 26,773 $ 19,837
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ................................................ $ 95 $ 94
======== ========
Cash paid for income taxes ............................................ $ 9,236 $ 2,727
======== ========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
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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,
2001, and the results of the Company's operations and cash flows for the
three-month periods ended March 31, 2001 and 2000.
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 Annual
Report on Form 10-K for the year ended December 31, 2000, filed March 27, 2001.
(2) ACQUISITIONS
EMCO - On January 2, 2001, Engineering Measurements Company ("EMCO"), a
publicly-held, Longmont, Colorado-based manufacturer of electronic and
electromechanical precision instruments for measuring and controlling the flow
of liquids, steam and gases, was merged with a wholly owned subsidiary of the
Company. The Company paid the EMCO shareholders cash in an aggregate amount of
approximately $30 million. The acquisition was accounted for using the purchase
method of accounting, and the operating results of EMCO are reflected in the
accompanying financial statements prospectively from the date of acquisition.
The purchase price was allocated to the net assets of EMCO as summarized below:
(In thousands)
(UNAUDITED)
Cash and cash equivalents $ 459
Marketable securities 674
Accounts receivable 1,167
Inventories 1,678
Deferred income tax assets, current 584
Other current assets 88
Fixed assets 4,596
Goodwill and intangibles 23,152
Accounts payable (355)
Accrued payroll (405)
Other accrued expenses (391)
Deferred income tax liability (856)
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$30,391
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SEKIDENKO, INC. - On August 18, 2000, Sekidenko, Inc. ("Sekidenko"), a
privately-held, Vancouver, Washington state-based supplier of optical fiber
thermometers to the semiconductor capital equipment industry, was merged with a
wholly owned subsidiary of the Company. The Company issued 2.1 million shares of
its common stock to the former shareholders of Sekidenko.
NOAH HOLDINGS, INC. - On April 6, 2000, Noah Holdings, Inc. ("Noah"), a
privately-held, California-based manufacturer of solid state temperature control
systems used to control process temperatures during semiconductor manufacturing,
was merged with a wholly owned subsidiary of the
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Company. The Company issued approximately 687,000 shares of its common stock in
connection with the acquisition. In addition, outstanding Noah stock options
were converted into options to purchase approximately 40,000 shares of the
Company's common stock.
The Sekidenko and Noah mergers constituted tax-free reorganizations and have
been accounted for as poolings of interests under Accounting Principles Board
Opinion No. 16. Accordingly, all prior period consolidated financial statements
presented have been restated to include the combined balance sheet, statements
of operations and cash flows of Noah and Sekidenko as though each had always
been part of the Company. There were no transactions between the Company, Noah
and Sekidenko prior to the combinations, and immaterial adjustments were
recorded at Noah and Sekidenko to conform their accounting policies. Certain
reclassifications were made to conform the Noah and Sekidenko financial
statements to the Company's presentations. The results of operations for the
separate companies and combined amounts presented in the consolidated financial
statements follow:
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
(UNAUDITED) (UNAUDITED)
----------- -----------
(IN THOUSANDS)
Sales:
Pre-Noah and Sekidenko mergers
Advanced Energy ............. $ -- $67,171
Noah ........................ -- 3,080
Sekidenko ................... -- 4,777
Post-Noah and Sekidenko mergers 74,714 --
------- -------
Consolidated ............... $74,714 $75,028
======= =======
Net income:
Pre-Noah and Sekidenko mergers
Advanced Energy ............. $ -- $ 9,996
Noah ........................ -- 43
Sekidenko ................... -- 1,199
Post-Noah and Sekidenko mergers 5,094 --
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Consolidated ............... $ 5,094 $11,238
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LITMAS -- During 1998 the Company acquired a 29% ownership interest in
LITMAS, a privately-held, North Carolina-based start-up company that designs and
manufactures plasma gas abatement systems and high-density plasma sources. The
purchase price consisted of $1 million in cash. On October 1, 1999, the Company
acquired an additional 27.5% interest in LITMAS for an additional $560,000. The
purchase price consisted of $385,000 in the Company's common stock and $175,000
in cash. The acquisition was accounted for using the purchase method of
accounting and resulted in $523,000 allocated to intangible assets as goodwill.
The results of operations of LITMAS have been consolidated in the accompanying
consolidated financial statements from the date the controlling interest of
56.5% was acquired. On October 1, 2000, the Company acquired an additional 3.0%
interest in LITMAS for an additional $250,000, bringing the Company's ownership
interest in LITMAS to 59.5%.
(3) MARKETABLE SECURITIES - TRADING
MARKETABLE SECURITIES - TRADING consisted of the following:
MARCH 31, DECEMBER 31,
2001 2000
(UNAUDITED) (UNAUDITED)
----------- -----------
(IN THOUSANDS)
Commercial paper .......... $ 76,849 $ 85,827
Municipal bonds and notes . 35,571 54,022
Mutual funds .............. 17,630 17,962
-------- --------
Total marketable securities $130,050 $157,811
======== ========
These marketable securities are stated at period end market value, and have
original costs of
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$129,523,000 and $157,112,000 as of March 31, 2001 and December 31, 2000,
respectively. Included in these balances is unrealized interest income of
$442,000 and $699,000 as of March 31, 2001 and December 31, 2000, respectively.
(4) ACCOUNTS RECEIVABLE - TRADE
ACCOUNTS RECEIVABLE - TRADE consisted of the following:
MARCH 31, DECEMBER 31,
2001 2000
(UNAUDITED) (UNAUDITED)
----------- -----------
(IN THOUSANDS)
Domestic ...................... $ 26,071 $ 41,545
Foreign ....................... 30,876 31,971
Allowance for doubtful accounts (969) (784)
-------- --------
Trade accounts receivable ..... 55,978 72,732
Related parties ............... 63 38
Other ......................... 6,165 3,775
-------- --------
Total accounts receivable ..... $ 62,206 $ 76,545
======== ========
(5) INVENTORIES
INVENTORIES consisted of the following:
MARCH 31, DECEMBER 31,
2001 2000
(UNAUDITED) (UNAUDITED)
----------- -----------
(IN THOUSANDS)
Parts and raw materials $37,534 $34,462
Work in process ....... 3,266 3,777
Finished goods ........ 12,218 7,027
------- -------
Total inventories ..... $53,018 $45,266
======= =======
(6) INVESTMENTS - AVAILABLE FOR SALE AND OTHER
In the third quarter of 2000 the Company exercised warrants of a supplier in
a cashless transaction and received 458,000 shares of the supplier's common
stock, which is publicly traded. Concurrent with the exercise, the Company sold
320,000 shares of the supplier's common stock and recognized a gain of
approximately $4.8 million. The remaining 138,000 shares have been classified as
available-for-sale securities and are reflected as an investment of
approximately $1.5 million in the accompanying balance sheet. Also included in
investments is $700,000 of private company placements accounted for under the
cost method.
(7) STOCKHOLDERS' EQUITY
STOCKHOLDERS' EQUITY consisted of the following:
MARCH 31, DECEMBER 31,
2001 2000
(UNAUDITED) (UNAUDITED)
----------- -----------
(IN THOUSANDS, EXCEPT PAR VALUE)
Common stock, $0.001 par value, 40,000 shares authorized;
31,557 and 31,537 shares issued and outstanding at March 31,
2001 and December 31, 2000, respectively ................... $ 32 $ 32
Additional paid-in capital ..................................... 125,129 124,930
Retained earnings .............................................. 122,065 116,971
Deferred compensation .......................................... (1,489) (1,620)
Accumulated other comprehensive loss ........................... (3,501) (1,515)
--------- ---------
Total stockholders' equity ..................................... $ 242,236 $ 238,798
========= =========
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(8) ACCOUNTING STANDARDS
COMPREHENSIVE INCOME -- Comprehensive income for the Company consists of net
income, foreign currency translation adjustments and an unrealized holding gain
as presented below
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2001 MARCH 31, 2000
(UNAUDITED) (UNAUDITED)
-------------- ---------------
(IN THOUSANDS)
Net income, as reported .................................. $ 5,094 $ 11,238
Adjustment to arrive at comprehensive net income:
Unrealized holding loss on available-for-sale marketable
securities ........................................... (207) --
Cumulative translation adjustment ...................... (1,779) (145)
-------- --------
Comprehensive net income ................................. $ 3,108 $ 11,093
======== ========
SEGMENT REPORTING -- SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," requires a public business enterprise to
report financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision-maker in deciding how to allocate resources and in
assessing performance. Management operates and manages the Company's business as
one operating segment, because all of its products and systems have similar
economic characteristics and production processes. Since the Company operates in
one segment, all financial segment information required by SFAS No. 131 is found
in the consolidated financial statements.
DERIVATIVE HEDGING ACTIVITIES -- In June 1998 the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company, as
required, adopted SFAS No. 133, as amended by SFAS No. 137, on January 1, 2001.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activity by requiring all derivatives to be recorded
on the balance sheet as either an asset or liability and measured at their fair
value. Changes in the derivative's fair value will be recognized currently in
earnings unless specific hedging accounting criteria are met. SFAS No. 133 also
establishes uniform hedge accounting criteria for all derivatives. The Company
will not seek specific hedge accounting treatment for its foreign currency
forward contracts. The adoption of SFAS No. 133 did not have a material impact
on the Company's financial condition or results of operations.
REVENUE RECOGNITION -- In December 1999 the staff of the Securities and
Exchange Commission issued its Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition." SAB No. 101 provides guidance on the measurement and
timing of revenue recognition in financial statements of public companies.
Changes in accounting policies to apply the guidance of SAB No. 101 were
required to be adopted by recording the cumulative effect of the change in the
fiscal quarter ending December 31, 2000. The adoption of SAB No. 101 did not
have a material effect on the Company's financial condition or results of
operations.
(9) CONVERTIBLE SUBORDINATED NOTES PAYABLE
In November 1999 the Company issued $135 million of convertible subordinated
notes payable at 5.25%. These notes mature November 15, 2006, with interest
payable on May 15th and November 15th each year beginning May 15, 2000. Net
proceeds to the Company were approximately $130.5 million, after deducting $4.5
million of offering costs, which have been capitalized and are being amortized
over a period of seven years. Holders of the notes may convert the notes at any
time into shares of the Company's common stock, at $49.53 per share. The Company
may convert the notes on or after November 19, 2002 at a conversion price of
103.00% times the principal amount, and may convert at successively lesser
amounts thereafter until November 15, 2006, at which time the Company may
convert at a redemption price equal to the principal amount. At March 31, 2001,
$1.6 million of interest expense related to these notes was accrued as a current
liability.
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In October and November 2000, the Company repurchased an aggregate of
approximately $53.4 million principal amount of its convertible subordinated
notes in the open market, for a cost of approximately $40.8 million. These
purchases resulted in an after-tax extraordinary gain of $7.6 million. The
purchased notes have been cancelled. Approximately $81.6 million principal
amount of the notes remains outstanding. The Company may continue to purchase
additional notes in the open market from time to time, if market conditions and
its financial position are deemed favorable for such purposes.
(10) LITIGATION RECOVERY
In March 2001, the Company received a $1.5 million settlement for recovery
of legal expenses pertaining to a patent-infringement suit in which the Company
was the plaintiff.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE ON FORWARD LOOKING STATEMENTS
This Form 10-Q, including the following discussion, contains 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 that are other than 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 occur or continue. Forward looking statements
involve risks and uncertainties. As a result, actual results may differ
materially from the results discussed in the forward looking statements. Factors
that could cause or contribute to such differences or prove any forward looking
statements, by hindsight, to be overly optimistic or unachievable, include, but
are not limited to the following:
o changes or slowdowns in economic conditions in the semiconductor
and semiconductor capital equipment industries or other industries
in which our customers operate;
o changes in customers' inventory management practices;
o timing and challenges of integrating recent and potential future
acquisitions;
o component shortages or allocations or other factors that change
our levels of inventory or substantially increase our spending on
inventory;
o introduction of new products by our competitors; and
o our ability to attract and retain key personnel.
For a discussion of these and other factors that may impact our realization of
our forward looking statements, see our Annual Report on Form 10-K for the year
ended December 31, 2000, Part I "Cautionary Statements - Risk Factors."
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
SALES
We sell power conversion and control systems and related equipment primarily
to the semiconductor capital equipment, data storage and advanced product
applications markets in the United States, to the flat panel display and
advanced product applications markets in the Asia Pacific region, and to data
storage and advanced product applications
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markets in Europe. We also sell spare parts and repair services worldwide
through our customer service and technical support organization.
Sales were $74.7 million in the first quarter of 2001, down less than one
percent from sales of $75.0 million in the first quarter of 2000, and down 27%
from sales of $102.7 million in the fourth quarter of 2000. The first quarter of
2001 included sales by EMCO, a wholly owned subsidiary we acquired on January 2,
2001, which was accounted for by the purchase method of accounting. The fourth
quarter of 2000 was the eighth consecutive quarter of sales growth, which was
primarily attributable to capacity expansion and increased investment in
advanced technology by the semiconductor industry, which resulted in increased
demand for our systems from manufacturers of semiconductor capital equipment.
During the first quarter of 2001, a worldwide slowdown in demand for
semiconductors resulted in a sudden and rapid decline in demand for
semiconductor manufacturing equipment, as inventory buildups and slower global
economic growth resulted in slower capital investment by semiconductor
manufacturers and their suppliers. Our experience has shown that our sales to
semiconductor capital equipment customers is dependent on the volatility of that
industry, which results from sudden changes in semiconductor supply and demand,
and rapid technological advances in both semiconductor devices and wafer
fabrication processes. Our sales to the semiconductor capital equipment industry
in the first quarter of 2001 increased one percent over sales to that industry
from the first quarter of 2000, but declined 31% from sales to that industry
from the fourth quarter of 2000. We expect sales to the semiconductor capital
equipment industry in 2001 to be lower than in 2000.
Our sales to the data storage industry decreased 62% from the first quarter
of 2000 to the first quarter of 2001, primarily due to slowdown in growth of
demand for CVD and DVD replication equipment, overcapacity of such manufacturing
equipment, and slower than expected personal computer sales. Sales to the flat
panel display industry increased 12% from the first quarter of 2000 to the first
quarter of 2001. Sales to advanced product applications industries increased 24%
from the first quarter of 2000 to the first quarter of 2001.
The following tables summarize net sales and percentages of net sales by
customer type for us for the three-month periods ended March 31, 2001 and 2000:
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
------- -------
(IN THOUSANDS)
Semiconductor capital equipment .. $51,047 $50,557
Data storage ..................... 2,199 5,806
Flat panel display ............... 6,710 5,967
Advanced product applications .... 10,974 8,841
Customer service technical support 3,784 3,857
------- -------
$74,714 $75,028
======= =======
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THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
---- ----
Semiconductor capital equipment .. 68% 67%
Data storage ..................... 3 8
Flat panel display ............... 9 8
Advanced product applications .... 15 12
Customer service technical support 5 5
--- ---
100% 100%
=== ===
The following tables summarize net sales and percentages of net sales by
geographic region for us for the three-month periods ended March 31, 2001 and
2000:
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
------- -------
(IN THOUSANDS)
United States and Canada $52,798 $53,713
Europe ................. 8,613 11,217
Asia Pacific ........... 13,092 9,897
Rest of world .......... 211 201
------- -------
$74,714 $75,028
======= =======
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
--- ---
United States and Canada 71% 72%
Europe ................. 12 15
Asia Pacific ........... 17 13
Rest of world .......... -- --
--- ---
100% 100%
=== ===
GROSS MARGIN
Our gross margin was 41.8% in the first quarter of 2001 compared to 48.9% in
the first quarter of 2000. The decrease was due to lower absorption of
manufacturing overhead and fixed costs. We added new facilities in Fort Collins,
Colorado in the first quarter of 2001 to increase our manufacturing capacity,
which will increase our lease and depreciation costs. This adversely impacted
absorption of overhead because the increased capacity was not fully utilized due
to decreased demand. Any further decreases in our level of sales in the future
could have an additional negative impact on our gross margin.
RESEARCH AND DEVELOPMENT EXPENSES
We invest in research and development to identify new technologies, develop
new products and improve existing product designs. Our research and development
expenses were $8.1 million in the first quarter of 2000 and $12.4 million in the
first quarter of 2001, representing an increase of 53%. The increase is
primarily due to increases in payroll, materials and supplies, purchased
services and higher infrastructure costs for new product development, and partly
due to the inclusion of EMCO research and development expenses in the first
quarter of 2001. As a percentage of sales, research and development expenses
increased from 10.8% in the first quarter of 2000 to 16.6% in the first quarter
of 2001 because of the higher spending.
We believe continued investment in the research and development of new
systems is critical to our ability to serve new and existing markets, and we
continue to invest in new
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product development during industry downturns. Since our inception, the majority
of our research and development costs generally have been internally funded and
all have been expensed as incurred.
SALES AND MARKETING EXPENSES
Our sales and marketing expenses support domestic and international sales
and marketing activities which include personnel, trade shows, advertising, and
other marketing activities. Sales and marketing expenses were $5.9 million in
the first quarter of 2000 and $6.6 million in the first quarter of 2001,
representing a 13% increase. The increase is primarily due to the inclusion of
EMCO sales and marketing expenses in the first quarter of 2001, and due to
higher payroll, promotion, distribution and travel costs. We incurred these
expenses to continue to increase our sales management and product management
capabilities. As a percentage of sales, sales and marketing expenses increased
from 7.8% in the first quarter of 2000 to 8.9% in the first quarter of 2001.
GENERAL AND ADMINISTRATIVE EXPENSES
Our general and administrative expenses support our worldwide financial,
administrative, information systems and human resources functions. General and
administrative expenses were $5.6 million in the first quarter of 2000 and $6.2
million in the first quarter of 2001, representing a 9% increase. The increase
is primarily due to the inclusion of goodwill amortization resulting from the
acquisition of EMCO, partially offset by lower spending for payroll. As a
percentage of sales, general and administrative expenses increased from 7.5% in
the first quarter of 2000 to 8.3% in the first quarter of 2001.
We continue to implement our management system software, including the
replacement of existing systems in our domestic and foreign locations. We expect
that charges related to personnel training and implementation of the software
will continue through 2001.
LITIGATION RECOVERY
In March 2001, we received a $1.5 million settlement for recovery of legal
expenses pertaining to a patent-infringement suit in which we were the
plaintiff.
OTHER INCOME (EXPENSE)
Other income consists primarily of interest income and expense, foreign
exchange gains and losses and other miscellaneous gain, loss, income and expense
items. Other income was $120,000 in the first quarter of 2000, and included $2.5
million of interest income offset by $2.0 million of interest expense, $319,000
of foreign currency loss and $56,000 of other expenses. Other income was
$187,000 in the first quarter of 2001, and included $1.8 million of interest
income offset by $1.3 million of interest expense and $293,000 of other
expenses.
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PROVISION FOR INCOME TAXES
The income tax provision for the first quarter of 2000 was $5.9 million and
represented an effective tax rate of 35%. The income tax provision for the first
quarter of 2001 was $2.7 million, which also represented an effective tax rate
of 35%. Changes in our relative earnings and the earnings of our foreign
subsidiaries affect our consolidated effective tax rate. We adjust our income
taxes periodically based upon the anticipated tax status of all foreign and
domestic entities.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations, acquired equipment and
met our working capital requirements through borrowings under our revolving
lines of credit, long-term loans secured by property and equipment, cash flow
from operations and proceeds from underwritten public offerings of our common
stock and convertible subordinated debt.
Operating activities provided cash of $7.2 million in the first three months
of 2000, primarily as a result of net income, depreciation and amortization, and
increased accruals for income taxes, partially offset by increases in accounts
receivable and inventories and decreases in accounts payable. Operating
activities provided cash of $4.0 million in the first three months of 2001,
primarily as a result of net income, depreciation and amortization, and
decreases in accounts receivable, partially offset by increases in inventories,
decreases in accounts payable and decreased accruals for payroll, employee
benefits and income taxes. We expect future receivable and inventory balances to
fluctuate with net sales. We are required to maintain higher levels of buffer
stock inventory to satisfy our customers' delivery requirements. Any increase in
our inventory levels will require the use of cash to finance the inventory.
Investing activities used cash of $11.9 million in the first three months of
2000, and included the purchase of marketable securities of $10.0 million and
the purchase of property and equipment for $2.0 million, partially offset by
proceeds from the sale of equipment of $150,000. Investing activities used cash
of $7.0 million in the first three months of 2001, and included the acquisition
of EMCO for $29.9 million, the purchase of property and equipment for $6.5
million and the purchase of investments for $592,000, partially offset by the
sale of marketable securities of $30.0 million.
Financing activities provided cash of $3.6 million in the first three months
of 2000, and included of $3.0 million from the exercise of employee stock
options and sale of common stock through our employee stock purchase plan
("ESPP"), and $627,000 of net changes in notes payable and capital lease
obligations. Financing activities used cash of $185,000 in the first three
months of 2001, and included $384,000 of net decreases in
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notes payable and capital lease obligations, offset by proceeds of $199,000 from
the exercise of employee stock options and sale of common stock through our
ESPP.
We plan to spend approximately $6.0 million through the remainder of 2001
for the acquisition of equipment, leasehold improvements and furnishings, with
depreciation expense projected to be approximately $7.1 million.
As of March 31, 2001, we had working capital of $252.4 million. Our
principal sources of liquidity consisted of $26.8 million of cash and cash
equivalents, $130.1 million of marketable securities, and a credit facility
consisting of a $30.0 million revolving line of credit. Advances under the
revolving line of credit bear interest at either the prime rate (7.50% at April
30, 2001) minus 1.00% or the LIBOR 360-day rate (4.44125% at April 30, 2001)
plus 175 basis points, at our option. All advances under the revolving line of
credit will be due and payable May 2003. As of March 31, 2001 there was an
advance outstanding of $792,000 on this line of credit by our Japanese
subsidiary, Advanced Energy Japan K.K. ("AE-Japan").
We believe that our cash and cash equivalents, marketable securities, cash
flow from operations and available borrowings, will be sufficient to meet our
working capital needs through at least the end of 2001. After that time, we may
require additional equity or debt financing to address our working capital,
capital equipment or expansion needs. In addition, any significant acquisitions
we make may require additional equity or debt financing to fund the purchase
price, if paid in cash. There can be no assurance that additional funding will
be available when required or that it will be available on terms acceptable to
us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio and long-term debt obligations. We generally place
our investments with high credit quality issuers and by policy are averse to
principal loss and seek to protect and preserve our invested funds by limiting
default risk, market risk and reinvestment risk.
As of March 31, 2001, our investments consisted of equity securities,
commercial paper, municipal bonds and notes and money market mutual funds which
had an original cost of $129.5 million, and earned $1.6 million for the quarter
then ended, at an average interest rate of approximately 4.8%. The impact on
interest income of a ten percent decrease in the average interest rate would
have resulted in approximately $157,000 less interest income for the quarter
ended March 31, 2001.
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As of March 31, 2001, all of our debt was at fixed interest rates except for
an amount outstanding of $792,000 on our line of credit. The impact on interest
expense of a ten percent increase in the average interest rate would have been
immaterial to our financial position and results of operations.
FOREIGN CURRENCY EXCHANGE RATE RISK
We transact business in various foreign countries. Our primary foreign
currency cash flows are generated in countries in Asia and Europe. We have
entered into various forward foreign exchange contracts to mitigate against
currency fluctuations in the Japanese yen. These currency swaps offset changes
in the exchange rate in the yen, when intercompany transactions we conduct with
AE-Japan are settled. Changes in the exchange rates of the U.S. dollar with
other currencies in which we operate are immaterial. We will continue to
evaluate various methods to minimize the effects of currency fluctuations.
Eleven European countries adopted a Single European Currency (the "euro") as
of January 1, 1999 with a transition period continuing through at least January
1, 2002. As of January 1, 1999, these eleven of the fifteen member countries of
the European Union (the "participating countries") established fixed conversion
rates between their existing sovereign currencies and the euro. For three years
after the introduction of the euro, the participating countries can perform
financial transactions in either the euro or their original local currencies.
This will result in a fixed exchange rate among the participating countries,
whereas the euro (and the participating countries' currencies in tandem) will
continue to float freely against the U.S. dollar and other currencies of
non-participating countries. A twelfth European country adopted the euro on
January 1, 2001. Although we do not expect the introduction of the euro currency
to have a significant impact on our revenues or results of operations, we are
unable to determine what effects, if any, the currency change in Europe will
have on competition and competitive pricing in the affected regions.
OTHER RISK
We have invested in start-up companies and may in the future make additional
investments in start-up companies that develop products which we believe may
provide future benefits. The current start-up investments and any future
start-up investments will be subject to all of the risks inherent in investing
in companies that are not established.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are party to various legal proceedings relating to our
business. We are not currently party to any material legal proceedings, except
as described below:
We are the defendant in an action filed by Applied Science and Technology,
Inc., a Delaware corporation. The civil action was filed in the U.S. District
Court for the District of Delaware on November 30, 2000. Applied Science and
Technology, which is a subsidiary of MKS Instruments, Inc., alleges that, by
manufacturing and selling reactive gas generators, we are infringing upon its
patent. Applied Science and Technology seeks injunctive relief and damages in an
unspecified amount. The action is in the discovery stage. We have reviewed the
allegations with our patent counsel and believe we have meritorious defenses to
the claim. We have denied the allegation of infringement and will defend against
the claim vigorously.
In March 2001, we received a $1.5 million settlement for recovery of legal
expenses pertaining to a patent-infringement suit in which we were the
plaintiff.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 The Company's Restated Certificate of Incorporation, as amended(1)
3.2 The Company's By-laws(2)
4.1 Form of Specimen Certificate for the Company's Common Stock(2)
4.2 Indenture dated November 1, 1999 between State Street Bank and Trust Company of
California, N.A., as trustee, and the Company (including form of 5 1/4% Convertible
Subordinated Note due 2006)(3)
10.1 1995 Stock Option Plan, as amended and restated through February 7, 2001*
10.2 1995 Non-Employee Directors' Stock Option Plan, as amended and restated through
February 7, 2001*
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(1) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999 (File
No. 000-26966), filed July 28, 1999.
(2) Incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 33-97188), filed September 20,
1995, as amended.
(3) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999 (File
No. 000-26966), filed March 20, 2000.
* Compensation Plan
(b) The Company filed a report on Form 8-K on February 20, 2001 announcing
the resignation and retirement of Dr. Hollis Caswell, then the Company's
President, Chief Operating Officer and a director, and the appointment of
James F. Gentilcore as Executive Vice President in charge of operations.
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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
------------------------
Richard P. Beck
Senior Vice President, Chief Financial May 9, 2001
Officer, Assistant Secretary and
Director (Principal Financial Officer
and Principal Accounting Officer)
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INDEX TO EXHIBITS
3.1 The Company's Restated Certificate of Incorporation, as amended(1)
3.2 The Company's By-laws(2)
4.1 Form of Specimen Certificate for the Company's Common Stock(2)
4.2 Indenture dated November 1, 1999 between State Street Bank and Trust Company of
California, N.A., as trustee, and the Company (including form of 5 1/4% Convertible
Subordinated Note due 2006)(3)
10.1 1995 Stock Option Plan, as amended and restated through February 7, 2001*
10.2 1995 Non-Employee Directors' Stock Option Plan, as amended and restated through
February 7, 2001*
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(1) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999 (File
No. 000-26966), filed July 28, 1999.
(2) Incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 33-97188), filed September 20,
1995, as amended.
(3) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999 (File
No. 000-26966), filed March 20, 2000.
* Compensation Plan