e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended September 30, 2009.
or
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o |
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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)
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Delaware
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84-0846841 |
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(State or other jurisdiction of incorporation
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(I.R.S. Employer Identification No.) |
or organization) |
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1625 Sharp Point Drive, Fort Collins, CO
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80525 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants 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
o 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):
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Large accelerated filer o |
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Accelerated filer þ |
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Non-accelerated filer o |
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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 November 5, 2009, there were 42,028,687 shares of the registrants Common Stock, par value
$0.001 per share, outstanding.
ADVANCED ENERGY INDUSTRIES, INC.
FORM 10-Q
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets *
(In thousands, except per share amounts)
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September 30, |
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December 31, |
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2009 |
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2008 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
139,679 |
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$ |
116,448 |
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Marketable securities |
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37,601 |
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33,266 |
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Accounts receivable, net of allowances of $2,880 and $971, respectively |
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37,160 |
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56,549 |
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Inventories, net |
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36,472 |
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46,659 |
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Deferred income tax assets |
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4,392 |
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13,253 |
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Other current assets |
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5,241 |
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5,324 |
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Total current assets |
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260,545 |
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271,499 |
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PROPERTY AND EQUIPMENT, net |
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29,916 |
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31,322 |
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OTHER ASSETS: |
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Deposits and other |
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7,527 |
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7,528 |
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Long-term investments |
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30,401 |
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Goodwill |
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66,163 |
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Other intangible assets, net |
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6,355 |
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6,755 |
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Deferred income tax assets |
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14,727 |
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6,969 |
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Total assets |
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$ |
319,070 |
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$ |
420,637 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
14,983 |
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$ |
8,005 |
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Accrued warranty expense |
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5,517 |
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6,189 |
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Accrued restructuring |
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1,825 |
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Other accrued expenses |
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12,364 |
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14,887 |
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Customer deposits and deferred revenue |
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1,313 |
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1,027 |
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Total current liabilities |
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34,177 |
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31,933 |
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LONG-TERM LIABILITIES: |
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Deferred income tax liabilities |
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2,511 |
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2,660 |
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Uncertain tax positions |
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7,877 |
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7,877 |
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Other long-term liabilities |
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1,267 |
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1,618 |
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Total liabilities |
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45,832 |
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44,088 |
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Commitments and contingencies (Note 10) |
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STOCKHOLDERS EQUITY: |
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Preferred stock, $0.001 par value, 1,000 shares authorized, none issued
and outstanding |
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Common stock, $0.001 par value, 70,000 shares authorized; 41,994 and 41,849
shares issued and outstanding, respectively |
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42 |
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42 |
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Additional paid-in capital |
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228,379 |
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224,139 |
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Retained earnings |
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15,737 |
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119,966 |
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Other comprehensive income |
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29,080 |
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32,402 |
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Total stockholders equity |
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273,238 |
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376,549 |
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Total liabilities and stockholders equity |
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$ |
319,070 |
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$ |
420,637 |
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* |
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Amounts as of September 30, 2009 are unaudited. Amounts as of December 31, 2008 are derived from the December 31, 2008
audited consolidated financial statements. |
The accompanying notes are an integral part of these consolidated financial statements.
3
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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SALES |
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$ |
51,762 |
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$ |
84,510 |
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$ |
119,956 |
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$ |
261,393 |
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COST OF SALES |
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36,181 |
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49,249 |
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90,056 |
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155,008 |
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GROSS PROFIT |
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15,581 |
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35,261 |
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29,900 |
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106,385 |
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OPERATING EXPENSES: |
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Research and development |
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10,195 |
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14,681 |
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32,035 |
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41,528 |
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Selling, general and administrative |
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10,788 |
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14,337 |
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30,349 |
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42,760 |
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Amortization of intangible assets |
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123 |
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223 |
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465 |
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689 |
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Impairment of goodwill |
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63,260 |
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Restructuring charges |
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235 |
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522 |
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4,370 |
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1,589 |
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Total operating expenses |
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21,341 |
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29,763 |
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130,479 |
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86,566 |
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INCOME (LOSS) FROM OPERATIONS |
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(5,760 |
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5,498 |
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(100,579 |
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19,819 |
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OTHER INCOME, NET |
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506 |
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429 |
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1,415 |
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2,330 |
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Income (loss) before income taxes |
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(5,254 |
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5,927 |
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(99,164 |
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22,149 |
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PROVISION FOR INCOME TAXES |
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3,177 |
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558 |
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5,064 |
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4,951 |
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NET INCOME (LOSS) |
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$ |
(8,431 |
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$ |
5,369 |
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$ |
(104,228 |
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$ |
17,198 |
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BASIC EARNINGS (LOSS) PER SHARE: |
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$ |
(0.20 |
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$ |
0.13 |
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$ |
(2.48 |
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$ |
0.40 |
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DILUTED EARNINGS (LOSS) PER SHARE: |
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$ |
(0.20 |
) |
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$ |
0.13 |
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$ |
(2.48 |
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$ |
0.40 |
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BASIC WEIGHTEDAVERAGE COMMON SHARES OUTSTANDING |
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42,004 |
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41,787 |
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41,944 |
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42,773 |
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DILUTED WEIGHTEDAVERAGE COMMON SHARES OUTSTANDING |
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42,004 |
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42,201 |
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41,944 |
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43,183 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
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Nine Months Ended |
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September 30, |
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2009 |
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2008 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income (loss) |
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$ |
(104,228 |
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$ |
17,198 |
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Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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6,408 |
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8,978 |
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Goodwill impairment charge |
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63,260 |
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Stock-based compensation expense |
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4,530 |
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3,172 |
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Provision (benefit) for deferred income taxes |
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934 |
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(4,780 |
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Restructuring charges |
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4,370 |
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1,589 |
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Provision for excess and obsolete inventory |
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1,340 |
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608 |
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Provision for doubtful accounts |
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1,909 |
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793 |
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Net loss on disposal of assets |
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290 |
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44 |
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Changes in operating assets and liabilities |
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Accounts receivable |
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17,480 |
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(2,706 |
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Inventories |
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8,847 |
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(4,196 |
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Other current assets |
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(688 |
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271 |
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Accounts payable |
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6,978 |
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1,953 |
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Other current liabilities and accrued expenses |
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(9,674 |
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(378 |
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Income taxes |
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585 |
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(582 |
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Non-current assets |
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(2,316 |
) |
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(1,787 |
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Non-current liabilities |
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(328 |
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(1,369 |
) |
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Net cash provided by (used in) operating activities |
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(303 |
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18,808 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchase of marketable securities |
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(202 |
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(28,053 |
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Proceeds from sale of marketable securities |
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25,173 |
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50,557 |
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Purchase of property and equipment |
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(2,776 |
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(5,750 |
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Net cash provided by investing activities |
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22,195 |
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16,754 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Payments on capital lease obligations |
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(68 |
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(51 |
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Purchase and retirement of treasury stock |
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(49,767 |
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Proceeds from common stock transactions |
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343 |
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1,063 |
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Net cash provided by (used in) financing activities |
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275 |
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(48,755 |
) |
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EFFECT OF CURRENCY TRANSLATION ON CASH |
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1,064 |
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(163 |
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
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23,231 |
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(13,356 |
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CASH AND CASH EQUIVALENTS, beginning of period |
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116,448 |
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94,588 |
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CASH AND CASH EQUIVALENTS, end of period |
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$ |
139,679 |
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$ |
81,232 |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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Cash paid for interest |
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$ |
15 |
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$ |
13 |
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Cash paid for income taxes |
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$ |
3,446 |
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$ |
8,763 |
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Cash held in banks outside the United States |
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$ |
68,768 |
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$ |
50,675 |
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The accompanying notes are an integral part of these consolidated financial statements.
5
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1. BASIS OF PRESENTATION
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 Advanced Energy Industries, Inc., a Delaware corporation,
and its wholly owned subsidiaries (we, us, our, or the Company) at September 30, 2009, and
the results of our operations and cash flows for the three and nine months ended September 30, 2009
and 2008.
The unaudited condensed consolidated 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 accounting principles generally accepted in the United States. The
condensed consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto contained in the Companys Annual Report on
Form 10-K for the year ended December 31, 2008.
ESTIMATES AND ASSUMPTIONS The preparation of our consolidated financial statements in
conformity with accounting principles generally accepted in the United States requires management
to make estimates and assumptions 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. Significant estimates are
used when establishing allowances for doubtful accounts, determining useful lives for depreciation
and amortization, assessing the need for impairment charges, establishing warranty reserves,
establishing the fair value of investments, the fair value and forfeiture rate of stock-based
compensation, accounting for income taxes, and assessing excess and obsolete inventory. Management
evaluates these estimates and judgments on an ongoing basis and bases its estimates on historical
experience, current conditions and various other assumptions that are believed to be reasonable
under the circumstances. The results of these estimates form the basis for making judgments about
the carrying values of assets and liabilities as well as identifying and assessing the accounting
treatment with respect to commitments and contingencies. Actual results may differ from these
estimates under different assumptions or conditions.
SUBSEQUENT EVENTS We
evaluated all events or transactions that occurred after September 30,
2009 through November 9, 2009, the date we issued these financial statements. During this period we
did not have any material subsequent events.
NEW ACCOUNTING PRONOUNCEMENTS In June 2009, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (SFAS) No. 168, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162. This statement modifies the Generally Accepted Accounting
Principles (GAAP) hierarchy by establishing only two levels of GAAP, authoritative and
nonauthoritative accounting literature. Effective July 2009, the FASB Accounting Standards
Codification (ASC), also known collectively as the Codification, is considered the single
source of authoritative U.S. accounting and reporting standards, except for additional
authoritative rules and interpretive releases issued by the SEC. Nonauthoritative guidance and
literature would include, among other things, FASB Concepts Statements, American Institute of
Certified Public Accountants Issue Papers and Technical Practice Aids and accounting textbooks. The
Codification was developed to organize GAAP pronouncements by topic so that users can more easily
access authoritative accounting guidance. It is organized by topic, subtopic, section, and
paragraph, each of which is identified by a numerical designation. This statement applies
beginning in the third quarter of 2009.
In October 2009, the FASB issued a pronouncement that establishes the accounting and reporting
guidance for arrangements including multiple revenue-generating activities and amends the criteria
for separating deliverables and measuring and allocating arrangement consideration to one or more
units of accounting. The amendments also establish a selling price hierarchy for determining the
selling price of a deliverable. Significantly enhanced disclosures will be required to provide
information about a vendors multiple-deliverable revenue arrangements, including information about
the nature and terms, significant deliverables, and its performance within arrangements. The
amendments also require providing information about the significant judgments made and changes to
those judgments and about how the application of the relative selling-price method affects the
timing or amount of revenue recognition. The amendments are effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or after June 15,
2010. Early application is permitted. We are currently evaluating this new pronouncement and the
impact, if any; it may have on our results of operations or financial position.
6
From time to time, new accounting pronouncements are issued by the FASB or other standards
setting bodies that are adopted by us as of the specified effective date. Unless otherwise
discussed, our management believes that the impact of recently issued standards that are not yet
effective will not have a material impact on our consolidated financial statements upon adoption.
NOTE 2. STOCK-BASED COMPENSATION
We recognize stock-based compensation expense based on the fair value of awards issued.
Stock-based compensation was $1.6 million and $1.3 million for the three months ended September 30,
2009 and 2008, respectively, and $4.5 million and $3.2 million for the nine months ended September
30, 2009 and 2008, respectively.
Stock Options
A summary of our stock option activity for the nine months ended September 30, 2009 is as
follows:
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Weighted- |
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Shares |
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Average |
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(in thousands) |
|
Exercise Price |
Options outstanding at December 31, 2008 |
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3,932 |
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$ |
17.42 |
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Options granted |
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1,099 |
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|
8.92 |
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Options exercised |
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(26 |
) |
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7.94 |
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Options cancelled |
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(433 |
) |
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19.30 |
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2009 |
|
|
4,572 |
|
|
$ |
15.24 |
|
|
|
|
|
|
|
|
|
|
The fair value of options granted during the three and nine months ended September 30,
2009 is $6.66 and $5.25 per share, respectively. The total intrinsic value of options exercised for
the three and nine months ended September 30, 2009 was an immaterial amount. The total intrinsic
value of options exercised for the three and nine month ended September 30, 2008 was approximately
$0.2 million and $0.9 million, respectively, determined as of the exercise date. As of September
30, 2009, there was $8.5 million of total unrecognized compensation cost related to stock options
granted and outstanding, with a weighted average remaining vesting period of 2.82 years, which is
expected to be recognized through fiscal year 2013. During the nine months ended September 30, 2009
there was approximately $0.2 million of cash received from stock option exercises. The fair value
of each option is estimated on the date of grant using the Black-Scholes option pricing model and
estimated forfeiture rate with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Risk-free interest rates |
|
|
2.4 |
% |
|
|
3.4 |
% |
|
|
2.1 |
% |
|
|
3.1 |
% |
Expected dividend yield rates |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Expected lives in years |
|
|
5.7 |
|
|
|
5.5 |
|
|
|
5.6 |
|
|
|
5.5 |
|
Expected volatility |
|
|
64.2 |
% |
|
|
61.5 |
% |
|
|
63.3 |
% |
|
|
61.9 |
% |
Expected forfeiture rate |
|
|
28.2 |
% |
|
|
30.0 |
% |
|
|
29.1 |
% |
|
|
30.3 |
% |
Restricted Stock
A summary of our non-vested Restricted Stock Units (RSU) activity for the nine months ended
September 30, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
Shares |
|
Grant-date |
|
|
(in thousands) |
|
Fair Value |
Non-vested RSUs outstanding December 31, 2008 |
|
|
395 |
|
|
$ |
15.26 |
|
RSUs granted |
|
|
159 |
|
|
|
8.97 |
|
RSUs vested |
|
|
(156 |
) |
|
|
8.77 |
|
RSUs forfeited |
|
|
(40 |
) |
|
|
17.71 |
|
|
|
|
|
|
|
|
|
|
Non-vested RSUs outstanding September 30, 2009 |
|
|
358 |
|
|
$ |
14.24 |
|
|
|
|
|
|
|
|
|
|
7
The fair value of our RSUs is determined based upon the closing fair market value of our
common stock on the grant date. At September 30, 2009, there was $1.2 million of total unrecognized
compensation cost related to non-vested RSUs outstanding that is expected to be recognized over a
weighted average period of 2.36 years. During the quarter ended September 30, 2009, the total fair
value of RSUs that vested was $0.3 million, based upon the closing fair market value of our common
stock on the date the underlying common stock was released to the recipient.
NOTE 3. INCOME TAXES
At September 30, 2009, we had gross deferred income tax assets of $55.0 million in the United
States and $1.9 million in foreign jurisdictions, a significant portion of which relates to net
operating losses and tax credit carryforwards, for which a valuation allowance of $40.3 million has
been provided. The ultimate realization of deferred income tax assets is dependent on the
generation of taxable income in appropriate jurisdictions during the periods in which those
temporary differences are deductible. Management considers the scheduled reversal of deferred
income tax liabilities, projected future taxable income, and tax planning strategies in determining
the amount of the valuation allowance. Based on the level of historical taxable income and
projections for future taxable income over the periods in which the deferred income tax assets are
deductible, management determines if we will realize the benefits of these deductible differences.
As of September 30, 2009, the most significant factors considered in determining the realizability
of these deferred tax assets and the amount of the valuation allowance was our taxable income or
loss over the past three years (excluding the effect of the non-deductible goodwill charge recorded
during the quarter ended March 31, 2009), the historical cyclicality of the markets in which we
operate and our projected profitability during these cycles. To fully utilize our deferred tax
assets, we would need to generate approximately $111.6 million in pre-tax income in the United
States and $9.2 million in pre-tax income in foreign jurisdictions prior to the expiration of our
net operating loss and tax credit carryforwards.
Our effective income tax rate for the three months ended September 30, 2009 was 60.5% as $3.2
million of tax expense was recorded. We incurred losses in the United States in the current
period, and, as a result, we have recorded a valuation allowance for the reasons described above and a tax benefit
has not been taken. Additionally, we incurred foreign tax expense related to taxable income
generated in certain of our foreign jurisdictions as well as additional domestic tax expense of
$1.3 million that resulted from an adjustment necessary to reconcile our 2008 year-end tax
provision with our 2008 Federal tax return that was filed on September 15, 2009. The domestic tax
adjustment related to a decision not to utilize certain research and development credits in an
effort to preserve their deductibility against future taxable income.
Our tax rate is projected to be 14.1% for the year ended December 31, 2009, which is a
reduction from our 2008 tax rate of 111.1%. This reduction is primarily due to an unusually large
effective tax rate in 2008 that resulted from the recording of a valuation allowance on net
operating losses and tax credits in the United States in 2008. The expected tax rate for the year
ended December 31, 2009 is also impacted by an impairment of goodwill recognized in the first
quarter of 2009, which is non-deductible for United States tax purposes, as well as income
recognized in the United States from the repatriation of cash from our subsidiary in Japan. The
United States net operating losses and tax credits were fully reserved since we determined we would
not realize the benefits of the deferred income tax assets described above.
As of December 31, 2008, the balance of our tax contingencies was $13.5 million. If the $13.5
million of tax contingencies reverse, $2.9 million of our tax contingencies would affect our
effective tax rate. There have been no significant changes to these amounts during the nine months
ended September 30, 2009. We do not anticipate a material change to the amount of unrecognized tax
positions within the next 12 months.
While we believe we have adequately provided for all tax positions, amounts asserted by taxing
authorities could materially differ from our accrued positions as a result of uncertain and complex
application of tax regulations. Additionally, the recognition and measurement of certain tax
benefits includes estimates and judgment by management and inherently includes subjectivity.
Accordingly, additional provisions on federal and foreign tax-related matters could be recorded in
the future as revised estimates are made or the underlying matters are settled or otherwise
resolved.
NOTE 4. RESTRUCTURING
Throughout 2008 and again in the first nine months of 2009, we implemented cost reduction efforts
in response to deteriorating economic conditions and weakening demand from our end markets.
Overall, we reduced our global workforce by approximately 455 people, or 27% of total headcount,
across all functional areas and geographies since the beginning of 2008. We expect the cost
savings from this workforce reduction to be $20.5 million annually, of which approximately $7.8
million is a reduction in cost of
8
goods sold, approximately $7.4 million is a reduction of selling,
general and administrative costs and $5.3 million is a reduction of research and development costs.
We incurred restructuring costs of $0.2 million and $4.4 million for the three and nine months
ended September 30, 2009, respectively, related to the cost reduction efforts. For the three and
nine months ended September 30, 2008, we incurred restructuring costs of $0.5 million and $1.6
million, respectively, related to the cost reduction efforts described above. As of September 30,
2009, we have no remaining outstanding obligations related to severance and benefits payments.
The following table summarizes the components of the restructuring costs, the payments and
non-cash charges as of September 30, 2009:
|
|
|
|
|
|
|
Severance and |
|
|
|
Benefits |
|
|
|
(In thousands) |
|
Restructuring liability balance at December 31, 2008 |
|
$ |
1,825 |
|
Total charge to operating expense |
|
|
4,809 |
|
Payments |
|
|
(6,195 |
) |
Adjustments |
|
|
(439 |
) |
|
|
|
|
Restructuring liability balance at September 30, 2009 |
|
$ |
|
|
|
|
|
|
NOTE 5. MARKETABLE SECURITIES AND LONG-TERM INVESTMENTS
Investment securities with original maturities of more than three months at time of purchase
are considered marketable securities. Investment securities that are not liquid within twelve
months are considered long-term investments.
The composition of securities is as follows at September 30, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
Cost |
|
|
Fair Value |
|
|
Cost |
|
|
Fair Value |
|
|
|
(In thousands) |
|
|
(In thousands) |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
$ |
3,197 |
|
|
$ |
3,197 |
|
|
$ |
1,269 |
|
|
$ |
1,270 |
|
Treasury bills |
|
|
2,149 |
|
|
|
2,149 |
|
|
|
2,792 |
|
|
|
2,797 |
|
Certificates of deposit |
|
|
1,868 |
|
|
|
1,868 |
|
|
|
29,199 |
|
|
|
29,199 |
|
Government bonds |
|
|
2,862 |
|
|
|
2,862 |
|
|
|
|
|
|
|
|
|
Auction rate securities |
|
|
24,925 |
|
|
|
21,329 |
|
|
|
|
|
|
|
|
|
Put agreement |
|
|
|
|
|
|
3,299 |
|
|
|
|
|
|
|
|
|
Corporate bonds/notes |
|
|
2,902 |
|
|
|
2,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current |
|
|
37,903 |
|
|
|
37,601 |
|
|
|
33,260 |
|
|
|
33,266 |
|
Non-current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
4 |
|
Auction rate securities |
|
|
|
|
|
|
|
|
|
|
30,850 |
|
|
|
24,938 |
|
Put agreement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-current |
|
|
|
|
|
|
|
|
|
|
30,854 |
|
|
|
30,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
$ |
37,903 |
|
|
$ |
37,601 |
|
|
$ |
64,114 |
|
|
$ |
63,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The value and liquidity of these securities are affected by market conditions as well as
the ability of the issuer to make principal and interest payments when due, and the functioning of
the markets in which these securities are traded.
We previously classified our auction rate securities (ARS) as long-term investments because
of our inability to determine when the investments would settle. However, in November 2008, we
executed a non-transferrable Auction Rate Securities Rights Agreement (the Put Agreement) with a
financial institution that provides us with the ability to sell our ARS to the financial
institution, at our sole discretion, and obligates the financial institution to purchase such ARS
at par during the period June 30, 2010 through July 2, 2012. Since the period for which this Put
Agreement is effective is now within twelve months, we have reclassified our auction rate
securities and the Put Agreement as current assets.
9
Upon executing the Put Agreement, we determined that an other-than-temporary impairment should
be recorded on our ARS in the fourth quarter of 2008, since we did not intend to hold the ARS until
the value fully recovered. At that time, we also recorded the Put Agreement in long term
investments at its fair value. At inception, we recognized a gain equal to the fair value of the
Put Agreement in other income. The net increase in fair value of the ARS and the Put Agreement
during the quarter ended September 30, 2009 was $0.2 million.
The fair value of our ARS and the Put Agreement were determined using Level 3 inputs. Some of
the inputs into the discounted cash flow models we use are unobservable in the market and have a
significant effect on valuation. The assumptions used in preparing the models include, but are not
limited to, periodic coupon rates, market required rates of return and the expected term of each
security. The coupon rate was estimated using implied forward rate data on interest rate swaps and
United States treasuries, and limited where necessary by any contractual maximum rate paid under a
scenario of continuing auction failures. We believe implied forward rates inherently account for a
lack of liquidity. In making assumptions of the required rates of return, we considered risk-free
interest rates and credit spreads for investments of similar credit quality. The expected term for
the ARS was based on a weighted probability-based estimate of the time the principal will become
available to us with and without exercising the Put Agreement. The expected term for the Put
Agreement was based on the earliest date on which we can exercise our put. Other than via the Put
Agreement, the principal could become available under three different scenarios: (1) the ARS is
called; (2) the principal has reached maturity; and (3) auctions have resumed and are successful.
As of September 30, 2009, management does not believe that any of the underlying issuers of
the ARS, the insurers of the ARS, or the issuer of the Put Agreement are presently at risk or that
the underlying credit quality of the issuers of the assets backing the ARS will affect the
Companys ability to realize the value of the investments at June 30, 2010.
Financial assets carried at fair value as of September 30, 2009 are classified as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
|
|
Auction rate securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
21,329 |
|
|
$ |
21,329 |
|
Put agreement |
|
|
|
|
|
|
|
|
|
|
3,299 |
|
|
|
3,299 |
|
Commercial paper |
|
|
3,197 |
|
|
|
|
|
|
|
|
|
|
|
3,197 |
|
Certificates of deposit |
|
|
1,868 |
|
|
|
|
|
|
|
|
|
|
|
1,868 |
|
Government bonds |
|
|
2,862 |
|
|
|
|
|
|
|
|
|
|
|
2,862 |
|
Corporate bonds |
|
|
2,897 |
|
|
|
|
|
|
|
|
|
|
|
2,897 |
|
Treasury bills |
|
|
2,149 |
|
|
|
|
|
|
|
|
|
|
|
2,149 |
|
|
|
|
Total |
|
$ |
12,973 |
|
|
$ |
|
|
|
$ |
24,628 |
|
|
$ |
37,601 |
|
|
|
|
The following table reconciles the December 31, 2008 beginning and September 30, 2009
ending balances for items measured at fair value on a recurring basis in the table above that used
Level 3 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARS |
|
Put Agreement |
|
Total |
|
|
|
Balances at December 31, 2008 |
|
$ |
24,938 |
|
|
$ |
5,459 |
|
|
$ |
30,397 |
|
Net realized gain (loss) included in other
income |
|
|
516 |
|
|
|
(360 |
) |
|
|
156 |
|
Purchases, sales, and settlements, net |
|
|
(4,125 |
) |
|
|
(1,800 |
) |
|
|
(5,925 |
) |
|
|
|
Balances at September 30, 2009 |
|
$ |
21,329 |
|
|
$ |
3,299 |
|
|
$ |
24,628 |
|
|
|
|
NOTE 6. AUCTION RATE SECURITIES SECURED LINE OF CREDIT
In June 2009, we entered into a Credit Line Agreement (the Credit Line Agreement) with UBS
Bank USA (UBS Bank), which provides us with an uncommitted, demand, revolving line of credit (an
intended no net cost loan) of approximately $18.7 million (75% of par value) secured by the ARS
we hold in our account with UBS.
Any interest expense that we incur on the no net cost loan is not expected to exceed the
interest income that we receive on the ARS that we have pledged to UBS Bank as security for the no
net cost loan. If the payments on our ARS are not sufficient to pay the accrued interest on such
advances before a due date, UBS Bank may, in its sole discretion (1) capitalize unpaid interest as
an additional advance or (2) require us to make payment of all accrued and unpaid interest. UBS
Bank may demand full or partial payment of the no net cost loan, at its sole option and without
cause, at any time.
10
Advances on this line of credit may be used to fund working capital requirements, capital
expenditures or other general corporate purposes, except that they may not be used to purchase,
trade or carry any securities or to repay debt incurred to purchase, trade or carry securities. As
of September 30, 2009, no advances were drawn against the line.
NOTE 7. INVENTORIES
Inventories are valued at the lower of cost or market and computed on a first-in, first-out
(FIFO) basis. Components of inventories were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Parts and raw materials |
|
$ |
24,491 |
|
|
$ |
33,129 |
|
Work in process |
|
|
4,191 |
|
|
|
2,209 |
|
Finished goods |
|
|
7,790 |
|
|
|
11,321 |
|
|
|
|
|
|
|
|
|
|
$ |
36,472 |
|
|
$ |
46,659 |
|
|
|
|
|
|
|
|
Inventories include costs of materials, direct labor and manufacturing overhead. Reserves
are provided for excess and obsolete inventory, which are estimated based on a comparison of the
quantity of inventory on hand to managements forecast of customer demand. Customer demand is
dependent on many factors, including both micro and macroeconomic, and requires us to use
significant judgment in our forecasting process.
We must also make assumptions regarding the rate at which new products will be accepted in the
marketplace, the rate at which customers will transition from older products to newer products,
effect of engineering changes to a product or discontinuance of a product line. If actual market
conditions or our customers product demands are less favorable than those projected, additional
valuation adjustments may be necessary.
The Company has recorded raw material reserves of $10.7 million and finished good reserves of
$0.3 million at September 30, 2009, and raw material reserves of $11.9 million and finished goods
reserves of $0.5 million at December 31, 2008.
NOTE 8. GOODWILL, PURCHASED TECHNOLOGY AND OTHER INTANGIBLE ASSETS
We performed a goodwill impairment analysis using the two-step method on an annual basis as of
October 31 and whenever events or changes in circumstances indicate that the carrying value may not
be recoverable. The recoverability of goodwill is measured by comparing the companys carrying
amount, including goodwill, to its fair market value.
Based upon a combination of factors subsequent to December 31, 2008, including a significant
decline in market capitalization below our carrying value, the deteriorating macro-economic
environment, which had resulted in a significant decline in customer demand, and illiquidity in the
overall credit markets, we concluded that sufficient indicators existed to require us to perform an
interim goodwill impairment analysis at February 28, 2009.
We determined our fair market value at February 28, 2009 based on our market capitalization,
an average weighting of both projected discounted future cash flows and the use of comparative
market multiples and relative control premiums. The use of comparative market multiples (the market
approach) compares the Company to other comparable companies based on valuation multiples to arrive
at a fair value. The use of discounted cash flows is based on assumptions that are consistent with
our estimates of future growth and the strategic plan used to manage the underlying business, and
also includes a probability-weighted expectation as to our future cash flows. Factors requiring
significant judgment include assumptions related to future growth rates, discount factors, and tax
rates, along with other considerations.
Having determined that our goodwill was potentially impaired, we performed the second step of
the goodwill impairment analysis which involved allocating the overall estimated fair value of the
Company to all of our assets and liabilities other than goodwill (including both recognized and
unrecognized intangible assets) and compared the residual amount to the carrying value of goodwill.
In March 2009, we determined that our goodwill was fully impaired and recorded a non-cash goodwill
impairment charge of approximately $63.3 million during the quarter ended March 30, 2009.
11
We also review our long-lived assets, including intangible assets subject to amortization,
which for us are trademarks, for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. Recoverability of long-lived assets
is measured by a comparison of the carrying amount of the asset group to the future undiscounted
net cash flows expected to be generated by those assets. If such assets are considered to be
impaired, the impairment charge recognized is the amount by which the carrying amounts of the
assets exceeds the fair value of the assets. As a result of the impairment indicators described
above, during the fourth quarter of 2008 and again in the first quarter of 2009, we tested our
long-lived assets for impairment and determined that there was no impairment. We did not test our
long-lived assets for impairment in the second or third quarter of 2009 since there were no events
or changes in circumstances that would indicate that the carrying value of the assets may not be
recoverable.
Goodwill and other intangible assets consisted of the following as of September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
Gross |
|
|
Changes in |
|
|
|
|
|
|
|
|
|
|
Net |
|
|
Average |
|
|
|
Carrying |
|
|
Exchange |
|
|
Accumulated |
|
|
|
|
|
|
Carrying |
|
|
Useful Life in |
|
|
|
Amount |
|
|
Rates |
|
|
Amortization |
|
|
Impairments |
|
|
Amount |
|
|
Years |
|
|
|
(In thousands, except weighted-average useful life) |
|
Amortizable intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology-based |
|
$ |
7,015 |
|
|
$ |
1,544 |
|
|
$ |
(8,559 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
Trademarks and other |
|
|
8,604 |
|
|
|
3,290 |
|
|
|
(5,539 |
) |
|
|
|
|
|
|
6,355 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortizable intangibles |
|
|
15,619 |
|
|
|
4,834 |
|
|
|
(14,098 |
) |
|
|
|
|
|
|
6,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
49,396 |
|
|
|
13,864 |
|
|
|
|
|
|
|
(63,260 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total goodwill and other intangible assets |
|
$ |
65,015 |
|
|
$ |
18,698 |
|
|
$ |
(14,098 |
) |
|
$ |
(63,260 |
) |
|
$ |
6,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangible assets consisted of the following as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
Gross |
|
|
Changes in |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
Carrying |
|
|
Exchange |
|
|
Accumulated |
|
|
Net Carrying |
|
|
Useful Life |
|
|
|
Amount |
|
|
Rates |
|
|
Amortization |
|
|
Amount |
|
|
in Years |
|
|
|
(In thousands, except weighted-average useful life) |
|
Amortizable intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology-based |
|
$ |
7,015 |
|
|
$ |
1,552 |
|
|
$ |
(8,457 |
) |
|
$ |
110 |
|
|
|
5 |
|
Trademarks and other |
|
|
8,604 |
|
|
|
3,215 |
|
|
|
(5,174 |
) |
|
|
6,645 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortizable intangibles |
|
|
15,619 |
|
|
|
4,767 |
|
|
|
(13,631 |
) |
|
|
6,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
49,396 |
|
|
|
16,767 |
|
|
|
|
|
|
|
66,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total goodwill and other intangible assets |
|
$ |
65,015 |
|
|
$ |
21,534 |
|
|
$ |
(13,631 |
) |
|
$ |
72,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to intangible assets was $0.1 million and $0.2 million for
the three months ended September 30, 2009 and 2008, respectively, and was $0.5 million and $0.7
million for the nine months ended September 30, 2009 and 2008, respectively. Amortization expense
related to our acquired intangible assets fluctuates with changes in foreign currency exchange
rates between the United States dollar and the Japanese yen. Estimated amortization expense related
to amortizable intangibles for each of the five years 2009 through 2013 and thereafter is as
follows:
|
|
|
|
|
|
|
Estimated |
|
|
Amortization |
|
|
Expense |
|
|
(In thousands) |
2009 |
|
$ |
130 |
|
2010 |
|
|
520 |
|
2011 |
|
|
520 |
|
2012 |
|
|
520 |
|
2013 |
|
|
520 |
|
Thereafter |
|
|
4,145 |
|
12
NOTE 9. STOCKHOLDERS EQUITY
Comprehensive income (loss) consists of net income (loss), foreign currency translation
adjustments, and net unrealized holding gains (losses) on available-for-sale investments, other
than ARS, as presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income (loss), as reported |
|
$ |
(8,431 |
) |
|
$ |
5,369 |
|
|
$ |
(104,228 |
) |
|
$ |
17,198 |
|
Adjustment to arrive at comprehensive income (loss), net of taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding loss on available-for-sale securities, net of tax |
|
|
(3 |
) |
|
|
(83 |
) |
|
|
(5 |
) |
|
|
(1,777 |
) |
Cumulative translation adjustments |
|
|
4,927 |
|
|
|
(6,442 |
) |
|
|
(3,314 |
) |
|
|
729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(3,507 |
) |
|
$ |
(1,156 |
) |
|
$ |
(107,547 |
) |
|
$ |
16,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 10. COMMITMENTS AND CONTINGENCIES
We are involved in disputes and legal actions from time to time in the ordinary course of our
business.
During 2008, the Customs Office of Taipei, Taiwan issued a series of orders to our Taiwanese
subsidiary, Advanced Energy Taiwan, Ltd., requiring that certain of our products manufactured in
mainland China and allegedly imported without proper authorization be removed from Taiwan. We have
protested the orders based upon recent rulings of the Taiwan Bureau of Foreign Trade that the
products were authorized for unrestricted import. We originally appealed to the Taiwan High
Administrative Court which ruled against us in May 2009. We then appealed that decision to the
Taiwan Supreme Administrative Court and it remains pending. We have previously recorded a charge of
$0.3 million as our best estimate of the amount we are likely to pay to resolve this matter. The
maximum penalty related to this matter is $2.3 million if the Customs Office determines that we
have not complied with the removal orders. We believe the likelihood of the Customs Office
determining that we have not complied with the removal orders to be remote.
We have firm purchase commitments and agreements with various suppliers to ensure the
availability of components. The obligation at September 30, 2009 under these arrangements is
approximately $21.8 million. Substantially all amounts under these arrangements are due in the next
twelve to eighteen months. Actual expenditures will vary based upon the volume of the transactions
and length of contractual service provided. In addition, the amounts paid under these arrangements
may be less in the event that the arrangements are renegotiated, settled, or cancelled. Certain
agreements provide for potential cancellation penalties. Our policy with respect to all purchase
commitments is to record losses, if any, when they are probable and reasonably estimable. We
believe we have adequate provision for potential exposure related to inventory on order which may
go unused.
NOTE 11. 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 diluted EPS is similar to the computation of basic EPS except that the numerator is
increased to exclude charges which would not have been incurred, and 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 securities containing potentially dilutive common
shares (stock options and restricted stock units) had been converted to such common shares, and if
such assumed conversion is dilutive.
As of September 30, 2009, stock options and restricted stock units relating to an aggregate of
approximately 4.9 million shares were outstanding. For the three and nine months ended September
30, 2009, all potentially dilutive common shares were excluded from the computation as the effect
of including the instruments in the computation would be anti-dilutive due to our net loss for the
period.
As of September 30, 2008, stock options and restricted stock units relating to an aggregate of
approximately 4.1 million shares were outstanding, of which 3.7 million shares for the three and
nine months ending September 30, 2008 are not included in the computation of diluted earnings per
share because the exercise price exceeded the average price per share for the period.
The following is a reconciliation of the numerator and denominator used in the calculation of
basic and diluted earnings per share for the three and nine months ended September 30, 2009 and
2008:
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(In thousands, except per share data) |
|
|
|
|
|
Earnings per common share basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(8,431 |
) |
|
$ |
5,369 |
|
|
$ |
(104,228 |
) |
|
$ |
17,198 |
|
Weighted average common shares outstanding |
|
|
42,004 |
|
|
|
41,787 |
|
|
|
41,944 |
|
|
|
42,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share basic |
|
$ |
(0.20 |
) |
|
$ |
0.13 |
|
|
$ |
(2.48 |
) |
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(8,431 |
) |
|
$ |
5,369 |
|
|
$ |
(104,228 |
) |
|
$ |
17,198 |
|
Weighted average common shares outstanding |
|
|
42,004 |
|
|
|
41,787 |
|
|
|
41,944 |
|
|
|
42,773 |
|
Effect of dilution: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option and restricted stock units |
|
|
|
|
|
|
414 |
|
|
|
|
|
|
|
410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common shares outstanding |
|
|
42,004 |
|
|
|
42,201 |
|
|
|
41,944 |
|
|
|
43,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share diluted |
|
$ |
(0.20 |
) |
|
$ |
0.13 |
|
|
$ |
(2.48 |
) |
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 12. GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION
Our chief operating decision-makers manage our business as a single operating segment, which
includes the design, manufacture, sale and support of industrial power conversion products that
transform power into various usable forms. We have operations in the United States, Europe and
Asia. Enterprise-wide disclosures about product revenues, other revenues and long-lived assets by
geographic area and information relating to major customers are presented below. Revenues are
attributed to individual countries based on location of the customer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(In thousands, except per share data) |
|
|
|
|
|
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
21,898 |
|
|
$ |
33,456 |
|
|
$ |
45,459 |
|
|
$ |
109,171 |
|
Asia |
|
|
22,361 |
|
|
|
36,774 |
|
|
|
54,711 |
|
|
|
112,577 |
|
Europe |
|
|
7,396 |
|
|
|
14,122 |
|
|
|
19,534 |
|
|
|
39,227 |
|
Rest of world |
|
|
107 |
|
|
|
158 |
|
|
|
252 |
|
|
|
418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
51,762 |
|
|
$ |
84,510 |
|
|
$ |
119,956 |
|
|
$ |
261,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands, except per share data) |
|
*Long-lived assets: |
|
|
|
|
|
|
|
|
United States |
|
$ |
11,705 |
|
|
$ |
36,083 |
|
Asia |
|
|
24,016 |
|
|
|
53,042 |
|
Europe |
|
|
550 |
|
|
|
15,115 |
|
|
|
|
|
|
|
|
|
|
$ |
36,271 |
|
|
$ |
104,240 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Long-lived assets include property and equipment, goodwill, and other intangible assets. |
Sales to Applied Materials Inc., our largest customer, were $9.2 million, or 18%, of
total sales, for the three months ended September 30, 2009 and $20.6 million, or 17% of total
sales, for the nine months ended September 30, 2009. This was a decline from $15.1 million, or 18%
of total sales, for the three months ended September 30, 2008 and $57.8 million, or 22% of total
sales, for the nine months ended September 30, 2008. Our sales to Applied Materials include
products used in semiconductor processing and solar, flat panel display and architectural glass
applications. No other customer accounted for 10% or more of our sales during these periods.
14
ITEM 2. MANAGEMENTS 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 and Section 21E of the
Securities Exchange Act of 1934. 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 continue. Forward-looking statements involve risks and uncertainties, which are difficult to
predict and many of which are beyond our control. Some of these risks and uncertainties are
described in Part II Item 1A below and in other filings we make with the Securities and Exchange
Commission, including our Annual Report on Form 10-K for the year ended December 31, 2008. As a
result, our actual results may differ materially from the results discussed in the forward-looking
statements. We assume no obligation to update any forward-looking statements or the reasons why our
actual results might differ.
BUSINESS OVERVIEW
We design, manufacture, sell and support industrial power conversion products that transform
power into various usable forms. Our products enable manufacturing processes that use thin-film
deposition for various products, such as semiconductor devices, flat panel displays, solar panels
and architectural glass, as well as grid-tie power conversion in the solar market. We also supply
gas flow control technology and thermal instrumentation products for control and detection of gases
in the thin-film deposition process for these same markets. Our network of global service support
centers provides local repair and field service capability in key regions. Our installed base
provides a recurring revenue opportunity as we offer repair services, conversions, upgrades and
refurbishments to companies using our products.
Our results historically have been driven primarily by worldwide demand for consumer
electronic products that utilize semiconductors, flat panel displays, magnetic or optical storage,
and industrial products such as solar panels and architectural glass. Our business is subject to
cyclical industry conditions, as demand for manufacturing equipment and services can change
depending on supply and demand for semiconductor devices, solar panels, flat panel displays and
other electronic devices, as well as other factors, such as global economic and market conditions,
and technological advances in fabrication processes.
We incurred net losses for the three and nine months ended September 30, 2009, and management
expects that industry conditions will remain challenging for the foreseeable future. Credit
constraints in the financial markets and the weak global economy are compounding the impact of the
highly cyclical markets in which we operate. Negative trends in consumer spending and pervasive
economic uncertainty led many of our customers to significantly reduce factory operations and to
reduce their projected capital spending plans for capacity expansion during the first half of 2009,
which severely impacted demand for our products. In the third quarter of 2009, demand for
semiconductor equipment increased as compared to the first and second quarters of 2009, but was
still down significantly from 2008 levels. While we began to see positive trends in our business in
the third quarter of 2009, a meaningful improvement in the equipment sector will depend on a
sustainable recovery in customers end markets to support factories running at higher utilization
rates, which will drive expansion in existing technologies, and to encourage customers to make
investments in capacity for new technologies. In this uncertain macroeconomic and industry climate,
our ability to forecast customer demand and our future performance is limited. We currently
anticipate that orders and net sales will increase in the fourth quarter of 2009 from the third
quarter of 2009 but will be lower overall for the full year as compared to 2008. We believe our
investments in new technology, which has remained strong during these challenging market
conditions, will position us well when our markets begin to recover.
Throughout 2008 and 2009 we implemented cost reduction efforts in response to the
deteriorating economic conditions and weakening demand from our end markets described above. Some
of the cost reductions were permanent in nature, such as reductions of personnel across all
functions and all geographies and consolidation of facilities on a worldwide basis. Overall, we
reduced our global workforce by approximately 455 people, or 27% of total headcount, across all
functional areas and geographies since the beginning of 2008. We expect the cost savings from this
workforce reduction to be $20.5 million annually, of which approximately $7.8 million is a
reduction in cost of goods sold, approximately $7.4 million is a reduction of selling, general and
administrative costs and $5.3 million is a reduction of research and development costs.
As a result of these actions, we incurred restructuring charges related to severance and
benefits payments. We continue to look for ways to make our global workforce more efficient and
effective, which may lead to additional personnel-related and facilities cost reduction activity in
the future.
In 2009 we also implemented cost-cutting initiatives that were more temporary in nature. These
activities included cuts in discretionary spending, such as travel and professional fees, as well
as pay cuts for management-level personnel, a reduction in Board of Directors fees, company-wide
shutdowns and employee benefit cuts. While these temporary cuts may be reversed at some point in the
future,
15
they have enabled us to maintain lower cost levels until such time that the positive trends
in end market demand for our products that we saw in the third quarter of 2009 become sustainable.
Our analysis presented below is organized to provide the information we believe will be
instructive for understanding our historical performance and relevant trends going forward.
However, this discussion should be read in conjunction with our consolidated financial statements
in Part I Item 1 of this report, including the notes thereto.
Results of Operations
SALES
The following tables summarize net sales, and percentages of net sales, by market type for
each of the three and nine months ended September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Increase/ |
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
Increase/ |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
|
% Change |
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
|
% Change |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Product: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor capital equipment |
|
$ |
20,808 |
|
|
$ |
28,211 |
|
|
$ |
(7,403 |
) |
|
|
(26.2 |
)% |
|
$ |
42,577 |
|
|
$ |
110,282 |
|
|
$ |
(67,705 |
) |
|
|
(61.4 |
)% |
Non-semiconductor capital equipment |
|
|
20,281 |
|
|
|
40,702 |
|
|
|
(20,421 |
) |
|
|
(50.2 |
) |
|
|
50,183 |
|
|
|
104,172 |
|
|
|
(53,989 |
) |
|
|
(51.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Product |
|
|
41,089 |
|
|
|
68,913 |
|
|
|
(27,824 |
) |
|
|
(40.4 |
) |
|
|
92,760 |
|
|
|
214,454 |
|
|
|
(121,694 |
) |
|
|
(56.8 |
) |
Global Support |
|
|
10,673 |
|
|
|
15,597 |
|
|
|
(4,924 |
) |
|
|
(31.6 |
) |
|
|
27,196 |
|
|
|
46,939 |
|
|
|
(19,743 |
) |
|
|
(42.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales |
|
$ |
51,762 |
|
|
$ |
84,510 |
|
|
$ |
(32,748 |
) |
|
|
(38.8 |
)% |
|
$ |
119,956 |
|
|
$ |
261,393 |
|
|
$ |
(141,437 |
) |
|
|
(54.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
Product: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor capital equipment |
|
|
40.2 |
% |
|
|
33.4 |
% |
|
|
|
|
|
|
|
|
|
|
35.4 |
% |
|
|
42.2 |
% |
|
|
|
|
Non-semiconductor capital equipment |
|
|
39.2 |
% |
|
|
48.2 |
% |
|
|
|
|
|
|
|
|
|
|
41.8 |
% |
|
|
39.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Product |
|
|
79.4 |
% |
|
|
81.6 |
% |
|
|
|
|
|
|
|
|
|
|
77.2 |
% |
|
|
82.0 |
% |
|
|
|
|
Global Support |
|
|
20.6 |
% |
|
|
18.4 |
% |
|
|
|
|
|
|
|
|
|
|
22.8 |
% |
|
|
18.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall sales for the three months ended September 30, 2009 were $51.8 million,
representing a 38.8% decrease from the three months ended September 30, 2008. Overall sales for the
nine months ended September 30, 2009 were $120.0 million, representing a 54.1% decrease from the
nine months ended September 30, 2008.
Product sales for the three months ended September 30, 2009 were $41.1 million, representing a
40.4% decrease from the three months ended September 30, 2008. Product sales for the nine months
ended September 30, 2009 were $92.8 million, representing a 56.8% decrease from the nine months
ended September 30, 2008. The decrease in product sales was due to a significant reduction in
worldwide demand from our end markets which significantly reduced the need for capacity expansion
in such markets.
Sales to the semiconductor capital equipment market were $20.8 million, or 40.2% of total
sales, for the three months ended September 30, 2009, as compared to $28.2 million, or 33.4% of
total sales, for the three months ended September 30, 2008 and $42.6 million, or 35.4% of total
sales for the nine months ended September 30, 2009, as compared to $110.3 million, or 42.2% of
total sales, for the nine months ended September 30, 2008. Demand in the semiconductor capital
equipment market fell significantly as end market demand for products that include semiconductors
fell in the wake of the global economic crisis. The drop in demand reduced factory utilization and
significantly reduced the need for semiconductor fab expansion. The semiconductor capital equipment
market was severely affected by these developments and, consequently, demand for our products in
these markets decreased from year ago levels.
As described above, there were positive trends in semiconductor demand in the third quarter of
2009 and we anticipate similar, if not higher, levels of sales to the semiconductor capital
equipment market in the fourth quarter of 2009.
Product sales to our non-semiconductor equipment markets declined year over year, accounting
for $20.3 million, or 39.2%, of total sales, for the three months ended September 30, 2009, as
compared to $40.7 million, or 48.2% of total sales, for the three months ended September 30, 2008.
Additionally, sales to our non-semiconductor equipment markets were $50.2 million, or 41.8% of
total sales, for the nine months ended September 30, 2009, as compared to $104.2 million, or 39.8%
of total sales, for the nine months ended September 30, 2008. Our non-semiconductor equipment
markets were also adversely affected by a number of the pervasive factors previously mentioned,
such as the credit constraints in the financial markets and the negative trends in consumer
spending. The drop in end market demand reduced factory utilization and significantly reduced the
need for capacity expansion in our non-
16
semiconductor markets. The markets that comprise our
non-semiconductor equipment markets include solar, flat panel display, data storage, architectural
glass, and other industrial thin-film manufacturing equipment. Our customers in these markets,
other than the solar market, are predominantly large original equipment manufacturers (OEMs) for
new equipment. Our customers in the solar market are predominantly large system integrators,
independent power producers and public utilities.
Over the past three years, the solar market has been growing the fastest of our
non-semiconductor equipment markets; however, product sales to this market were adversely affected
by the weakened global economy and the financial credit crisis which began in the second half of
2008 and has continued through most of 2009. Solar panel manufacturers installed substantial panel
manufacturing capacity over the past three years, and as a result of declining panel sales caused
in part by the global recession, built significant inventory. The majority of panel manufacturers
must work through their current inventory levels before their factory utilization will be at a
point where they will need to expand capacity. Sales to customers in the solar market decreased to
$6.5 million, or 12.5% of total sales, for the three months ended September 30, 2009 as compared to
$19.3 million, or 22.8% of total sales, for the three months ended September 30, 2008. Similarly,
sales to customers in the solar market decreased to $18.9 million, or 15.8% of total sales, for the
nine months ended September 30, 2009, as compared to $40.2 million, or 15.4% of total sales, for
nine months ended September 30, 2008. Our products are used in the thin-film deposition process for
solar cell production, such as amorphous silicon, polysilicon, amorphous-microcrystalline silicon,
cadmium telluride (CdTe), copper indium gallium selenide (CIGS), copper indium selenide (CIS) and
cadmium telluride. Sales of our Solaron® solar inverter, which converts DC power generated by the
solar panel to AC power, are included in sales to the solar market.
Although we have experienced continued success in our non-semiconductor equipment business,
just as in our semiconductor business, demand for our products is driven by requirements for
capacity expansion in each of the non-semiconductor markets we serve. We have experienced near term
weakness throughout 2009 due to the softness in the global economy and have limited visibility
as to whether this weakness will continue in 2010. As discussed above, however, we have seen
signs of positive trends in our non-semiconductor business as well and anticipate a continued shift
in our business towards our non-semiconductor equipment markets as we continue to invest in new
technology and products for the solar market.
Sales from our global support business were $10.7 million, or 20.6% of total sales, for the
three months ended September 30, 2009 and $27.2 million, or 22.8% of total sales, for the nine
months ended September 30, 2009. This was a decrease from $15.6 million, or 18.4% of total sales,
for the three months ended September 30, 2008 and $46.9 million, or 18.0% of total sales, for the
nine months ended September 30, 2008. The decrease in absolute dollars resulted in large part from
a continuing practice by our customers of utilizing spare parts inventory and idle equipment for
spare parts in efforts to conserve cash as opposed to repairing malfunctioning or worn parts.
However, we did experience a 21.6% increase in global support sales in the third quarter of 2009 as
compared to the second quarter of 2009. This is an early indication that factory utilization is
beginning to improve and that customers no longer have enough inventory to maintain their
production lines. As a result, we anticipate our global support business to experience similar, if
not higher, levels of sales in the fourth quarter of 2009.
GROSS PROFIT
Our gross profit was $15.6 million, or 30.1% of sales, for the three months ended September
30, 2009, as compared to $35.3 million, or 41.7% of sales for the three months ended September 30,
2008. Similarly, gross profit decreased to $29.9 million, or 24.9% of sales, for the nine months
ended September 30, 2009, from $106.4 million, or 40.7% of sales, for the nine months ended
September 30, 2008. The large decrease in both periods was due to an overall decrease in production
volume related to the weakening economy which resulted in a lack of absorption of our factory costs
therefore reducing our gross margin. In response to the decrease in production volume we reduced
our overall manufacturing costs by reducing fixed production and overhead costs including personnel
costs and discretionary spending through the cost-cutting activities described above.
The decrease in gross profit of $19.7 million in the three months ended September 30, 2009 as
compared to the same period in 2008 was driven primarily by lower sales volume. Production and
overhead personnel cost reductions decreased by $2.2 million, travel decreased $0.3 million and
professional fees decreased $0.2 million. The decrease in gross profit of $76.5 million in the nine
months ended September 30, 2009 as compared to the same period in 2008 was almost exclusively
driven by lower sales volume. Production and overhead personnel costs decreased $6.5 million,
travel decreased $0.7 million and professional fees decreased $0.5 million.
Maintaining lower cost levels has allowed us to improve our gross margin percentage in the
current quarter as compared to the first and second quarters of 2009 on higher demand. Although we
currently have excess manufacturing capacity related to buildings, machinery and unabsorbed
overhead expenses, we do anticipate continued improvement in our gross profit and gross margin
percentage in the fourth quarter of 2009.
17
RESEARCH AND DEVELOPMENT EXPENSES
The markets we serve constantly present us with opportunities to develop our products for new
or emerging applications and require technological changes driving for higher performance, lower
cost, and other attributes that will advance our customers products. We believe that continued and
timely development of new and differentiated products, as well as enhancements to existing products
to support customer requirements, is 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.
Since inception, all of our research and development costs have been expensed as incurred.
Research and development expenses for the three months ended September 30, 2009 were $10.2
million, or 19.7% of sales, as compared to $14.7 million, or 17.4% of sales, for the three months
ended September 30, 2008. Similarly, research and development expenses decreased to $32.0 million,
or 26.7% of sales, for the nine months ended September 30, 2009, from $41.5 million, or 15.9% of
sales, for the nine months ended September 30, 2008.
The decrease in research and development expenses of $4.5 million in the three months ended
September 30, 2009 as compared to the same period in 2008 was driven primarily by decreases of $3.2
million in personnel costs, $1,0 million in engineering material and $0.2 million in travel costs.
The decrease in research and development expenses of $9.5 million in the nine months ended
September 30, 2009 as compared to the same period in 2008 was driven primarily by decreases of $7.2
million in personnel costs, $1.7 million in engineering material, and $0.3 million in travel costs,
The decrease in engineering material in the nine months ended September 30, 2009 was offset by an
approximate $0.8 million charge for excess and obsolete engineering inventory, for which management
does
not believe there will be utilizable demand. Overall, the decreases in material costs were due
to more effective spending controls related to engineering projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling expenses are comprised of all global sales and marketing activities which include
personnel, trade shows, advertising, third-party sales representative commissions and other selling
and marketing activities. General and administrative expenses are comprised of our worldwide
corporate, legal, patent, tax, financial, governance, administrative, information systems and human
resource functions in addition to our general management.
Selling, general and administrative (SG&A) expenses for the three months ended September 30,
2009 were $10.8 million, or 20.8% of sales, as compared to $14.3 million, or 17.0% of sales, in the
three months ended September 30, 2008. Similarly, SG&A expenses decreased to $30.3 million, or
25.3% of sales, for the nine months ended September 30, 2009, from $42.8 million, or 16.4% of
sales, for the nine months ended September 30, 2008.
The decrease in SG&A expenses of $3.5 million in the three months ended September 30, 2009 as
compared to the same period in 2008 was primarily driven by decreases of $2.1 million in personnel
costs, $1.1 million in professional fees and $0.5 million in travel costs, offset by an increase to
bad debt expense of $0.3 million. The decrease in SG&A expenses of $12.5 million in the nine months
ended September 30, 2009 as compared to the same period in 2008 was primarily driven by decreases
of $9.7 million in personnel costs, $4.0 million in professional fees and $1.8 million in travel
costs, offset by a $1.9 million increase in bad debt expense. The increases in bad debt expense in
both periods are a result of certain customers deteriorating financial condition. While we believe
that our allowance for doubtful accounts at September 30, 2009 is adequate, we will continue to
closely monitor customer liquidity and other economic conditions. .
GOODWILL IMPAIRMENT CHARGE
We recorded a non-cash goodwill impairment charge in the amount of $63.3 million during the
nine months ended September 30, 2009 based upon the results of our impairment test performed during
the first quarter of 2009. For further discussion of the goodwill impairment charge recorded, see
Note 8 Goodwill, Purchased Technology and Other Intangible Assets to the Condensed Consolidated
Financial Statements and Managements Discussion and Analysis of Financial Condition and Results
of Operations Critical Accounting Policies and Estimates Goodwill Impairment.
RESTRUCTURING CHARGES
As previously discussed, we implemented cost reduction efforts in response to deteriorating
economic conditions and weakening demand from our end markets. As a result, we incurred
restructuring costs of $0.2 million and $0.5 million for the three months ended
18
September 30, 2009
and 2008, respectively and $4.4 million and $1.6 million for the nine months ended September 30,
2009 and 2008, respectively. The costs incurred were primarily severance and benefits related to
reductions in personnel. We continue to look for ways to make our global workforce more efficient
and effective, which may lead to additional cost reduction activities in the future.
OTHER INCOME, NET
Other income, net consists primarily of investment income and expense and foreign exchange
gains and losses. Other income, net was $0.5 million for the three months ended September 30, 2009,
as compared to $0.4 million for the three months ended September 30, 2008. This increase was due to
a foreign exchange loss that occurred in the three months ended September 30, 2008 caused by the
strengthening of the Japanese Yen and Euro against the United States Dollar. The impact of foreign
exchange on our results of operation was immaterial in the three months ended September 30, 2009.
Other income, net was $1.4 million for the nine months ended September 30, 2009, as compared to
$2.3 million for the nine months ended September 30, 2008. This decrease was due to a significant
reduction in interest rates earned on our cash and investments due to market conditions.
PROVISION (BENEFIT) FOR INCOME TAXES
During 2008, based on our 2008 operating results and projection of future operating results
within the United States, our management evaluated the recoverability of our deferred tax assets in
the United States and concluded a portion of our United States
deferred tax assets were not recoverable. As such, an increase to the valuation allowance of
$18.0 million was recorded during the quarter ended December 31, 2008.
For the three and nine months ended September 30, 2009, we sustained further losses in the
United States and, as a result, management determined that an increase to the valuation allowance
of $17.0 million was necessary since management has determined that we are not likely to utilize
the benefits of the associated deferred tax assets. The ultimate realization of our overall
deferred tax assets is dependent upon the generation of approximately $111.6 million of future
taxable income in the United States, the timing and amount of which is uncertain. We assess the
recoverability of our net deferred tax assets on a quarterly basis. If our expectation of future
realization of our deferred tax assets changes, we will adjust the valuation allowance with a
corresponding change in income tax expense in such period.
We recorded an income tax provision for the three months ended September 30, 2009 of $3.2
million, which related to taxable income in our foreign jurisdictions as well as additional
domestic tax expense of $1.3 million that resulted from an adjustment necessary to reconcile our
2008 year-end tax provision with our 2008 Federal tax return that was filed on September 15, 2009.
The domestic tax adjustment related to a decision not to utilize certain research and development
credits in an effort to preserve their deductibility against future taxable income.
The tax expense for the three months ended September 30, 2009 represented an effective tax
rate of 60.5% as compared to an effective tax rate of 26.6% for the three months ended September
30, 2008. The increase in the current three month effective tax rate as compared to the rate for
the three months ended September 30, 2008, resulted primarily from lower taxable income in our
foreign jurisdictions, offset by the recording of the additional valuation allowance discussed
above on continued losses in the United States. Additionally, we incurred a charge for the
impairment of goodwill during the current year, which is non-deductible for United States tax
purposes.
Our future effective income tax rate depends on various factors, such as tax legislation and
the geographic composition of our pre-tax income. We carefully monitor these factors and timely
adjust our effective income tax rate accordingly.
Liquidity and Capital Resources
Our primary sources of liquidity are our available cash levels and available liquidity from
our Credit Line Agreement. We utilize these capital resources to make capital expenditures
primarily for our operational needs, investment in technology applications and tools to further
develop our products and for other general corporate purposes, including the funding of possible
acquisitions. In future periods, we intend similar uses of these funds.
During the nine months ended September 30, 2009, we generated $25.0 million in cash from net
changes in marketable securities and $0.3 million of proceeds from stock option exercises and used
$2.8 million for capital expenditures and $0.3 million for operating
19
activities, resulting in a
$23.2 million increase in available cash (including $1.0 million of favorable effects of
international currency exchange rates on cash).
Net cash flows used in operating activities in the nine months ended September 30, 2009 were
$0.3 million, compared to $18.8 million cash provided by operating activities in the nine months
ended September 30, 2008. The $19.1 million decrease in net cash flows from operating activities in the nine months ended September 30, 2009
was due to a $121.4 million decrease in net income, offset by a $72.6 million increase in non-cash
reconciling items such as goodwill impairment, depreciation and amortization, stock-based
compensation, restructuring charges, provision for excess and obsolete inventory, provision for
doubtful accounts and deferred income taxes and a $29.7 million increase in cash flows from changes
in operating assets and liabilities, principally the collection of receivables.
Capital expenditures were $2.8 million for the nine months ended September 30, 2009, compared
to $5.8 million for the nine months ended September 30, 2008. Capital expenditures in both periods
presented primarily include the cost of lab and testing equipment to support sustaining engineering
and new product development efforts as well as capacity expansion for the production of our
Solaron® Inverter.
At September 30, 2009, our ARS whose underlying assets are primarily student loans originated
under the Federal Family Education Loan Program (FFELP) have a fair value of $21.3 million. FFELP
student loans are guaranteed by state guarantors who have reinsurance agreements with the United
States Department of Education. In addition to the student loans, a smaller portion of our
portfolio is held in municipal securities. Since February 2008, the majority of the auctions for
our investment in these securities have failed to settle, causing us to hold the securities longer
than originally intended. In November 2008, we executed the Put Agreement and expect to liquidate
all of our remaining ARS at par when our rights under the agreement are effective beginning June
30, 2010. Since the period for which this Put Agreement is effective is now within twelve months and it
is managements intent to liquidate the securities at the effective date, we have reclassified our
ARS from long-term assets to current assets. We do not expect to incur any loss of principal;
however, until we liquidate our ARS, we will recognize any decline in fair value of the ARS in
earnings. We expect the subsequent changes in the value of the Put Agreement will largely offset
any subsequent fair value declines of the ARS, subject to the continued performance by the
financial institution of its obligations under the Put Agreement. Other than via the Put Agreement,
the principal could become available through three different means: (1) the ARS is called; (2)
auctions have resumed and are successful; and (3) the principal has reached maturity.
On June 2, 2009, pursuant to the Put Agreement, we entered into a Credit Line Account
Agreement with UBS Bank. The Credit Line Agreement provides us with an uncommitted, demand
revolving line of credit (an intended no net cost loan) of $18.7 million (75% of par value), as
determined by UBS Bank in its sole discretion, which is secured by our ARS that we have pledged as
collateral. Upon our request, UBS Bank may make one or more advances to us. Any interest expense
that we incur on the no net cost loan is not expected to exceed the interest income that we receive
on the ARS that we have pledged to UBS Bank as security for the no net cost loan. If the payments
on our ARS are not sufficient to pay the accrued interest on such advances before a due date, UBS
Bank may, in its sole discretion (1) capitalize unpaid interest as an additional advance or (2)
require us to make payment of all accrued and unpaid interest. UBS Bank may demand full or partial
payment of the no net cost loan, at its sole option and without cause, at any time. UBS Bank may
also, at any time, in its discretion, terminate and cancel the no net cost loan. If at any time UBS
Bank exercises its right of demand under certain sections of the Credit Line Agreement, then UBS
Financial Services Inc. or one of its affiliates shall provide, as soon as reasonably possible,
alternative financing on substantially the same terms and conditions as those under the Credit Line
Agreement and the Credit Line Agreement will remain in full force and effect until such time as
such alternative financing has been established. As of September 30, 2009, no advances were drawn
against the line.
At September 30, 2009, we had $177.3 million in cash, cash equivalents and marketable
securities, including our ARS and the Put Agreement. We believe that our current cash levels,
available liquidity from our Credit Line Agreement and cash flows from future operations will be
adequate to meet anticipated working capital needs, anticipated levels of capital expenditures and
contractual obligations for the foreseeable future.
Critical Accounting Policies and Estimates
In preparing our financial statements, we must make estimates and judgments that affect the
reported amounts of assets and liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
20
We believe that the following critical accounting policies, as discussed in this Form 10-Q
and/or our Form 10-K for the year ended December 31, 2008, affect our more significant judgments
and estimates used in the preparation of our condensed consolidated financial statements:
WARRANTY COSTS We offer warranty coverage for a majority of our products for periods
typically ranging from 12 to 24 months after shipment. We warrant our solar inverter for five
years, and we offer extended warranties in increments of five years up to an additional ten years.
We estimate the anticipated costs of repairing products under warranty based on the historical or
expected cost of the repairs and expected failure rates. The assumptions used to estimate warranty
accruals are reevaluated quarterly, at a minimum, in light of actual experience and, when
appropriate, the accruals or the accrual percentage is adjusted based on specific estimates of
project repair costs and quantity of product returns. Our determination of the appropriate level of
warranty accrual is based on estimates of the percentage of units affected and the repair costs.
Estimated warranty costs are recorded at the time of sale of the related product, and are recorded
within cost of sales in the consolidated statements of operations.
The following table summarizes the activity in our warranty reserve during the three and nine
months ended September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Balance at beginning of period |
|
$ |
5,797 |
|
|
$ |
7,856 |
|
|
$ |
6,189 |
|
|
$ |
8,812 |
|
Additions charged to expense |
|
|
2,088 |
|
|
|
2,076 |
|
|
|
4,668 |
|
|
|
6,211 |
|
Deductions |
|
|
(2,368 |
) |
|
|
(2,433 |
) |
|
|
(5,340 |
) |
|
|
(7,524 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
5,517 |
|
|
$ |
7,499 |
|
|
$ |
5,517 |
|
|
$ |
7,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXCESS AND OBSOLETE INVENTORY Reserves are provided for excess and obsolete inventory,
which are estimated based on a comparison of the quantity of inventory on hand to managements
forecast of customer demand. Customer demand is dependent on many factors, including both micro and
macroeconomic, and requires us to use significant judgment in our forecasting process. We must also
make assumptions regarding the rate at which new products will be accepted in the marketplace, the
rate at which customers will transition from older products to newer products, effect of
engineering changes to a product or discontinuance of a product line. If actual market conditions
or our customers product demands are less favorable than those projected, additional valuation
adjustments may be necessary.
We will continue to evaluate the estimates related to our excess and obsolete inventory
reserve. If market conditions and customer demand continue to weaken in future periods, we may
determine that increases in our reserve and, therefore, further increases in cost of goods sold and
decreases in gross profit may be necessary.
ALLOWANCE FOR DOUBTFUL ACCOUNTS We maintain allowances for doubtful accounts of $2.9
million, or 7.2% of accounts receivable, as of September 30, 2009 for estimated losses arising from
the inability of our customers to make required payments. Our estimate is based on factors
surrounding the credit risk of certain customers, historical collection experience and a review of
the current status of trade accounts receivable. It is reasonably possible that our estimate of
the allowance for doubtful accounts will change if the financial condition of our customers were to
deteriorate, resulting in a reduced ability to make payments.
GOODWILL IMPAIRMENT We perform a goodwill impairment analysis using the two-step method on an
annual basis as of October 31 and whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. The recoverability of goodwill is measured by comparing the
companys carrying amount, including goodwill, to its fair market value.
As of October 31, 2008, and again as of December 31, 2008, after completing the first step of
the impairment test, no indication of impairment existed because our market capitalization exceeded
our carrying value as of those dates. However, based upon a combination of factors subsequent to
December 31, 2008, including a significant decline in market capitalization below our carrying
value, the deteriorating macro-economic environment, which had resulted in a significant decline in
customer demand, and illiquidity in the overall credit markets, we concluded that sufficient
indicators existed to require us to perform an interim goodwill impairment analysis at February 28,
2009.
We determined our fair market value at February 28, 2009 based on our market
capitalization, an average weighting of both projected discounted future cash flows and the use of
comparative market multiples and relative control premiums. The use of comparative market multiples
(the market approach) compares the Company to other comparable companies based on valuation
21
multiples to arrive at a fair value. The use of discounted cash flows is based on assumptions that
are consistent with our estimates of future growth and the strategic plan used to manage the
underlying business, and also includes a probability-weighted expectation as to our future cash
flows. Factors requiring significant judgment include assumptions related to future growth rates,
discount factors, and tax rates, along with other considerations.
Having determined that our goodwill was potentially impaired, we began performing the second
step of the goodwill impairment analysis which involves allocating the overall estimated fair value
of the Company to all of our assets and liabilities other than goodwill (including both recognized
and unrecognized intangible assets) and comparing the residual amount to the carrying value of
goodwill. In March 2009, we determined that our goodwill was fully impaired and recorded a non-cash
goodwill impairment charge of approximately $63.3 million for the three months ended March 31,
2009.
FAIR VALUE OF AUCTION RATE SECURITIES We value our financial assets and liabilities using
fair value measurements. Fair value is based on the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. In order to increase consistency and comparability in fair value measurements, a
fair value hierarchy is used that prioritizes observable and unobservable inputs used to measure
fair value into three broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that are
accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the
highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted in active markets, but corroborated
by direct or indirect market data.
Level 3: Unobservable inputs, developed using our estimates and assumptions, which reflect those
that market participants would use. Such inputs are used when little or no market data is
available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
The fair value of our ARS and the Put Agreement were determined using Level 3 inputs. Some of
the inputs into the discounted cash flow models we use are unobservable in the market and have a
significant effect on valuation. The assumptions used in preparing the models include, but are not
limited to, periodic coupon rates, market required rates of return and the expected term of each
security. The coupon rate was estimated using implied forward rate data on interest rate swaps and
United States treasuries, and limited where necessary by any contractual maximum rate paid under a
scenario of continuing auction failures. We believe implied forward rates inherently account for a
lack of liquidity. In making assumptions of the required rates of return, we considered risk-free
interest rates and credit spreads for investments of similar credit quality. The expected term for
the ARS was based on a weighted probability-based estimate of the time the principal will become
available to us with and without exercising our Put Agreement. The expected term for the Put
Agreement was based on the earliest date on which we can exercise our put. Any change to these
inputs will affect the fair value of the ARS and the Put Agreement and will affect our reported
earnings. However, we do not expect changes in the inputs or reported earnings to affect our
liquidity.
INCOME TAXESWe assess the recoverability of our net deferred tax assets on a quarterly basis.
Our assessment includes a number of factors, including historical results and income projections
for each jurisdiction. At September 30, 2009, we had gross deferred income tax assets of $55.0
million in the United States and $1.9 million in foreign jurisdictions, a significant portion of
which relates to net operating losses and tax credit carryforwards, for which a valuation allowance
of $40.3 million has been provided. The ultimate realization of deferred income tax assets is
dependent on the generation of taxable income in appropriate jurisdictions during the periods in
which those temporary differences are deductible. Management considers the scheduled reversal of
deferred income tax liabilities, projected future taxable income, and tax planning strategies in
determining the amount of the valuation allowance. Based on the level of historical taxable income
and projections for future taxable income over the periods in which the deferred income tax assets
are deductible, management determines if we will realize the benefits of these deductible
differences. As of September 30, 2009, the most significant factors considered in determining the
realizability of these deferred tax assets and the amount of the valuation allowance were our
profitability over the past three years (excluding the effect of the non-deductible goodwill charge
recorded during the quarter ended March 31, 2009), the historical cyclicality of the markets in
which we operate and our projected profitability during these cycles. We need to generate
approximately $111.6 million in pre-tax income in the United States and $9.2 million in pre-tax
income in foreign jurisdictions prior to the expiration of our net operating loss and tax credit
carryforwards to fully utilize our deferred tax assets.
The calculation of tax assets and liabilities involves significant judgment in estimating the
impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties
in a manner inconsistent with our expectations could have a significant impact on our results of
operations and financial condition.
22
STOCK-BASED COMPENSATION We account for stock plans and our employee stock purchase plan
based on the fair value of stock-based awards. The fair value of stock options and purchase rights
pursuant to the employee stock purchase plan is estimated using the Black-Scholes valuation model.
This model requires the input of highly subjective assumptions, including expected life of the
award and expected stock price volatility. The fair value of restricted stock units is determined
based upon our closing stock price on the grant date. The fair value of stock-based awards expected
to vest is amortized over the requisite service period, typically the vesting period, of the award
on a straight-line basis. Our estimate of forfeitures is based on our historical activity, which we
believe is indicative of expected forfeitures. In subsequent periods if the actual rate of
forfeitures differs from our estimate, the forfeiture rates may be revised, as necessary. Changes
in the estimated forfeiture rates can have a significant effect on share-based compensation expense
since the effect of adjusting the rate is recognized in the period the forfeiture estimate is
changed.
COMMITMENTS AND CONTINGENCIES From time to time we are involved in disputes and legal
actions arising in the normal course of our business. While we currently believe that the amount of
any ultimate loss would not be material to our financial position, the outcome of these actions is
inherently difficult to predict. In the event of an adverse outcome, the ultimate loss could have a
material adverse effect on our financial position or reported results of operations in a particular
quarter. An unfavorable decision, particularly in patent litigation, could require material changes
in production processes and products or result in our inability to ship products or components
found to have violated third-party patent rights. We accrue loss contingencies when it is probable
that a loss has occurred or will occur and the amount of the loss can be reasonably estimated. Our
estimates of probability of losses are subjective, involve significant judgment and uncertainties
and are based on the best information we have at any given point in time. Resolution of these
uncertainties in a manner inconsistent with our expectations could have a significant impact on our
results of operations and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We face market risk exposure associated with our investments in ARS. Our investments in ARS
have a par value of $24.9 million, and have an estimated fair value of $21.3 million at September
30, 2009. The underlying securities related to these investments are student loans, which accounted
for $19.6 million of the recorded fair value, and other municipal securities, which accounted for
the remaining $1.7 million of the recorded fair value. As a result of current negative conditions
in the global credit markets, since February 2008, the large majority of the auctions for our
investment in these securities have failed to settle, causing us to continue to hold the
securities. We continue to monitor the market for ARS and consider the impact, if any, on the fair
value of these investments. If current market conditions deteriorate further, we may be required to
record additional unrealized losses.
In November 2008, we executed the Put Agreement, which provides us with the ability to sell
our ARS to the financial institution, at our sole discretion, and obligates the financial
institution to purchase such ARS, at par during the period June 30, 2010 through July 2, 2012. The
Put Agreement had a fair value of $3.3 million at September 30, 2009. The benefits of the Put
Agreement are subject to the continued performance by the financial institution of its obligations
under the agreement.
In June 2009, we executed the Credit Line Agreement which provides us with an uncommitted,
demand revolving line of credit of $18.7 million as determined by UBS Bank in its sole discretion,
which is secured by our ARS that we have pledged as collateral. The benefits of the Credit Line
Agreement are subject to the continued performance by the financial institution of its obligations
under the agreement.
See Note 5 to the Condensed Consolidated Financial Statements included in this Report and the
Risk Factors set forth in Part II, Item 1A of this Report for more information about the market
risks to which we are exposed. There were no additional material changes in our exposure to market
risk from December 31, 2008.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods specified in the rules
and forms of the Securities and Exchange Commission, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
23
As of the end of the period covered by this report, we conducted an evaluation, with the
participation of management, including our Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the disclosure controls and procedures pursuant to
the Exchange Act Rule 13a-15(b). Based upon this evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were effective as of
September 30, 2009. The conclusions of the Chief Executive Officer and Chief Financial Officer from
this evaluation were communicated to the Audit Committee. We intend to continue to review and
document our disclosure controls and procedures, including our internal controls and procedures for
financial reporting, and may from time to time make changes aimed at enhancing their effectiveness
and to ensure that our systems evolve with our business.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during
our most recent quarter that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in disputes and legal actions from time to time in the ordinary course of our
business. There have been no material developments in legal proceedings. For a description of
previously reported legal proceedings refer to Part I, Item 3, Legal Proceedings, of our 2008
Form 10-K for the year ended December 31, 2008, and Part II, Item 1 of our Form 10-Q for the
quarters ended March 31, 2009 and June 30, 2009.
ITEM 1A. RISK FACTORS
Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31,
2008 describes some of the risks and uncertainties associated with our business. The risk factors
set forth below update such disclosures. Other factors may also exist that we cannot anticipate or
that we currently do not consider to be significant based on information that is currently
available. These risks and uncertainties have the potential to materially affect our business,
financial condition, results of operations, cash flows and future results. Such risks and
uncertainties also may impact the accuracy of forward-looking statements included in this Form 10-Q
and other reports we file with the Securities and Exchange Commission.
The risk factors set forth below have been updated from those previously disclosed in the
Risk Factors section of our Annual Report on Form 10-K with more current information.
Raw material, part, component and subassembly shortages, exacerbated by our dependence on sole and
limited source suppliers, could affect our ability to manufacture products and systems and could
delay our shipments.
Our business depends on our ability to manufacture products that meet the rapidly changing
demands of our customers. Our ability to manufacture our products timely depends in part on the
timely delivery of raw materials, parts, components and subassemblies from suppliers. We rely on
sole and limited source suppliers for some of our raw materials, parts, components and
subassemblies that are critical to the manufacturing of our products. This reliance involves
several potential and existing risks, including the following:
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inability to obtain an adequate supply of required parts, components or subassemblies; |
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supply shortages if a sole or limited source provider ceases operations or goes bankrupt; |
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having to fund the operating losses of a sole or limited source provider; |
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reduced control over pricing and timing of delivery of raw materials and parts,
components or subassemblies; |
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need to qualify alternative suppliers which could be time consuming and lead to delays
in, or prevention of delivery of products to our customers, as well as increased costs; and |
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inability of our suppliers to develop technologically advanced products to support our
growth and development of new products. |
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If we are unable to qualify additional suppliers and manage relationships with our existing
and future suppliers successfully, if our suppliers experience financial difficulties including
bankruptcy or if our suppliers cannot meet our performance or quality specifications or timing
requirements, we may experience shortages, delays or increased costs of raw materials, parts,
components or subassemblies. This in turn could limit or prevent our ability to manufacture and
ship our products, which could materially and adversely affect our relationships with our current
and prospective customers and our business, financial condition and results of operations. Some of
our sole or limited source suppliers have given us notice that they are ending supply of critical
parts, components and subassemblies that are required for us to deliver product. In those cases, we
have been required to make last time buys of such supplies in advance of product demand from our
customers. If we cannot qualify alternative suppliers before these end-of life supplies are
utilized in our products, we may be unable to deliver further product to our customers. To mitigate
the risk of not having a supply of critical parts, components and subassemblies for our products,
we have pro-actively made additional purchases which we believe addresses such risk.
Our orders of raw materials, parts, components and subassemblies are based upon quarterly demand
forecasts.
We place orders with many of our suppliers based upon quarterly forecasts. These forecasts are
based upon our expectations as to demand for our products from our customers. As the quarter
progresses, such demand can change rapidly or we may realize that our expectations were overly
optimistic, especially during a downturn in the industry and other adverse economic conditions.
These orders cannot always be amended in response. In addition, in order to assure availability of
certain components or to obtain priority pricing, we have entered into contracts with some of our
suppliers that require us to purchase a specified amount of components and subassemblies each
quarter, even if we are not able to use such components or subassemblies. Moreover, we have
obligations to some of our customers to hold a minimum amount of finished goods in inventory, in
order to fulfill just in time orders, regardless of whether the customers expect to place such
orders. We currently have firm purchase commitments and agreements with various suppliers to ensure
the availability of components. Our obligation to our suppliers at September 30, 2009 under these
purchase commitments was $21.8 million. In periods of decreased demand we may attempt to negotiate
the purchase commitments with our suppliers to lower our future obligations. If we successfully
negotiate decreases in these commitments, we may be unable to successfully procure parts quickly
enough to meet customer requirements in the event of a sooner-than-expected upturn in demand for
our products. If we are unsuccessful in our efforts to negotiate decreases in these commitments, we
may be required to purchase products that we do not anticipate needing and to manufacture systems
that we do not anticipate our customers ordering. In addition, such purchases and manufacturing can
result in significant write-offs for excess and obsolete inventory, which can have a materially
adverse effect on our results of operations.
We might make substantial capital expenditures and commitments to meet anticipated demand for our
solar inverters.
We have invested and will continue to invest significant human and financial resources in the
development, marketing and sale of our Solaron® solar inverters. To increase our manufacturing
capacity for our Solaron® solar inverters in order to meet anticipated demand, we expect to
purchase equipment, lease new facilities and make other capital expenditures and commitments. These
additional expenditures and commitments will increase our overhead expenses during a time when our
operations are not fully absorbing current overhead expenses.
We are subject to risks related to holding financial instruments in foreign countries.
A majority of our cash, cash equivalents and marketable securities have historically been held
in accounts in Japan and Germany. During the second quarter of 2009, we transferred to accounts in
the United States approximately $46.2 million in cash from Japan. We are, however, still holding a
substantial amount of cash, cash equivalents and marketable securities in Germany. Repatriation of
such cash is subject to limitations and may be subject to significant taxation. We cannot be
certain that we will be able to repatriate such cash on favorable terms or in a timely manner. If
we continue to incur losses in our operations and need the cash held in these international
accounts, but are unable to repatriate such cash in a timely manner, we may be prevented from
taking advantage of business opportunities that arise or from executing some of our business plans,
either of which could cause our business, financial condition or results of operations to be
materially and adversely affected.
A significant portion of our sales and accounts receivable are concentrated among a few customers.
Our ten largest customers accounted for 53% and 46% of total sales for the three and nine
months ended September 30, 2009, respectively, and 49% of total sales for the three and nine months
ended September 30, 2008, respectively. Applied Materials, Inc.,
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our largest customer, accounted for 18% and 17% of total sales for the three and nine months
ended September 30, 2009, respectively, and 18% and 22% for the three and nine months ended
September 30, 2008, respectively. No other customer accounted for more than 10% of total sales
during these periods. The loss of any of our significant customers, a material reduction in any of
their purchase orders or an inability to collect on significant receivables could significantly
harm our business, financial condition and results of operations.
Funds associated with auction rate securities that we have traditionally held as short-term
investments may not be liquid or readily available.
Our investment securities include auction rate securities (ARS) that are not currently
liquid or readily available to convert to cash. In November 2008, we executed the Put Agreement,
which provides us with the ability to sell our ARS to the financial institution, at our sole
discretion, and obligates the financial institution to purchase such ARS, at par during the period
June 30, 2010 through July 2, 2012. Our ARS holdings to which the Put Agreement relates have a cost
basis of approximately $24.9 million and a fair value of approximately $21.3 million at September
30, 2009. $22.9 million of the par value of ARS are in student loan securities and the remaining
$2.0 million are in municipal securities. Additionally, the Put Agreement had a fair value of $3.3
million at September 30, 2009. The benefits of the Put Agreement are subject to the continued
performance by the financial institution of its obligations under the agreement.
We will not be able to utilize the Put Agreement to liquidate our ARS before June 30, 2010.
Pursuant to the Put Agreement, as of June 2, 2009 we entered into the Credit Line Agreement with
UBS Bank. The Credit Line Agreement provides us with an uncommitted, demand revolving line of
credit (an intended no net cost loan) of approximately $18.7million that is secured by our ARS
that we have pledged as collateral.
The lack of liquidity associated with these investments may require us to borrow against the
no net cost loan or repatriate cash from international locations at a significant cost. In light of
current economic conditions and other factors, we cannot be certain that we will be able to borrow
against these securities or continue to repatriate cash, on favorable terms or if at all. If we are
unable to do so, our available cash may be reduced until some or all of our ARS can be liquidated.
The lack of available cash may prevent us from taking advantage of business opportunities that
arise and may prevent us from executing some of our business plans, either of which could cause our
business, financial condition or results of operations to be materially and adversely affected.
Changes in tax rates, tax liabilities, or utilization of our deferred tax assets could materially
affect our results.
We are subject to taxation in the United States and various other countries. Significant
judgment is required to determine and estimate worldwide tax liabilities. Our future annual and
quarterly tax rates could be affected by numerous factors, including changes in the applicable tax
laws, composition of earnings in countries with differing tax rates or our valuation and
utilization of deferred tax assets and liabilities. Recently, there have been adverse changes in
the business climate and in the markets in which we operate and as a result we have recorded a
valuation allowance against our deferred tax assets of $40.3 million. We must generate a minimum of
$111.6 million of taxable income in the United States and $9.2 million of taxable income in foreign
jurisdictions to utilize our deferred tax assets. However, if we do not anticipate generating that
level of United States taxable income we may have to recognize additional valuation allowances
against our deferred tax assets. In addition, we are subject to regular examination of our income
tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the
likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the
adequacy of our provision for income taxes. Although we believe our tax estimates are reasonable,
there can be no assurance that any final determination will not be materially different from the
treatment reflected in our historical income tax provisions and accruals, which could materially
and adversely affect our results of operations.
Our Chairman of the Board owns a significant percentage of our outstanding common stock, which
could enable him to influence our business and affairs, and future sales of our common stock by our
Chairman of the Board may negatively affect the market price of our common stock.
Douglas S. Schatz, our Chairman of the Board, beneficially owned approximately 18% of our
outstanding common stock as of November 1, 2009. This stockholding gives Mr. Schatz significant
voting power and influence. Depending on the number of shares that abstain or otherwise are not
voted on a particular matter, Mr. Schatz may be able to elect all of the members of our board of
directors and to influence our business affairs for the foreseeable future in a manner with which
our other stockholders may not agree. In addition, the sale of a substantial amount of the shares
beneficially owned by him could negatively affect the market price of our common stock. The trust
through which Mr. Schatz beneficially owns a significant number of shares has entered into a
written trading plan pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, which, as
of November 3, 2009, provided for the sale of up to 1.636,364 shares of common stock if certain
price targets and other conditions are met. On May 8, 2009, the trust entered into a
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series of variable prepaid forward contracts with a securities broker, in order to monetize
1,000,000 shares of common stock of the Company. Upon fulfillment of each of 6 orders under the
variable prepaid forward contracts, the trust received a cash payment equal to approximately 84% of
the market value of the shares subject to such orders and pledged such shares to the securities
broker. Pending settlement of such contracts, between May 11, 2010 and December 13, 2010, the trust
will retain all of its voting rights in respect of the pledged shares.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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
31.1 |
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Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification of the Principal Financial Officer Pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. |
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32.1 |
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Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 |
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Certification of the Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURE
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.
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ADVANCED ENERGY INDUSTRIES, INC.
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Dated: November 9, 2009 |
/s/ Lawrence D. Firestone
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Lawrence D. Firestone |
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Executive Vice President & Chief Financial Officer |
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INDEX TO EXHIBITS
31.1 |
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Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification of the Principal Financial Officer Pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. |
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32.1 |
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Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 |
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Certification of the Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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