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| AEIS > SEC Filings for AEIS > Form 10-K on 27-Feb-2009 | All Recent SEC Filings |
27-Feb-2009
Annual Report
In 2008, there were adverse changes in the overall business climate which
caused deterioration in the markets in which we operate and as a result our
revenues have declined substantially.
Our analysis presented below is organized to provide the information we
believe will be instructive for understanding the relevant trends going forward.
However, this discussion should be read in conjunction with our consolidated
financial statements in Item 8 of this report, including the notes thereto.
Results of Operations
The following table sets forth, for the periods indicated, certain data
derived from our Consolidated Statements of Operations:
Years Ended December 31,
2008 2007 2006
(In thousands)
Sales $ 328,918 $ 384,699 $ 410,742
Gross profit 124,782 162,809 175,218
Operating expenses:
Research and development 54,952 50,393 44,848
Selling, general and administrative 52,273 62,179 61,062
Amortization of intangible assets 946 1,010 1,808
Restructuring charges 3,487 3,287 111
Total operating expenses 111,658 116,869 107,829
Income from operations 13,124 45,940 67,389
Other income, net 2,883 4,810 4,677
Income from continuing operations before income taxes 16,007 50,750 72,066
Provision (benefit) for income taxes 17,786 16,389 (15,118 )
Income (loss) from continuing operations (1,779 ) 34,361 87,184
Income from discontinued operations, net of tax - - 1,138
Net income (loss) $ (1,779 ) $ 34,361 $ 88,322
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The following table sets forth, for the periods indicated, the percentage of revenues represented by certain items reflected in our Statements of Operations:
Years Ended December 31,
2008 2007 2006
Sales 100.0 % 100.0 % 100.0 %
Gross profit 37.9 42.3 42.7
Operating expenses:
Research and development 16.7 13.1 10.9
Selling, general and administrative 15.9 16.2 14.9
Amortization of intangible assets 0.3 0.3 0.5
Restructuring charges 1.0 0.8 0.0
Total operating expenses 33.9 30.4 26.3
Income from operations 4.0 11.9 16.4
Other income, net 0.9 1.3 1.1
Income from continuing operations before income taxes 4.9 13.2 17.5
Provision (benefit) for income taxes 5.4 4.3 (3.7 )
Income (loss) from continuing operations (0.5 ) 8.9 21.2
Income from discontinued operations, net of tax - - 0.3
Net income (loss) (0.5) % 8.9 % 21.5 %
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SALES
The following tables summarize annual net sales, and percentages of net
sales, by customer type for each of the years ended 2008, 2007 and 2006:
Years Ended December 31, Increase/(Decrease) Percentage Change
2008 2007 2006 2008 v 2007 2007 v 2006 2008 v 2007 2007 v 2006
(In thousands) (In thousands)
Semiconductor capital
equipment $ 170,535 $ 262,740 $ 283,470 $ (92,205 ) $ (20,730 ) (35.1 )% (7.3 )%
Non-semiconductor
equipment 158,383 121,959 127,272 36,424 (5,313 ) 29.9 (4.2 )
Total Sales $ 328,918 $ 384,699 $ 410,742 $ (55,781 ) $ (26,043 ) (14.5 )% (6.3 )%
Years Ended December 31,
2008 2007 2006
Semiconductor capital equipment 52 % 68 % 69 %
Non-semiconductor equipment 48 % 32 % 31 %
100 % 100 % 100 %
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We provide product and services to a diverse range of markets and geographic
regions with semiconductor capital equipment being our largest market, while
sales to the solar market grew to become our second largest market during 2008.
Total sales decreased by $55.8 million, or 14.5%, in 2008 compared to 2007 and
by $26.0 million, or 6.3%, in 2007 as compared to 2006, primarily as a result of
a weakened demand in the semiconductor capital equipment market. Sales to the
semiconductor capital equipment market decreased by $92.2 million, or 35.1%, in
2008 as compared to 2007 and by $20.7 million, or 7.3%, in 2007 as compared to
2006.
Applied Materials Inc., our largest customer, accounted for $69.3 million, or
21%, of our sales in 2008, as compared to $111.6 million, or 29%, of our sales
in 2007 and $123.2 million, or 30%, in 2006. Our sales to Applied Materials
include sales for the semiconductor capital equipment market, as well as the
solar and flat panel display markets.
Sales to customers in the non-semiconductor markets accounted for 48% in
2008, 32% in 2007 and 31% in 2006. This shift in the balance of our business
partially offset the decline in the semiconductor capital equipment market. The
markets that comprise our non semiconductor 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 (OEM's) for new
equipment.
The solar market was our fastest growing market in 2008 and 2007. Overall,
product sales to customers in the solar market, which is included in
non-semiconductor revenue above, comprised 17% in 2008, 7% in 2007 and 2% in
2006. Our investments in capacity for solar panel production lines have driven
this growth in revenue. Our products are used in leading thin-film solar cell
production technologies, such as polysilicon, copper indium gallium selenide
(CIGS), copper indium selenide (CIS) and cadmium telluride. Sales of our
Solaron® solar inverter are included in sales to the solar market.
Although we experienced growth in our non-semiconductor business in 2008,
demand for our products is driven by requirements for capacity expansion in each
of the markets we serve. We expect near term weakness in 2009 from the softness
in the global economy that may impact our customers expansion plans, coupled
with difficulties in obtaining capital and deteriorating market conditions which
may lead to the inability of our customers to obtain financing, resulting in a
reduction of our sales to the non-semiconductor markets. We do, however,
anticipate a continued shift in our business towards our non-semiconductor
markets as we continue to invest in new technology and products for the solar
market.
GROSS PROFIT
Our gross profit was $124.8, or 37.9% in 2008, $162.8 million, or 42.3% in
2007, and $175.2 million, or 42.7% in 2006. The decrease in our gross profit, in
both absolute dollars and as a percentage of revenue, in 2008 as compared to
2007 was primarily attributable to the decrease in revenue in the semiconductor
capital equipment market which impacted utilization and additional costs
incurred in transitioning additional manufacturing from the United States to
Shenzhen, China as well as a decrease in the value of the US dollar, which
resulted in increased material costs from our key European and Japanese
suppliers.
Additionally, as a result of the weakening global economy, current market
conditions and changing customer demand, we reviewed our end of life product and
inventory strategies and our excess and obsolete inventory reserve policies. We
determined that the uncertain market conditions negatively affected the
longer-term demand for our parts and components on hand. This change in estimate
resulted in an approximately $4.0 million increase to our reserve for excess and
obsolete inventory, therefore increasing cost of goods sold and decreasing gross
profit.
The decrease in our gross profit, in both absolute dollars and as a
percentage of revenue, in 2007 as compared to 2006 was primarily attributable to
lower revenue which impacted utilization as well as the cost incurred for the
transition of manufacturing from Stolberg, Germany to Shenzhen, China and an
additional charge of $2.2 million related to a change in estimates of warranty
expenses for two products.
OPERATING EXPENSES
The following table summarizes our operating expenses as a percentage of
sales for the years ended 2008, 2007 and 2006:
Years Ended December 31,
2008 2007 2006
(In thousands)
Research and development $ 54,952 16.7 % $ 50,393 13.1 % $ 44,848 10.9 %
Selling, general and administrative 52,273 15.9 % 62,179 16.2 % 61,062 14.9 %
Amortization of intangible assets 946 0.3 % 1,010 0.3 % 1,808 0.5 %
Restructuring charges 3,487 1.0 % 3,287 0.8 % 111 0.0 %
Total operating expenses $ 111,658 $ 116,869 $ 107,829
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RESEARCH AND DEVELOPMENT
The market for our products is characterized by ongoing technological
changes. We believe that continued and timely development of new, highly
differentiated products and enhancements to our existing products in support of
customer requirements is necessary for us to maintain a competitive position in
the markets we serve. Accordingly, we continue to devote a significant portion
of our personnel and financial resources to research and development projects
and seek to maintain close relationships with our customers and other industry
leaders in order to remain responsive to their current and future product
requirements. We believe that the continued investment in research and
development and ongoing development of new products are essential to the
expansion of our markets, and expect to continue to make significant investments
in research and development activities. All of our research and development
costs have been expensed as incurred.
Research and development costs were $55.0 million, or 16.7% of sales, in
2008, $50.4 million, or 13.1% of sales, in 2007 and $44.8 million, or 10.9% of
sales, in 2006. The increase in both periods is a result of increases in
compensation and material expenses related to the development of new platforms
and the costs associated with the sustaining engineering of existing platforms.
Research and development costs have supported business growth opportunities,
including the development and release of several new power conversion platforms
including Paramount®, an advanced RF power supply, and Solaron®, our
transformerless photovoltaic (PV) inverter.
We expect to continue these investments in order to deliver an expanded
product suite to many of the markets we currently serve.
SELLING, GENERAL AND ADMINISTRATIVE
Our selling expenses support domestic and international sales and marketing
activities that include personnel, trade shows, advertising, third-party sales
representative commissions, and other selling and marketing activities. Our
general and administrative expenses support our worldwide corporate, legal, tax,
financial, governance, administrative, information systems and human resource
functions in addition to our general management.
Selling, general and administrative costs were $52.3 million, or 15.9% of
sales, in 2008, $62.2 million, or 16.2% of sales, in 2007 and $61.1 million, or
14.9% of sales, in 2006.
The decrease in selling, general and administrative costs in 2008 as compared
to 2007 was a result of the reductions of personnel and related costs aimed at
reducing administrative burden and increasing efficiencies. We have also
implemented cost reductions in all discretionary spending areas, such as travel,
trade shows and professional fees. Additionally, third party sales compensation
to independent sales representatives was lower due to a decrease in overall
sales revenue.
As part of our cost reduction efforts in 2008 related to general and
administrative expenses, we continue to consolidate worldwide accounting
processing functions in a shared services center in Shenzhen, China.
The increase in selling, general and administrative costs in 2007 as compared
to 2006 was driven by increased fees related to audit and legal services as well
as compensation expense, offset by decreases in insurance expense, property tax
expense and depreciation.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets was $0.9 million in 2008, $1.0 million in
2007 and $1.8 million in 2006. This amortization is related to the value of
non-technology-related assets, such as contracts and non-compete agreements, and
were acquired in connection with previously completed acquisitions.
RESTRUCTURING CHARGES
Restructuring costs are related to actions we took primarily in response to
downturns in the semiconductor capital equipment industry. These costs were
incurred to exit an activity or cancel an existing contractual obligation,
including the closure of facilities and employee termination related charges.
During 2008, we recognized restructuring costs of $3.5 million, of which
$3.2 million was associated with global cost reduction plans implemented at
various times throughout the year made through job elimination. The remaining
$0.3 million of restructuring charges recognized in 2008 was a result of a plan
to transition the production of a number of our legacy products from our
manufacturing facility in Fort Collins, Colorado to our manufacturing facility
in Shenzhen, China. This activity in 2008 led to the elimination of
approximately 140 positions on a worldwide basis.
In 2007, we closed our operation in Stolberg, Germany. Related to this
closure, we recorded restructuring charges of $3.3 million, consisting primarily
of impairment on real and personal property and employee severance and benefit
costs associated with the reduction of employees at the facility.
OTHER INCOME (EXPENSE)
Other income (expense) consists primarily of interest income and expense,
foreign exchange gains and losses and other miscellaneous gains, losses, income
and expense items.
Other income was $2.9 million in 2008, $4.8 million in 2007 and $4.7 million
in 2006. The decrease of $1.9 million in 2008 as compared to 2007 was primarily
driven by a $1.4 million decrease in interest income and a net $0.5 million loss
related to the valuation of our auction rate securities and Put Agreement. The
decrease related to interest income was a result of lower interest rate
opportunities being offered in the financial markets and a decrease in our
invested funds due to a $49.8 million buyback of the Company's stock.
The increase of $0.1 million in 2007 as compared to 2006 was driven by a
$2.6 million increase in interest income, which resulted from higher interest
rates on short-term securities as well as an improved cash position of
investable cash over the comparable period. This increase was offset by a
$2.5 million increase in foreign exchange loss. These losses were attributable
to an increase in realized and unrealized foreign currency transaction losses,
primarily related to the Japanese yen, Korean won and the euro strengthening
relative to the US dollar.
PROVISION FOR INCOME TAXES
We account for income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes." SFAS No. 109 requires deferred tax assets and liabilities to be
recognized for temporary differences between the tax basis and financial
reporting basis of assets and liabilities, computed at the enacted tax rates for
the periods in which the assets or liabilities will be realized, as well as for
the expected tax benefit of net operating loss and tax credit carryforwards.
Prior to December 31, 2006, management could not conclude that it was more
likely than not that these net deferred tax assets would be realized.
Based on our 2005 and 2006 operating results, our management, in accordance
with SFAS No. 109, evaluated the recoverability of our net deferred tax assets
and concluded that it was more likely than not that the majority of net deferred
tax assets would be realized, resulting in a reduction in the valuation
allowance of $39.3 million during the year ended December 31, 2006. 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 U.S. deferred tax
assets were not recoverable under the more likely than not criteria in SFAS 109.
As such, an increase to the valuation allowance of $18.0 million dollars was
recorded during the year ended December 31, 2008. The ultimate realization of
these deferred tax assets is dependent upon the generation of
approximately $45.3 million of future taxable income in the U.S., 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.
The income tax expense of $17.8 million in 2008 represents an effective tax
rate on income from continuing operations of 111.1%. The income tax expense of
$16.4 million in 2007 represents an effective tax rate on income from continuing
operations of 32.3%. The income tax benefit of $15.1 million in 2006 represents
an effective tax rate on income from continuing operations of 21.0%.
The increase in the effective tax rate in 2008 as compared to 2007 resulted
primarily from the recording of the additional valuation allowance discussed
above and a change in the profitability mix between the U.S. and our global
subsidiaries, whereby more income was generated at our lower income tax
subsidiaries during 2008 than in the comparable period. The negative rate in
2006 includes the impact of the reversal of the valuation allowance discussed
above.
DISCONTINUED OPERATIONS
Income from discontinued operations was $1.1 million in 2006 from the release
of funds held in escrow relating to the EMCO product line sold in 2005.
GOODWILL IMPAIRMENT
We experienced a cyclical slowdown in demand during fiscal 2008 that has
continued into the first quarter of 2009. As a result, our market capitalization
has declined below the levels of our carrying value of the Company. As of
February 18, 2009, our market capitalization was below our carrying value and
our goodwill may be impaired. We expect to proceed with step two of the goodwill
impairment analysis during the first quarter of 2009, which may result in an
impairment charge of up to $66.2 million in 2009.
QUARTERLY RESULTS OF OPERATIONS
The following tables present unaudited quarterly results in dollars and as a
percentage of sales for each of the eight quarters in the period ended
December 31, 2008. We believe that all necessary adjustments have been included
in the amounts stated below to present fairly such quarterly information. Due to
the volatility of the industries in which our customers operate, the operating
results for any quarter are not necessarily indicative of results for any
subsequent period.
Quarter Ended
Dec. 31, Sept. 30, Jun. 30, Mar. 31, Dec. 31, Sept. 30, Jun. 30, Mar. 31,
2008 2008 2008 2008 2007 2007 2007 2007
(In thousands, except per share data)
Sales $ 67,525 $ 84,510 $ 87,996 $ 88,887 $ 83,836 $ 90,491 $ 103,049 $ 107,323
Gross Profit 18,397 35,261 35,276 35,848 32,819 36,726 44,955 48,309
Restructuring 1,898 522 393 674 (219 ) 556 158 2,792
Income (loss) from
operations (6,695 ) 5,498 6,940 7,381 4,235 7,495 16,270 17,940
Net income (loss) $ (18,977 ) $ 5,369 $ 5,863 $ 5,966 $ 4,167 $ 5,856 $ 11,667 $ 12,671
Diluted earnings
per share $ (0.45 ) $ 0.13 $ 0.14 $ 0.13 $ 0.09 $ 0.13 $ 0.25 $ 0.28
Quarter Ended
Dec. 31, Sept. 30, Jun. 30, Mar. 31, Dec. 31, Sept. 30, Jun. 30, Mar. 31,
2008 2008 2008 2008 2007 2007 2007 2007
Percentage of Sales:
Sales 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Gross Profit 27.2 % 41.7 % 40.1 % 40.3 % 39.1 % 40.6 % 43.6 % 45.0 %
Restructuring 2.8 % 0.6 % 0.4 % 0.8 % -0.3 % 0.6 % 0.2 % 2.6 %
Income (loss) from
operations -9.9 % 6.5 % 7.9 % 8.3 % 5.1 % 8.3 % 15.8 % 16.7 %
Net income (loss) -28.1 % 6.4 % 6.7 % 6.7 % 5.0 % 6.5 % 11.3 % 11.8 %
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Impact of Inflation
In recent years, inflation has not had a significant impact on our
operations. However, we continuously monitor operating price increases,
particularly in connection with the supply of component parts used in our
manufacturing process. To the extent permitted by competition, we pass increased
costs on to our customers by increasing sales prices over time. Sales price
increases, however, were not significant in any of the years presented herein.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations,"
("SFAS 141(R)") as part of a joint project with the International Accounting
Standards Board. SFAS 141(R) provides for several significant changes to
existing accounting practices
for business combinations. Most notably, (i) acquisition-related transaction
costs, such as legal and professional fees, shall be expensed rather than
accounted for as part of the acquisition cost; (ii) acquired in-process research
and development shall be capitalized rather than expensed at the acquisition
date; and (iii) contingent consideration shall be recorded at fair value at the
acquisition date rather than the points in time that payment becomes probable.
SFAS 141(R) applies to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. The adoption of SFAS 141(R) will likely impact our
results of operations and financial position to the extent that we make
acquisitions subsequent to December 31, 2008.
We adopted the provisions of SFAS No. 157, "Fair Value Measurements" ("SFAS
157") on January 1, 2008. SFAS 157 defines fair value, establishes a
market-based framework or hierarchy for measuring fair value, and expands
disclosures about fair value measurements. SFAS 157 is applicable whenever
another accounting pronouncement requires or permits assets and liabilities to
be measured at fair value. SFAS 157 does not expand or require any new fair
value measures; however the application of this statement may change current
practice. In February 2008, the FASB decided that an entity need not apply this
standard to nonfinancial assets and liabilities that are recognized or disclosed
at fair value in the financial statements on a nonrecurring basis until 2009.
. . .
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