Advanced Energy Industries (Nasdaq: AEIS $13.00) is a leading provider of power conversion technologies. The company manufactures photovoltaic (“PV”) inverters, used to change the direct current (“DC”) power collected by solar arrays into usable alternating current (“AC”) energy. The inverters are deployed for both residential and industrial settings. Advanced Energy also produces thin film deposition power converters primarily used by original equipment manufacturers of semiconductors, flat panel displays and architectural glass. These thin film converters regulate raw energy to provide OEMs with efficient, predictable output for increased precision in their production. The company’s thermal instrumentation line is used to control temperatures during the manufacture of semiconductors and solar panels to optimize yield and performance.
Advanced Energy continues to report strong earnings even with declining government support of solar energy. Year-end 2011 revenue of $516.8 million was up 12.4% from $459.4 million the year before; sales increased 219% from $161.8 million in 2009. The reduction of solar feed-in tariffs (subsidies) in Czech Republic, Germany and Italy could decrease the profitability of investing in those countries. Most of the damage is done to large- and medium-scale installations, though, so Advanced Energy could find a footing in those regions with smaller projects, like rooftop solar farms. The tariff cuts in Germany will hurt the most this year. But supply was beginning to outgrow demand, so smaller companies will begin to fail, or merge with larger companies this year. This could thin the market and provide Advanced Energy with more opportunities in the next year or two. That is, if Advanced Energy can persist in what figures to be a year of flat or slightly declined earnings.
Other countries are now beginning to offer or increase subsidies. Advanced Energy’s inverters were chosen for six projects in Canada by Moose Power. The Ontario Power Authority will purchase electricity at a fixed rate for 20 years. Success in this partnership could lead to further opportunities. Subsidies have also led to more sales in China, India, the United Kingdom and sections of the United States. The company is adding salesmen in the U.S.
Thin film sales protected Advanced Energy in Q1, when solar revenues are typically down. Solar sales dropped 22% sequentially to $45.4 million in first quarter 2012, since winter weather restricts system installation. But quarterly revenues were up 20.9% year-to-year, from $37.6 million in 2010, driven by North American sales. The thin film segment grew 11% sequentially in Q1 to $60.4 million from $54.4 million. However, thin film sales retreated 39.7% from $100.1 million the year prior. Thin film margins slipped owing to a one-time purchase from a supplier which discontinued production on several parts; Advanced Energy made the purchase to bolster inventory. The company has repurchased 4.1 million shares ($44 million) since November, and plans to buy back more through 2012.
Solar manufacturing costs should decrease as the company shifts production to a plant in Shenzhen, China. Inverters were assembled in plants in Washington and Oregon. The new facility is also expected to reduce shipping expenses. The trade-off is the quality of goods of the inverters produced in China. Asian suppliers now provide the bulk of materials used in the inverters, and sales could suffer if customers decide the products are not up to snuff. Cheaper parts might also lead to malfunctions, which would lead to warranty claims against Advanced Energy. So, though manufacturing costs may drop, maintenance expenses could nullify the savings. Operations in China could also be affected by unforeseen changes in economic and/or political policy.
There are many risks. But the reward could be substantial if solar energy begins to seriously compete with traditional energy sources (oil, coal, etc.). For now, Advanced Energy’s inverters are popular, and the company should stay afloat this year because of the thin film unit. The outlook is brighter beyond this year, but it could be a hairy nine months.
Advanced Energy is based in Fort Collins, CO.
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