Advanced Energy retools for rebound

FORT COLLINS — On Sept. 20, shares of Advanced Energy Industries Inc. (Nasdaq: AEIS) closed at $8.60, marking the lowest price the Fort Collins-based company has traded at since October 1998.

AE makes components used in the semiconductor manufacturing process. Its customers include the manufacturers of semiconductors that are used in computers, data storage devices and flat-panel displays.

As a result, the company’s recent fortunes — a string of negative quarters, sagging stock value — have been subject to a deep slump in demand.

“This is the worst down cycle in the history of the industry,´ said Michael El-Hillow, chief financial officer for AE. “It’s deeper than it’s been in the past, but it also follows the biggest up-cycle in industry history.”

During that record upswing in 2000, AE traded as high as $73.25, and over the years its share price has ridden the roller-coaster ride that defines this cyclical industry.

“Many would say this cycle has hit bottom,” El-Hillow said.

But the Semiconductor Equipment and Materials International organization reported that book-to-bill ratios have decreased slightly since May and industry experts have pushed estimates for a rebound back to late 2003 at the earliest.

“Visibility is still extremely limited,” El-Hillow said.

And as a company that sells technology used by semiconductor manufacturers, AE’s performance generally lags six to nine months behind the chip makers.

Unable to control industry demand or the stock market, AE isn’t sitting idle. The company is taking steps to fortify its market share to emerge even stronger when the long-awaited rebound occurs.

The company is optimistic as quarter-to-quarter figures show a decrease in losses — from a 27-cent loss per share in the first quarter 2002 to a 16-cent per share loss in the second quarter — and 2002 revenues improved 58 percent quarter over quarter.

Part of the company’s strategy is to acquire companies that are “either industry leaders or offer new and disruptive technologies to the industry,” El-Hillow said.

For example, the January 2001 purchase of Longmont-based EMCO secured a new mass flow controller technology. The EMCO product will allow AE to capture market share from competitors, El-Hillow said. And this past January, AE purchased Aera Japan Ltd., described as a worldwide leader in mass flow controllers.

With the acquisitions and steady investment in research and development, AE has expanded its product depth, now providing power, mass flow, plasma source and thermal controllers.

Now it’s preparing to tie the technologies together to provide more complete control products to its customers.

“We try to maintain spending at the right level whether we’re in an up cycle or down cycle. But one area of spending we always try to maintain at a consistent level is research and development,” El-Hillow said.

AE plans to have its new subsystem ready for review next year and ready to penetrate the market in 2004, El-Hillow said.

Alex Paris Sr., an analyst with Barrington Research in Chicago, said that investment in the semiconductor industry is roughly 50-50, with half the investment coming from capital spending in new technology and the other in new capacity.

Even though chip companies have cleared inventory, Paris said, the industry is still waiting for demand to pick up and maintain a higher level, so new capacity sales just aren’t happening.

However, a new technology that is pushing its way into the industry may help.

The 300-millimeter wafer allows chip makers to make about 21/2 more chips per silicon wafer than the standard 250-millimeter wafer, creating better economies of scale.

“If you don’t have the equipment to make 300-millimeter wafers, you’re going to have to invest some money,” Paris said.

While Paris agrees that visibility is limited and the entire industry is depressed, he believes many of AE’s strategies for the downturn will help it to emerge when the time comes.

“I don’t think anything negative is going on within the company itself,” he said. “If anything, they’re preparing to come out stronger.”

Because the company has grown from a power-control supplier to include temperature control and flow management, Paris said, it has expanded its market base.

“You can’t make semiconductors without their product,” he said, “and they’re pretty much the leader in all their niches.”

With nearly $200 million in cash, Paris said the company’s balance sheet is in good shape, but AE has to “stop the bleeding,” by bringing costs in line with its moderate sales. With third-quarter revenues expected to be in the $68 million to $70 million range, Paris said he anticipates that AE could be back in the black early next year.

So with AE’s share price nudging the $10 mark, now might be a good time to get in.

“It’s what I call a desert-island stock,” Paris said. “If you were going to be on a desert island for a while, and you couldn’t look at the stock for a few years, that’s the stock to buy. At some point it’s going to turn up.”

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