Court, market pound AEI with one-two punch

FORT COLLINS — Advanced Energy Industries Inc., beaten up by Wall Street since the beginning of the year, has also taken a punch in federal court.
A jury in the U.S. Federal District Court in Delaware ruled against Advanced Energy July 23 in a patent-infringement case. Barring a successful appeal, the decision could cost the company an undetermined amount of cash.
The patent decision came shortly after the company?s stock took a two-day free fall of 30 percent on July 21 and July 22. Investors had punished Advanced Energy because its sales and earnings for the second quarter, while improved over 2003, fell short of projections. It was the second straight quarterly report in which the company missed its targets.
In its latest quarter, Advanced Energy reported $108.9 million in revenues and a $4.5 million profit, a strong turnaround from its $62.9 million in sales and $5.8 million loss the year before. Still, the profit figures were roughly half of analyst expectations.
Between Jan. 1 and July 27, Advanced Energy stock fell 65 percent from $26.70 to $9.35. The stock inched back to $9.88 by July 30.
Meanwhile, the patent ruling is the second time in three years that Advanced Energy was slapped for infringement against Massachusetts-based rival MKS Instruments. In 2002, MKS Instruments received $4.2 million in damages from the Fort Collins company for patent infringement.
In the wake of the July 23 jury ruling, MKS said it would seek damages in a later court proceeding. While Advanced Energy continues to dispute the ruling, the company has not declared if it will appeal the verdict.
?We continue to believe we have an incredibly strong case,? said Cathy Kawakami, director of investor relations for Advanced Energy. ?That?s why we are looking at some options that are available to us.?
She declined to explain the options under consideration.
Both infringement cases stem from patents that cover a version of reactive-gas generators, an instrument that separates gases used in semiconductor processing.
After the first infringement case, Advanced Energy came back with a new product that it believed was outside the scope of the MKS patent.
?We claim our technology does not infringe (on MKS) underneath the umbrella of patent protection,? Kawakami said.
In the first case, the judge ?gave us a very narrow definition of what was patent-protected. We felt we had a strong understanding of what areas the patent covered, so in our next-generation version of this product, we took that into consideration.?
If Advanced Energy can?t continue to make the product in question, it won?t amount to a significant loss of sales. The company was in the early stages of marketing the product generator.
?It was not a product that was well-entrenched in the marketplace,? Kawakami said. ?It was not a material contributor to our financial performance.?
Meanwhile, Advanced Energy is also in the early stages of a patent-infringement case against MKS. However, Kawakami declined to elaborate on the case.
Mark FitzGerald, an analyst who covers Advanced Energy for Banc of America Securities, agreed that the latest infringement ruling shouldn?t have a serious impact on Advanced Energy.
?These patent things tend to go back and forth,? he said. ?In the grand scheme of things, it should force them to come up with a design around, which might be a little more expensive.?
Asked if the decision could scare off customers from Advanced Energy, FitzGerald said, ?Not at all. (Semiconductor equipment) customers want a couple of sources. (Advanced Energy) and MKS are two of the leading sources of power supplies.?
FitzGerald placed more concern on Advanced Energy?s recent inability to meet sales and revenue projections, and suggested that company management has made strategic errors in recent years.
For instance, Advanced Energy?s decision to open a manufacturing plant in China was an effort to save production costs. Still, the company continues to produce similar products in the United States while it irons out supply and customer issues in China, a fact that has saddled the company with extra costs, FitzGerald said.
He explained that certain customers have still not ?qualified? the China plant, which makes it necessary for Advanced Energy to keep more production in the United States than it had expected.
?It shows you the problems that can occur when a small company located in Fort Collins, Colorado, is trying to go global with a strategy like this,? FitzGerald said.
In its latest earnings report, Advanced Energy officials acknowledged the problem of higher-than-expected operating costs, which increased 4 percent over the previous year. The company said transition issues in China are improving.
FitzGerald said the company would have been better off to keep its operations in North America, but added, ?It?s so far down the road, there?s no backing away from it at this point. But how quickly can they get it up and running and mitigate the problem??
The analyst also contended that Advanced Energy?s effort at diversification, through the acquisition of other companies, has ?proven to be a mistake.?
FitzGerald had words of encouragement for Advanced Energy ? ?Product-wise, it?s a well-positioned company,? he said. Also, large institutional investors are taking a close look at the company?s stock because of its potential as a value at less than $10 per share.
On the other hand, the company needs to correct its sullied image on Wall Street, FitzGerald said.
?They were insistent on the conference call they would put some of the issues behind them by the end of the year,? he said. ?But their credibility is pretty low because of the performance in the last two quarters.?

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