Advanced Energy Industries Inc (AEIS) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to Advanced Energy second quarter 2010 conference call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions). Thank you. I will now turn the call over to Annie Leschin, who will begin the conference.

Thank you, Operator, and good morning, everyone. Thank you for joining us this morning on our second quarter 2010 earnings conference call. With me is Hans Betz, Chief Executive Officer, and Larry Firestone, Executive Vice President and CFO. Both of them will present prepared remarks. By now you should have received a copy of the earnings press release that was issued last night. We also issued a press release last night announcing the divestiture of our flow business last evening. For a copy of either of these, please visit our website at www.advanced-energy.com or contact us at 970-407-4670.

Let me begin by saying during the quarter, Advanced Energy Industries will be participating in the Pacific Crest Growth Conference in Vail, Colorado on August 9, the Deutsche Bank 2010 Technology Conference in San Francisco, held September 14-16, and the Think Equity Growth Conference in New York, held September 15 and16.We'll make additional announcements as other events occur.

I would like to remind everyone except for historical financial information contained herein, the matters discussed contain forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Statements that include the term believe, express, plan, objective, estimate, anticipate, intend, target or the like should be viewed as forward-looking and therefore uncertain. Such risks and uncertainties include but not limited to the volatility and the cyclicality of the industries we serve, the timing of orders received from our customers, and unanticipated changes in estimates reserved for allowances. These and other risks are described in Form 10-K and 10-Q and other reports filed with the SEC.

In addition, we assume no obligation to update the information that we provide you during this conference call, including the third quarter guidance provided during this call and in our press release dated today. Guidance will not be updated after today's call until our next scheduled quarterly financial (inaudible). I would now like to turn the call over to Hans Betz, CEO of Advanced Energy.

Good morning everyone, and thank you for joining us. This is a very exciting time at Advanced Energy. We are seeing the results of our strategic efforts as the acquisition, divestiture and product line extension lie perfectly with improvement of market conditions. We took two very significant strategic steps in the second quarter with the addition of PV Powered and yesterday's announced divestiture of our Aera mass flow controller business.

First laid out in 2005, our long-term vision of establishing AE as the premier supply of power conversion devices has taken a giant leap forward this quarter. The combination of these transitions has set the stage for AE to drive significant growth in all of its existing markets as well as new markets and even more focused on power conversion. Advanced Energy is currently the market leader in power conversion for (defense) and the markets that we serve.

Now, in combination with PV Powered, we host the number two market position in the fast growing US inverter markets. Based on the momentum we are seeing in the inverter pipelines for the second half of 2010, the lead position is definitely within reach. Actually, in 2011 our goal is to become number one in the three-phase US inverter markets and to continue to increase our market position in Europe and other geographies as we expand our footprint throughout the globe. We have taken the first step toward this goal with our first acquisition in several years, PV Powered. That acquisition was accretive in the first quarter of combined operations.

We also expanding to take advantage of several regional opportunities in various markets. In the inverter market we see Ontario, Canada as an area of opportunity with its healthy turf. We have already incorporated a Canadian subsidiary in Canada and will be working with a contract manufacturer to position to satisfy the local content requirements to serve the Ontario markets. We also opening a sales and service office in Singapore to support our OEM key customers that have announced factory relocations to Singapore. As our business for Solaron is beyond our current capacity as we anticipate shipping at levels above 130 Solarons per quarter for the second half of the year, we are extending our Solaron factory to capacity in Fort Collins, Colorado by adding a second shift. In Korea, we have expanded our sales and service operations to include manufacturing to serve the market locally for Korean OEMs and end users, to satisfy local content requirements in Korea.

In addition to the strategic initiatives I just mentioned, I'm extremely pleased to announce the results of another outstanding quarter financially at Advanced Energy. We exceeded our top line guidance and met high end of our earnings guidance. Including our flow business and two months of PV Powered acquisition, we received quarterly bookings of $154 million and revenues of $115.2 million, and net income doubled to $13.6 million or $0.31 per diluted share. We ended the quarter with $128.9 million in cash and investments, reflecting the reduction of $35 million related to cash at closing for the PV Powered acquisition. We improved financial performance across the board including gross margin, profitability, and cash flow from operations in face strong growth.

Our guidance is in record territory as well even after excluding revenues from the flow business. Let me begin by providing a quick overview of yesterday's announcement of the divestiture of our flow business and then I will move on to the discussion of our second quarter results.

We have entered into an agreement to sell our mass flow control business and related product lines to Hitachi Metals Limited, a leading high-technology materials manufacturer, for $44 million in cash, with an adjustment is the purchase price based on the inventory levels at closing which we expect to occur in the third quarter. Hitachi Metals currently manufactures mass flow controllers and sells them to the semiconductor and other industries, making the Aera product lines complementary. This is an excellent strategic fit. Advanced Energy will support Hitachi in the manufacturing and profits during a transition period up to 18 months to ensure no interruptions apply to our customers. We have service agreements in place and even though the revenue costs an expensive related to this product line, referring to the discontinued operations section of our income statement, AE will be compensated for its efforts.

We are working together to ensure a seamless transition to our mass flow control business customers worldwide. Hitachi will also leverage our service infrastructure going forward. AE will provide free support services for them in countries where they do not have presence. This arrangement will ensure that all of our customers are supported long-term, the flow products and brands continue to remain the highest quality product in the industry. Hitachi has committed to retain the majority of our workforce related to the mass flow control product line and will acquire all of the assets related to the business including our own building in Hachioji, Japan. This is an excellent fit and Hitachi is the right partner to take this business to the next level.

Let me now move on to our end markets, which for discussion purposes will include our flow business. All of our end markets showed strong growth this quarter. In particular semiconductors continue to be strong for the fourth consecutive quarter. Non-semiconductor thin film markets enjoyed the widespread recovery in the equipment industry as well. Our combined inverter business grew substantially, as we shipped several units to Europe with the first ones up and running successfully on the grid. Revenue for the semiconductor market continued to climb this quarter moving closer to our prior peaks of 2006 and 2007. The industry witnessed a shift from operating at full throttle to a drastically (inaudible) over the last several quarters, more balanced and sustainable growth this quarter, accommodating a certain level of inventory replenishment.

Overall, the industry sentiment on the semiconductor markets remain positive and healthy for the second half of 2010 and into 2011. The foundation for this sentiment is the strong demand for DUM and the ramping following it, typically we have seen coupled with growth as the industry continues to build capacity to satisfy the consumer electronic market that shows strong signs of continued growth. These market drivers are an indication for more growth in industry capex than the current 50% year over year projections in 2010, and point to continued growth in 2011 even with fewer semiconductor manufactures building (inaudible). From our perspective, customers are more confident than they were just a few quarters ago when they were ordering at an incredibly brisk pace. They were tracking immediate delivery with virtually no inventory on hand.

Today, customers continue to closely manage their business, operating on a order by order basis without the long-term forecast that we have operated with in the past. With this limited visibility, we are employing the necessary precautions to react quickly if any of our markets change their tone. Having begun the quarter with low inventory levels this quarter, we began to see a portion of orders going towards filling the longer-placed inventories for just in time items. While material shortages still exist for some components, the industry is beginning to make progress restocking its shelves, driving a trend to shorter lead times and revenue in (inaudible) quarters. Advanced Energy has semiconductor revenue to reflect all of these trends driven by strong orders from tier 1 and 2 OEM customers.

Moving on to solar inverters. The highlight of this quarter was the closing of PV Powered acquisition in early May. With just two months of combined operation, PV Powered contributed over $10 million to AE's total inverter sales, with approximately 70% of the commercial market. The acquisition was accretive to the bottom line and further solidifies Advanced Energy's presence in North American markets. We have begun joint marketing of the broad product line and the two teams are working tremendously well together. This is an excellent combination of two of the most highly reliable product lines together in a financially strong company with a strong service network.

The market for three-phase inverters picked up from the seasonal low in the first quarter and remained strong, especially in Europe but we're just beginning to make head way. The growing US inverter market continues to be our focus, as we penetrate new accounts and secure this business from existing customers. We shipped over $14 million in inverters and are targeting to more than double that for the third quarter, driven in part by shipments to Europe, as the 500E is beginning to be installed on the grid in larger numbers.

Although we are gaining more traction in Europe, some orders experienced shipping delays in the quarter, which were the result of some projects being pushed out due to panel shortages. Nonetheless, we see strong growth in inverters and with the Canadian expansion ready to ship in the fourth quarter. We are poised to capture market share in the Ontario market. In addition we signed an agreement with Chinese contract manufacturer that currently serves renewable energy markets to add to our capacity in China to satisfy the demand for China and greater Asian markets for our high power inverters.

The order backlog again reached record levels at $30.4(?) million, up from $4 million at the end of the first quarter, the vast majority will ship by the end of the year. In addition we have over $8 million in letters of intent, all of which points an extremely strong second half of the year. In the fourth quarter, when we add Canadian sales, service, and manufacturing capacity for our full product line, our growth will accelerate as we head into 2011. We believe that the PV Powered team is on track to earn additional proceeds related to the earnout as the momentum is very strong for the second half of the year.

In the second quarter we saw record shipments level of solar panel equipment to customers who are investing in crystalline silicon in this quarter. This activity was from one of our larger OEM customers in solar equipment market as well as a growing number of Chinese customers. Sales for (inaudible) silicon production were also strong in the quarter, driven mostly by the Chinese market. The availability of panels in the broader market continues to be an issue as many manufacturers are sold out of panels, as reflected in our inverter business where some installation experienced delays. We expect investments in crystalline silicon and various (inaudible) applications to continue to grow in the second half of the year.

In the flat panel display market, the investment cycle is building. Momentum from the first quarter continued into the second with revenues growing 57% sequentially. This activity was largely driven by (inaudible) and the aggressive investments of the Korean flat panel manufacturers as well as the market adoption of flat panels by Chinese consumers, the migration of new technology such as LED back lighting and 3-D televisions. OEMs in Korea are also gaining share in the equipment arena and have branched out to sell tools into the rest of Asia. From an east vantage point, we have been the clear market leader in PVD, and our strategy to expand our footprint to include flat panel is playing out with the Korean OEMs, leaving us poised for the additional growth as the investment side continues.

Finally, let me move on to service. After only two years of consolidation of semiconductor factories, with some shutting down, others being decommissioned, et cetera, the markets for services are building deck. Revenue is strong but has yet to return to peak levels from a few years ago. We believe that we are now in a stabilized period where the driving force is replacement parts and inventory restocking.

Industry wide service is running 10% less than at the last peak in the industry. Among the factors that are causing this is the 300mm capacity that was taken offline in 2008 and 2009 during the downturn. Revenues, however, remain healthy, driven by high factory utilization rates and increasing availability of components for repair and replacement parts.

The outlook for our service business in the second half of 2010 continues to be strong and should grow as we add OEM contracts for the solar arrays. Our investments in the service business will expand our focus on largely semiconductor only repair-based business to one with a variety of service offerings from other non-semiconductor areas. Where the majority of our service business is now repairs, we are developing other products such as refurbishment, support, renewable energy products such as SiteGuard, which offers preventive maintenance. These new service markets may take some time to grow before they become significant but we believe they represent a growing opportunity for us.

In closing, results of the second quarter of 2010 demonstrated an optimum combination of strong markets with exceptional execution and the fulfillment of our strategy to inorganic opportunities. After a tremendously strong quarter across our thin film business with every market increasing, as well as the growth in our order revenues and backlog, we see new and much higher peak levels in the near future for advanced energy.

The current environment for capital equipment remains incredibly healthy for the second half, though some markets may moderate in any given quarter. The overall growth trend will be complemented by a strong ramp in the much less volatile inverter business which is more of a consumption business than our traditional thin film OEM-driven market. The inverter business is showing signs of becoming as large or even larger than the semiconductor business has been, which would balance out our revenue stream and lead to strong growth and long-term financial performance.

I would like to take a moment to thank the entire energy team world wide for their hard work, dedication and strong commitment to our customer needs before excellent delivery performance in a ramp that began earnest in Q3 of 2009 and stressed every part of the business. Now I would like to turn over the call to Larry Firestone our CFO to provide details on our operating results.

Thank you, Hans. And thank you all for joining us on our second quarter earnings call. I would like to cover several topics today.

Along with the financial results for the second quarter, I'm going to discuss the reporting of our financials as it relates to the sale of our Aera mass flow controller business. In conjunction with earnings press release today, we are pleased to announce the pending sale of our Aera mass flow controller business to Hitachi Metals Ltd. While our financials in the press release exclude the flow business, we have provided a reconciliation table in the press release presenting the revenue, cost and expenses of the Aera mass flow control business for the first two quarters of 2010. With the exception of select financial metrics in which we call out our flow business, the results we discuss will exclude the adjustments for the divestiture.

For clarification purposes, the financial information provided on the Aera mass flow controller business is in accordance with discontinued operations accounting and only includes those costs related to specific items or resources that are discrete to the business and will be eliminated upon closing. Even though the divestiture transaction has not yet been completed, now that the definitive agreement has been signed, the assets related to the flow business are held for sale and consequently, any operations related to those assets will be considered discontinued, and all the revenue costs and expenses will be reported on a net basis and discontinued operations below net income from continuing operations line on the income statement.

Now for the second quarter financial results. As Hans discussed, we had a sequence of many extremely positive events and strategies take hold this quarter. The same holds true in our financial results. We posted new records which drove our strong results, and we continued to raise the bar for future quarters. Excluding the flow business, total second quarter revenues grew 43.7% over the first quarter to $101 million from $69.7 million.

Given the economic weakness in the same period last year, revenues rose considerably year over year at 214%. This reflects the strength of the semiconductor and other non-semi thin film markets and the inverter business. This resulted in tremendous leverage in our financial model as we achieved our gross margin and profitability targets and met the consensus EPS even after the sale of the flow business.

Turning to our end markets, sales to the semiconductor market increased 9.9% to $53.5 million on a gross basis which includes $9.6 million of flow business and represented 46.4% of sales during the quarter. Solaron revenues nearly doubled from the first quarter, with PV Powered contributing more than $10 million with just two months of operating results, pushing inverter revenues to $14.4 million for the quarter representing 12.5% of revenue. We booked over 200 Solarons in the quarter compared to 58 in the first quarter, and the combined backlog for AE and for PV Powered inverters at the end of June was $34 million. The majority of this backlog will ship in 2010, and the outlook for the third quarter is that inverter sales will exceed $30 million. Our increased factory capacity in Fort Collins will be on-line the end of July which will total one gigawatt at Advanced Energy, and we anticipate added capacity in Canada will be ready to ship prior to the fourth quarter.

Sales in the solar panel and glass markets more than doubled to $15.6 million or 13.5% of sales in the quarter including $1.2 million of flow. We seek continued growth in this market throughout 2010. Flat panel sales were up 56.5% to $7.2 million including $1.4 million of flow or 6.2% of sales during the quarter. Advanced Energy's flat panel display business will continue to grow over the course of this investment cycle.

As expected sales to the data storage and industrial market up a strong 78.4% to $13.2 million or 11.5% of sales. These results included $2.2 million of business from our flow product and currently seeing demand for magnetic and optical stores products which are partially driven by Blu-Ray, and we are anticipating growth in this market through the remainder of 2010. Our service business was relatively flat this quarter at $11.4 million versus $11.5 million in the first quarter. Allocation of raw material was less of a concern this quarter and this allowed us to reduce the backlog built up in late 2009 and early 2010.

Our record second quarter booking of $154.3 million included $15.3 million for the flow business, and that was an increase of 60% compared to $96.7 million in the first quarter. The book to bill ratio for the total business continues strong at 1.34 to 1 compared to 1.19 to 1, reflecting the ongoing strength of revenue and our sales pipeline. Excluding the $15.3 million in bookings and the $15.1 million related to the flow business, our book to bill was 1.38 to 1. Ending backlog continues to grow and was up 52% sequentially to a record $123.6 million including $14.4 million for the flow business. Gross profit for the quarter increased 52.6% sequentially to $44.6 million, leading to 260 basis point increase in gross margin to 44.5% from 41.9% last quarter. Gross margin benefited from the leverage from the increase in sales and factory absorption. R&D increased to $13.5 million. However as a percent of sales, it was down 13.5% compared to $11.1 million or 16% of sales in first quarter.

The increase in absolute dollars was attributable to the additional head count and spending associated to two months PV Powered operational results as well as engineering materials for continued product development programs. SG&A increased to $17.2 million from $12.2 million last quarter, and declined as a percent of sales to 17.2% from 17.5% in the prior quarter. The increase in absolute dollars was partially driven by expenses associated with the newly acquired PV Powered acquisition. Incentive compensation accelerated by $800,000 with the growth in revenue, and the amortization of intangibles related to PV Powered acquisition was approximately $767,000 for the quarter and will continue at that rate.

As we discussed last quarter we anticipate the annualized effective tax rate of 22% for 2010. In the second quarter we recorded a 19.5% tax rate to offset the 27% effective rate that was recorded in the first quarter putting us in line with our annualized expectations of 22% for the remainder of the year.

After strong profitability last quarter we were pleased to report our total income more than doubled sequentially to $13.6 million or $0.31 per diluted shares. This compares to $6.2 million, or $0.15 per diluted share, in the first quarter and a net loss of $16 million, or $0.38 per share, in the same period a year ago. Head count at the end of the second quarter was 1597 compared to 1474 employees at the end of the first quarter, and the majority was a result of the head count associated with the acquisition of PV Powered.

We also continued to leverage our workforce as we only added a small number of workers in Shenzhen China to increase capacity and deliver over $20 million in incremental revenues over the first quarter to meet the current demand from our customers. We entered the second quarter with cash and cash equivalents of $128.9 million, and the $34.5 million decrease in cash was due to our $35 million payment for PV Powered which closed on May 3, 2010. We are happy to report we sold our auction rate securities at the end of the quarter and repatriated approximately $42 million cash from our German subsidiary. At quarter end, over $100 million of our cash was in US.

Accounts receivable increased $14.1 million to $75.2 million compared to $61.9 million as a result of higher revenues. However we were able to maintain consistent cash flow from our largest customers and DSOs improved to 62 days from 64 last quarter. Total net inventory grew 44.2% to $54.5 million from $37.8 million in the first quarter and net inventory turns were 3.8 times. As demand is expected to increase even more sharply in the third and fourth quarters and where certain areas of supply chain being constrained, we increased our inventory in order to meet our customers' very tight delivery expectations.

Stock option expense for the quarter was $1.9 million and capital expenditures were $2.4 million, and fixed asset depreciation was $1.9 million and our intangible amortization, including intangibles related to flow and newly added amortization of PV Powered was $0.9 million for the second quarter. Our guidance for Advanced Energy in the third quarter, excluding the flow business, is as follows -- revenues will be between $130 million and $140 million. Gross margins will be in the range of 43% to 45% and EPS in the range of $0.36 to $0.44 per diluted share on 44 million shares.

And that concludes our prepared remarks for the day. Operator, I would like to open up the call to questions.

(Operator Instructions) Our first question from the line of Bill Ong from Merriman. Your line is open.

Good morning. Congratulations on a solid quarter.

Thanks, Bill.

In the US inverter market, What state also be driving your growth in the second half and what states can you expect to be the larger opportunity in 2011?

So as far as growth is concerned, the main driver for the inverter business is of course, US. But we are having strong orders out of Europe as well.

I'm actually concerned about what particular states are driving the near-term growth -- I know that California is obviously one of the states but perhaps you can give me more color within the individual states?

It is hard for me to say at this point. What we see is of course California, which is well known for being the most aggressive. We see something in New Jersey now, in particular to PV Powered.

We don't have that granularity to give that perspective for you.

That's fair. I realize revenue levels are small and base numbers but what type of sustainable growth rates can be expected in the inverter business as well as the solar thin film renewables going forward?

On the inverter business, the market CAGRs that we are looking at on the utility side -- and these are overall CAGRs -- are in the 85% range so they are pretty huge. In the commercial side, the CAGRs are in the 40 and 50% range. So we are seeing and actually, we are pretty fortunate especially with the timing of the PV Powered acquisition is we are hitting market in the US with a complete suite of products at a time the US market is growing very fast. As far as forecasting or giving you a number on sustainable growth rates, I point you back to the CAGRs on the overall market expectation.

Okay. Thank you so much. Nice job, gentlemen.

Thanks.

The next question from the line of Colin Rusch from ThinkEquity. Your line is open.

Thank you so much for taking the question. Can you break out solar capital equipment sales for us, a specific number of bookings for the quarter?

We don't break out the bookings that way. I think we broke out the revenue numbers for you on the call. You're talking about the solar panel revenues?

Just the capital equipment. I think it was lumped in with some of the other numbers or was it that the number you quoted was all solar?

For glass and solar?

Yes.

The glass part was $1.6 million and the solar part was $14 million.

Perfect. Thanks, guys. And as you move more into the power management, are you expecting to integrate low voltage ride through reactive power, any voltage for large capability into large-scale inverters?

Yes, yes. It's on our road map and I think that's important for the next generation of inverter or things, because one of the key elements and one of the driving forces for the next generation is how to stabilize the grids. And in order to do that you have to exactly do what you mentioned.

And when do you think the products might hit the market? Is that a 12-month program or is it more of a 24-36 month type of program?

No, it's a 12-month.

Excellent. And in the small inverters, we are seeing a movement afoot to adjust UL 1741 and IEEE 1547 standards -- are you guys involved in those efforts? And what are you expecting in terms of seeing those adjustments?

At this point in time I cannot answer this question.

Okay, great. And one final one from me -- in terms of the geographic breakdown in Europe, do you guys have a sense where the inverters are ending up? Are you selling direct into the Czech Republic or any of the eastern European countries or are we looking at Germany and Italy right now?

In order to give you a color for that, not the exact number, I think the bulk goes into Czech Republic and we have strong orders out of Germany as well. We are not yet Italy.

Perfect. Thanks a lot, guys, and congratulations.

Thank you.

The next question from the line of Edwin Mok from Needham & Company. Your line is now open.

First of all, I have a question on your divestiture. Just curious, two things. One is logistically, do you expect to get the deal done within this quarter, the third quarter of 2010? And second thing is how do you come to the $44 million price?

Yes. We will close the deal in this quarter. And because of fact there's no problem on the HSR close, we expect that there are no major hiccups for not to close in this quarter. The $44 million price tag, a new negotiation.

We did it, we worked with -- we mentioned in the press release we worked with Savion and worked up a valuation on the business and arrived at that with Hitachi Metals.

That's fair. And besides MFC product, you have thermal instrumentation and other pressure products you sell in the market, are you focusing more on power conversion now, any thought about the product lines? Would that be on the market? How do we think about that?

Of course. We have just the thermal instrumentation. We don't have any kind of pressure sensors. So thermal is a small very self standing independent business which serves the semiconductor key customers. And in this point of time we have no intention and no plans to sell it off.

I see. Great. And Larry, just a quick question on opex. If I take your guidance which says that opex will increase to $37 million range, I wonder how much of that is amortization and intangibles and the rate we should expect going beyond the September quarter?

Yes, the amortization is $900,000 and that's the level we should expect going forward.

And overall level?

Overall opex will be in the $37 million range, and that will be a sustainable level for us as well since we've combined PV Powered into the overall mix.

And a question on your guidance of $130 million to $140 million, strong guidance and congratulations on that. If I take your comment on the inverter which, as you said, over $30 million in revenue in the third quarter, you still have probably an incremental $15 million to $20 million from other business line. Wondering if you can put some color into where you think is driving this growth. Is it semi? I know that solar equipment grew sequentially last quarter -- or any color will be helpful. Thank you.

Really across the board. We see it in semi, flat panel, renewables, which is glass and solar, and also on the industrial side.

Great. That's all I have. Thank you.

All righty.

Your next question comes from the line of Jim Covello from Goldman Sachs. Your line is open.

Good morning, this is Kate Kotlarsky for Jim Covello. A quick question on your lead times. I was wondering if you have seen any meaningful changes on the lead times, particularly in the (inaudible) front. I know you mentioned capacity constraints you are now facing, and so I was hoping if you could give us a little bit color on that.

The solar on lead times in the 10-12 week range. PV power lead times in the 4-6 week lead time range. Hasn't been a big shift in that.

As far as the capacity constraints are concerned, we have enough measures put in place in order to cope with that. And it's going to happen in Q3 and Q4, but the reaction to that is in place.

And I know you mentioned your plan on expanding capacity in Fort Collins -- can you help us quantify how much capacity will expand there?

We are doubling the capacity in fort Collins from 130 Solarons per quarter up to 260 as we see shipping beyond 130 in Q3.

Okay. That's very helpful and the last question, Larry, do you have an update on the target level, given all of the moving parts, with PV Powered and the divestiture of the mass flow controller business?

The target model is staying the same and we think we're heading to achieve it right now. As you mentioned we have moving parts and we are going to let the business settle down and then we'll take a look at it going forward.

Okay. Thank you.

Your next question from Krish Sankar from Bank of America Merrill Lynch. Your line is open.

Good morning. This is Paul Thomas for Krish Sankar. I want to confirm, just on the semi side, that you said that it sounds like tailwind that we've been getting from inventory restocking you consider that to be pretty much over and now expect the semi business to move pretty much along the shipment growth that we see from the OEMs.

Yes, that's true. But what we see so far the inventory has not been replenished totally. Because what we see is that they are starting to replenish the inventory. On the other side because of the situation in the semiconductor market which is mainly driven by the fact that that being announced cannot be billed at this point in time because of shortage of lithography, we see and we expect the semiconductor growth by bringing new factories on-line next year is continuing to grow through 2011.

Okay. Maybe not completely done but a little les less of the tailwind than it's been in the past.

Correct.

Okay. And then on the PV Powered side, you guys had a little more than $10 million in the quarter or so just doing the straight math, you get the low end of $40 million to $50 million range you talked about in the past. Are you comfortable saying that you think you'll be higher than that low end for the year or still in the range?

I think we see some similar pattern -- as we see in our Solaron business, the second half is dramatically stronger. So from that vantage point, I think we expect at least that they fulfill their business plan. It may even come to the point that they exceed that.

Okay. That's all I got. Thank you.

Thank you.

Your next question from the line of Timothy Arcuri from Citi. Your line is open.

Hi, a couple things. Larry, as I look at the semiconductor revenue, it's a little bit light relative to the last peak. If you look at the customer shipments, they are all shipping close to the prior peak and you're still 30% below. I'm sort of wondering whether there's something going on in the semi business for the entire component supply chain or if there are some customer specifics going on there.

Our prior peak was $60 million in the quarter. We are running about 10% off peak right now for Q2. So I'm expecting that to grow. Of course, the numbers will get adjusted in Q3 as we remove the flow business. We are running close to peak in semi right now.

I guess based on your former disclosure I had something more in the mid 70s but we can talk about that. What was the flow business at last peak?

I don't have that number off the top of my head. I'd have to dig that one out for you.

Got it. And clearly sounds like the inverter business as we move into December probably moderates a little bit because you have a slug coming in, in Q3. I'm wondering -- I know you don't want to give guidance that far out, but how do we think about the moderation of the inverter business as we head into December? What portion of the September revenues maybe is the result of pushout from June because folks couldn't get product?

Yes, we actually see strong growth through the end of the year in the inverter business. I don't think we're seeing much moderation at all in the second half of this year.

So you think December revenues in the inverter business will be up?

Yes.

Great. Thanks.

Your next question comes from the line of C.J. Muse from Barclays Capital. Your line is open.

Hello?

Yes, go ahead.

Yes, first question -- how do you expect your percentage of semi product revenues and portfolio to change over time given your outlook for the inverter business? In other words, how should we think about your gross margin?

As I stated in my written script, I think what we see in terms of growth in the inverter business, we would assume within the next two years we have a business of the inverter side which is equally or bigger than the semiconductor has been. So therefore I think what we expect is a very clear balance between semi and non-semi business.

And what the gross margin looks like in that change of mix?

The gross margins in the inverter business right now are similar to semi but growing. So as the business grows, we'll see the additional inverter revenues being accretive to gross margin.

As we discussed earlier they are becoming more and more functionality into the inverter, and therefore, we expect a higher growth margin with these new functionalities.

That's helpful. And then trying to baseline your core semi business ex-MFC, what was MFC in 2009 to get through rate growth here in 2010?

I don't have that. I'll have to get back to you on that one, C.J.

Okay. And lastly, can you just highlight the timing of your decision to sell MFC today, what drove your thinking there?

We looked, we engaged an investment banker this year and looked at marketing the business and seeing what was out there. And then we found the right partner, a great partner and one that is going to take care of the business and grow it and also take care of the customers. So we've got momentum around that once we got engaged.

Sounds good. Thank you.

All right.

Your next question from the line of Neil Wagner from Stephens. Your line is open.

Hey guys, this is Neil. Thanks for taking my questions. Larry, it sounds like gross margins for PV Powered were a little bit better than you were expecting in the second quarter. What drove that performance? And secondly, what's the timeline to getting PV Powered up to the corporate inverter gross margin average? And what is the some of the leverage you think you can pull to get there?

They did really well with the concentration of commercial versus residential. Seventy percent of what they delivered was commercial. That mix drove higher gross margin for us in the quarter. So outstanding performance from the team. From the standpoint of gross margin leverage and where are we going to go combined company -- right now we're running PV Powered as an independent subsidiary while they get to the earn-out period. But there's really nice, I'd say significant, opportunities in the material costs as we combine and integrate PV Powered as we get into 2011. There's opportunity for print circuit boards and other components to really drive the costs down. I would say gross margin increased in a meaningful way is more than a 2011 story than it is immediate.

Okay. And what were gross margins in the quarter? Can you tell us that?

We didn't break that out for you guys.

And Hans, one last question. You mentioned delays in shipment in the second quarter in the inverter business due to lack of panel availability. What was the impact in the quarter and do you expect that trend to continue in the second half of the year?

It has a good side of the coin and the bad side. Good side it drives, of course, a business into the panel and equipment for building the panel primarily in China and I think capacity will catch up until the end of the year, so we do not expect major delays going forward.

Okay. Thanks, guys.

Your next question from the line of Weston Twigg from Pacific Crest Securities.

Hi. Just a couple of quick questions. The inverters that you have letters of intent for, $84 million, is that all shippable by the end of the year?

It's $8 million.

Oh, $8 million. A difference.

And letters of intent, Wes, they need to close into purchase orders before they can head out the door, so we are building to order right now. Just characterizing that in our order pipeline. They'll need to turn in the hard orders before we can move on.

Okay. The one megawatt inverter, the Solaron product, you have new timing on that?

Yes, the story is probably in the second half of 2011. And I think the reason that it's being delayed is twofold. First, we have seen other opportunities in order to get into the European business which we put a higher priority on. And the second point is we don't see at this point in time not that much immediate need for one megawatt. And one megawatt will be much more important if we see the installation goes into the 10 megawatt plus or 20 megawatt plus.

That's helpful and one more question on the Canadian inverter operations -- do you have any projection much revenue that will contribute beginning next year?

It's hard. What we can see is round about 1.5 gigawatt which was announced for Ontario. Because there are some incumbents there already, so this is combined with the growth in the Ontario market in general but at the same time market share gain. It is always hard to make a prediction when we gain the market share and therefore, when we have a certain revenue stream out of that.

Okay. Thank you.

(Operator Instructions) Your next question from Edwin Mok from Needham & Company.

Thanks for taking my follow-up. Larry, you have previously said that your tax rate next year is expected to be 12% to 15% assuming your revenue at about $500 million. With the sale of the MFC product, does that outlook change?

It may change a little bit as PV Powered is going to be a domestic taxpayer. We will give further guidance on that as we go forward. It probably won't change materially but may change a little bit.

I see. That's fair. And then just quickly on the MFC business, if I look at that business, the $50 million this quarter and also wondering how do we think about that business in the first quarter? Do you expect to have similar growth rate as your semi business or ex-inverter business or a slower growing business?

I'm not sure I understand the question, Ed. Talking about the flow business?

Talking the flow business, yes.

The flow business generically is always coupled with the semi business.

And that's the lion's share our revenues. We gave -- is the question around adjusting your Q1 up to 2010 numbers?

No, what I'm trying to get to is if you didn't sell MFC business, you wouldn't have slower sequential growth versus what you have guided, right?

In the third quarter?

In the third quarter.

Oh, I thought you said first quarter.

I'm sorry.

If we didn't sell it, it would -- yes. If you wanted to do the math, it would run in the third quarter similar to what it was running, probably a little bit north of what it was running in the second quarter.

Great. And then lastly on PV Powered -- you previously guide $40 million to $50 million and you talked about it being dramatically stronger than second half. Is that also -- and then you also made a comment you expect sequential growth in the fourth quarter. PV Powered growth, does that part of the business also have (inaudible) or do you expect Solaron to be bigger driver because Solaron is really big in the third quarter? Do you expect PV Powered to have also sequential growth from the third to the fourth quarter as well?

Let me just clarify, the $40 million to $50 million range that we gave was a post-closing range so that would have been eight-month perspective. We have the first two months under our belt. As far as growth rates go, PV growth profile goes, PV Powered is in the same kind of position that AE is with Solaron. Both addressing the US market, the US commercial market and three-phase market is unfolding and getting a lot of momentum right now. So they're going to have the same growth profile, it's going to be the second half of the year strong as well. And so combined for AE, it's a really strong second half for inventors.

I could probably just squeeze one more in -- one of your competitors yesterday guided for the semi business to be more flat in the third quarter sequentially from the second quarter. Sounds like you believe your business can grow. Is it more function of Powered business having better growth profile or why would there be a difference there?

If you look at the situation of the Powered business, it has a different profile, that's one point. And the other point is, it depends always on the mix of the equipment shipped by our OEM customers, because nobody is on all of these systems. So depending on the mix, what is being shipped, it may shift back and forth a bit.

Great. That's all I have. Thank you.

Thank you.

Your next question from the line of Timothy Arcuri from Citi. Your line is open.

Larry, just a last question from me. If I try to fit the guidance and if I normalize for the inclusion of Aera in June but the exclusion in the guidance, you have to come up something like $35 million to $40 million worth of incremental revenue quarter over quarter. And you sort of indicated that maybe $20 million of that comes from PV Powered or the inverter business. I'm wondering of the other $15 million to $20 million, is that more on the semi side or where is that going to come from?

What we said is we think the inverter business is going to be at least $30 million in Q3. That's certainly going to be a strong contributor. And then the rest of it is spread. We talked about semi being a growth component, flat panel display, glass, and solar and then also the industrial products. They are all really targeted for some pretty good growth in Q3.

All right. So not any one slug up that is going to be up that $20 million -- it is sprinkled through the other businesses.

Yes.

Got it. .

And no further questions at this time. I turn the call back over to Mr. Larry Firestone for any closing remarks.

Thank you, Operator, and thank you for everyone for joining. It was certainly an exciting quarter and look forward to seeing you at all of our future events. Thank you.

This concludes today's conference call. You may now disconnect.