Advanced Energy Industries, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited consolidated results. Advanced Energy designs and supplies precision power conversion, measurement and control products and services. Its September 2019 acquisition of Artesyn Embedded Power significantly expanded its data center, telecom, industrial and medical businesses.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $339.9 million | $134.8 million | $655.3 million | $275.6 million |
| Gross profit / margin | $130.3 million / 38.3% | $64.1 million / 47.6% | $242.5 million / 37.0% | $129.9 million / 47.1% |
| Operating income | $35.5 million | $11.0 million | $61.3 million | $22.8 million |
| Continuing-operations income | $29.3 million | $23.4 million | $47.7 million | $38.8 million |
| Net income | $29.1 million | $31.7 million | $47.2 million | $47.1 million |
| Diluted EPS, continuing operations | $0.76 | $0.61 | $1.24 | $1.01 |
| Diluted EPS, total | $0.76 | $0.82 | $1.23 | $1.22 |
- Reported sales rose 152% in Q2 and 138% in the first half, including Artesyn sales of $159.8 million and $313.7 million, respectively. Organic Q2 sales increased $46.3 million year over year. Semiconductor equipment demand strengthened; industrial and medical organic sales declined.
- Q2 gross margin fell 9.3 percentage points year over year, primarily because Artesyn products have lower gross margins; management cited favorable organic mix and other cost items as partial offsets. COVID-19 reduced Q2 gross profit by an estimated $2.7 million.
- Q2 operating expenses were $94.8 million, including $5.8 million of restructuring costs. First-half operating cash flow was $67.0 million, versus $16.4 million a year earlier; continuing-operations operating cash flow was $67.6 million versus $18.3 million.
- First-half investing cash outflow was $14.5 million, mainly reflecting capital investment; financing cash outflow was $17.4 million, including $7.2 million of share repurchases and $8.8 million of term-loan repayments. Cash increased $34.2 million to $380.6 million.
Liquidity, debt and balance sheet
- At June 30, 2020, cash, cash equivalents and marketable securities totaled $383.4 million. Current assets were $929.7 million and current liabilities $342.9 million.
- Debt carrying value was $330.5 million, including $17.5 million current; gross term-loan principal was $332.5 million. The $150 million revolving facility was undrawn and available, and the company reported covenant compliance. Debt matures in September 2024.
- Interest-rate swaps fixed approximately 85% of term-loan principal at a stated total rate of 1.271% under current credit spreads. Inventory rose to $260.0 million from $230.0 million at year-end 2019.
Material changes, outlook and risks
- Artesyn accounts for much of the reported year-over-year revenue and expense growth; its reported Q2 contribution was $159.8 million of sales and $9.6 million of net income. The acquisition purchase-price allocation remained preliminary.
- Q2 total net income was below prior year despite higher continuing-operations income. The 2019 comparison included a $14.8 million gain on sale of the central inverter service business in other income and $8.3 million of discontinued-operations income.
- Backlog was $280.1 million at quarter-end, up from $258.9 million at December 31, 2019. Management expected COVID-related supply and capacity constraints to continue affecting the third quarter; no specific financial guidance was provided in the filing text.
- COVID-19 caused intermittent facility shutdowns or reduced capacity, disrupted materials availability and required additional health and safety measures. Management said first-half effects had not materially impaired liquidity, capital access, covenant compliance or asset fair values, but future effects remained uncertain.
- Key risks include semiconductor and other end-market cyclicality; supply-chain and manufacturing concentration, including the required Shenzhen facility relocation by December 2021; successful Artesyn integration; trade and export restrictions; customer concentration; and legacy inverter warranty claims and litigation. The ten largest customers represented 59.1% of first-half sales; Applied Materials represented 17.6%.
- Other notable items: the company recorded $6.4 million of first-half restructuring charges, mainly for severance and facility actions; it had approximately $200.3 million in supplier purchase commitments. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much reported growth and future earnings depend on Artesyn, and whether anticipated integration synergies and margins are being achieved.
- Whether semiconductor and hyperscale data center demand, backlog conversion and supply capacity remain strong, while monitoring industrial/medical and telecom demand.
- Whether lower gross margins persist as Artesyn product mix grows, and whether COVID-related costs and restructuring expenses continue.
- Cash conversion, inventory levels, supplier commitments, debt repayment and covenant headroom, including the effect of interest rates and foreign exchange.
- Progress on relocating Shenzhen production by December 2021 and qualifying Malaysia capacity, plus exposure to trade restrictions and legacy inverter claims.