Advanced Energy Industries, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless otherwise stated.
Business context and results
The company designs, manufactures, sells and supports precision power, measurement and control products. Its markets include semiconductor equipment, industrial technology and related services. Results were pressured by a pronounced downturn in semiconductor equipment demand.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $134.8m | $196.0m | $275.6m | $391.6m |
| Gross profit / margin | $64.1m / 47.6% | $101.2m / 51.6% | $129.9m / 47.1% | $204.9m / 52.3% |
| Operating income / margin | $11.0m / 8.2% | $56.0m / 28.6% | $22.8m / 8.3% | $112.1m / 28.6% |
| Continuing-operations net income | $23.4m | $46.4m | $38.8m | $92.8m |
| Net income attributable to Advanced Energy | $31.7m | $46.4m | $47.1m | $92.8m |
| Diluted EPS, continuing operations | $0.61 | $1.17 | $1.01 | $2.33 |
- Q2 sales fell 31.2% year over year; first-half sales declined 29.6%. Semiconductor equipment sales fell 48.9% in Q2 and 49.6% for the half. Industrial technology sales were down 2.0% in Q2 but up 11.1% for the half; services rose 6.8% and 11.8%, respectively.
- Management attributed weaker gross margin to lower-volume operating deleverage, product mix, and higher freight and customs costs. Backlog was $57.1m at June 30, versus $74.7m at year-end 2018.
- Q2 net income includes $8.3m of after-tax discontinued-operations income. Continuing-operations “other income” included a $14.8m gain on the central inverter service-business sale; these unusual gains make reported net income less representative of recurring operations.
Cash, liquidity and capital
- At June 30, cash and cash equivalents were $359.1m and marketable securities were $0.7m. Total liabilities were $209.7m; the balance sheet reports no funded borrowings. The existing $150m revolving credit facility was fully available, with no amount drawn disclosed, and expires in July 2022.
- For the first half, operating cash flow was $16.4m, including $18.3m from continuing operations and $1.9m used by discontinued operations. Continuing-operations investing cash outflow was $9.9m, including $8.9m of capital expenditures. Operating cash flow was down from $85.5m in the first half of 2018, primarily due to reduced earnings as semiconductor sales weakened.
- The company reported $54.0m of operating lease liabilities and $108.4m of firm supplier purchase commitments. It held $185.0m of cash in banks outside the U.S.
Material changes, outlook and risks
- In May 2019, the company agreed to acquire Artesyn’s Embedded Power business for a base price of $400m, comprising approximately $364m cash and $36m assumed liabilities, subject to adjustments and closing conditions. The transaction had not closed by the filing date. Financing was supported by a non-binding commitment for up to $500m of debt; failure to obtain financing could trigger a $20m reverse break fee.
- The company sold its grid-tied central inverter repair and service operation for $1 and transferred warranty and service obligations. It loaned the buyer $2.8m and made up to an additional $5.25m available subject to conditions. The transaction generated the gains noted above.
- Management described continued weakness in semiconductor investment, particularly memory-related demand, and said timing of a market recovery was difficult to determine. It cited slower flat-panel, consumer-electronics coating and European demand, partly offset by solar strength. No specific numerical revenue or earnings guidance is provided in the filing text.
- Key risks include semiconductor-market cyclicality, tariffs and trade-policy uncertainty, customer concentration (Applied Materials and Lam Research together represented 39.7% of Q2 sales), international and currency exposure, and supply-chain constraints. The Shenzhen manufacturing facility must be relocated by December 2021; disruption or execution delays could affect production and delivery.
- Restructuring charges were $1.8m in Q2 and $3.5m in the first half. The first-half effective tax rate was 0.8%, primarily reflecting release of uncertain-tax-position liabilities; Q2’s rate was 12.0%. Management said disclosure controls were effective as of June 30, 2019, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether semiconductor demand and backlog stabilized or continued to decline after June 30, 2019.
- Closing status, final consideration, financing terms and integration progress for the Artesyn acquisition.
- Cash-flow generation excluding transaction-related gains and the one-time tax benefit, alongside the company’s acquisition funding needs.
- Progress and costs of the Shenzhen relocation, and exposure to tariffs, supplier commitments and concentrated customers.
- Remaining inverter warranty obligations and the collectability and terms of the buyer loan and potential additional advances.