Advanced Energy Industries, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited. The company designs and supplies precision power conversion, measurement, and control products and related services for semiconductor, industrial and medical, data center computing, and telecom and networking markets.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $361.3 million | $339.9 million | $712.9 million | $655.3 million |
| Gross profit / margin | $135.0 million / 37.4% | $130.3 million / 38.3% | $272.5 million / 38.2% | $242.5 million / 37.0% |
| Operating income / margin | $41.1 million / 11.4% | $35.5 million / 10.4% | $85.3 million / 12.0% | $61.3 million / 9.4% |
| Net income attributable to Advanced Energy | $35.4 million | $29.1 million | $74.1 million | $47.2 million |
| Diluted EPS, continuing operations | $0.92 | $0.76 | $1.91 | $1.24 |
- Q2 sales rose 6.3%; first-half sales increased 8.8%. First-half continuing-operations net income increased to $73.9 million from $47.7 million.
- Q2 gross margin declined year over year as supply shortages, COVID-related capacity restrictions in Malaysia, freight, and procurement costs reduced productivity; favorable sales mix partly offset the pressure. First-half margin improved, reflecting higher volume and mix, partly offset by costs and inefficiencies.
- Q2 operating expenses were $94.0 million, slightly below the prior year; lower restructuring costs were partly offset by higher R&D investment. First-half R&D expense increased to $80.3 million from $70.6 million.
- First-half operating cash flow was $87.7 million, versus $67.0 million in 2020. Inventory growth used $73.2 million of cash, partly offset by an $80.3 million increase in accounts payable. Investing cash outflow was $32.9 million, including $18.7 million for acquisitions and $14.2 million for capital expenditures; financing cash outflow was $26.2 million.
Liquidity, debt, and capital allocation
- At June 30, 2021, cash and cash equivalents were $507.2 million and marketable securities were $2.8 million. Management said liquidity and expected operating cash flows should meet anticipated needs for the next 12 months.
- Debt under the credit agreement was $315.0 million gross, or $313.5 million net of issuance costs; $17.5 million was current. The $150 million revolving facility was undrawn and available. The term loan and revolver mature in September 2024; the company reported compliance with debt covenants.
- About $264.5 million of term-loan principal was covered by interest-rate swaps at a 1.271% total rate; the remaining $50.5 million was variable rate. The balance sheet also included $110.6 million of operating lease liabilities.
- The company paid $7.7 million in dividends and repurchased $6.5 million of stock during the first half. On July 29, the board authorized repurchases of up to $200 million with no time limit. Future dividends remain subject to board approval.
Material changes and operating context
- Sales by market in Q2: Semiconductor Equipment $176.7 million, up 21.5%; Industrial and Medical $83.2 million, up 17.4%; Data Center Computing $69.5 million, down 16.6%; Telecom and Networking $32.0 million, down 20.5%. Semiconductor and Industrial and Medical gains were offset in part by customer digestion in Data Center Computing and lower Telecom and Networking demand.
- Backlog reached $534.7 million at June 30, versus $290.7 million at December 31, 2020. The filing attributes the increase to strong demand and customers ordering further ahead amid longer supply lead times.
- Applied Materials accounted for 20.4% of Q2 sales and 17.0% of receivables at June 30. The ten largest customers represented 57.7% of first-half sales.
- The company acquired TEGAM on June 1 for a preliminary purchase price of $17.2 million, net of cash acquired, adding metrology and calibration instrumentation. It also acquired fiber-optic sensing-related intangible assets in January. Purchase accounting for TEGAM and Versatile Power remained preliminary.
Outlook, risks, and unusual items
- The filing provides no numeric revenue or earnings guidance. Management expects supply-chain constraints to continue through the remainder of 2021, potentially worsening; shortages, longer lead times, higher input and freight costs, and production restrictions may constrain shipments, margins, earnings, and cash generation. Industrial and Medical supply constraints were expected to extend into Q3.
- Management reported strong Q2 demand across served markets. It expected Data Center Computing demand to improve through the remainder of 2021 and semiconductor investment to continue, while noting uncertainty from COVID-19, supply conditions, customer investment cycles, and geopolitics.
- Inventory rose to $296.7 million from $221.3 million at year-end. Management cited longer procurement lead times and supply constraints; forecast uncertainty also creates potential excess-inventory exposure.
- Q2 restructuring expense fell to $0.2 million from $5.8 million a year earlier. First-half effective tax rate was 8.8%, versus 15.1%, primarily reflecting different discrete items and the geographic mix of earnings. Q2 other expense increased to $3.7 million, including a reduction in the Artesyn tax indemnity receivable and the absence of a prior-year insurance recovery.
- Key risks include supply-chain and pandemic disruption, cyclical end markets, manufacturing concentration and the planned Shenzhen-to-Malaysia transition, customer concentration, international and trade-policy exposure, and execution of acquisition integration. The filing reports ordinary-course disputes and litigation but no legal action the company believed would reasonably have a material adverse impact; adverse litigation outcomes could nonetheless be significant.
- Management concluded disclosure controls were effective at June 30, 2021 and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track whether suppliers and manufacturing capacity allow the company to convert its elevated backlog into shipments, revenue, and cash without further margin erosion.
- Monitor inventory, accounts payable, working-capital cash use, freight and component costs, and the timing and cost of the Shenzhen manufacturing transition.
- Assess whether semiconductor and Industrial and Medical growth can offset continued weakness or customer digestion in Data Center Computing and Telecom and Networking.
- Review customer concentration, especially Applied Materials, and the durability of demand from major accounts.
- Confirm acquisition purchase-price allocations and integration outcomes, and evaluate the impact of the expanded repurchase authorization, dividends, debt repayment, and any future acquisitions on liquidity.
- Check subsequent disclosures for developments in supply constraints, COVID-related facility restrictions, legacy inverter claims, and tax or other contingencies.