Advanced Energy Industries, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited consolidated results. The company designs, manufactures and services precision power-conversion, measurement and control products for semiconductor, industrial and medical, data-center, and telecom markets.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $389.5 | $175.1 | $1,044.9 | $450.7 |
| Gross profit / margin | $153.8 / 39.5% | $73.5 / 42.0% | $396.3 / 37.9% | $203.4 / 45.1% |
| Operating income | $59.0 | $9.4 | $120.2 | $32.2 |
| Continuing-operations net income | $45.6 | $7.3 | $93.3 | $46.0 |
| Net income attributable to Advanced Energy | $45.6 | $7.6 | $92.8 | $54.7 |
| Diluted EPS, continuing operations | $1.18 | $0.19 | $2.42 | $1.20 |
- Sales and mix: Q3 sales rose 122% year over year; nine-month sales rose 132%. Artesyn, acquired in September 2019, contributed $188.8 million of Q3 sales and $502.5 million year to date, so reported growth is not directly comparable with the prior-year periods. Management reported Q3 organic sales increased $66.5 million year over year.
- Markets: Q3 sales were $167.1 million in semiconductor equipment, $87.0 million in industrial and medical, $87.7 million in data-center computing, and $47.7 million in telecom and networking. Semiconductor demand strengthened; data-center growth reflected hyperscale share gains and demand for cloud services. Industrial and medical organic sales remained affected by COVID-related uncertainty and supply constraints.
- Margins and earnings: Gross margin declined despite substantially higher sales, primarily because Artesyn products carry lower gross margins; higher manufacturing volume efficiencies and other mix and cost improvements partly offset the impact. Q3 operating margin was 15.1%, versus 5.4% a year earlier. Q3 other expense was $6.6 million, compared with $1.4 million of other income in 2019; year-to-date other expense included higher debt-related interest and foreign-exchange losses, while 2019 included a $14.8 million gain on the sale of the central inverter service business.
- Cash flow: Nine-month operating cash flow was $134.4 million, versus $29.2 million in 2019. Investing cash outflow was $27.3 million, compared with $382.5 million, which included the Artesyn acquisition in 2019. Financing cash outflow was $26.2 million, including $13.1 million of debt repayments and $11.6 million of share repurchases. Cash and equivalents increased $82.5 million to $429.0 million.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $431.6 million at September 30. Debt carrying value was $326.3 million (including $17.5 million current); gross term-loan principal was $328.1 million. The $150 million revolving facility was undrawn, and the company reported compliance with its covenants. Current assets were $978.5 million and current liabilities were $336.5 million.
Material changes and notable items
- The Artesyn acquisition materially expanded sales and added data-center, telecom, and embedded-power exposure. Artesyn’s reported contribution, together with lower gross margins in its product mix, is central to interpreting year-over-year growth and profitability.
- Q3 backlog was $281.5 million, compared with $280.1 million at June 30, 2020 and $258.9 million at December 31, 2019. Management said higher throughput helped resolve some COVID-related capacity and supply delays, while demand continued to increase.
- The company incurred $7.9 million of restructuring expense in the first nine months, primarily associated with the Shenzhen facility transition and acquisition-related synergies; cumulative restructuring charges through September 30 were $17.2 million.
- The company repurchased 243,000 shares for $11.6 million in the first nine months and had $38.4 million remaining under its authorization.
Outlook, risks and contingencies
- No specific revenue, earnings or margin guidance is provided in the supplied filing text. Management described Q3 customer demand as strong across markets, but said COVID-19, geopolitical conditions, supply-chain availability and customer investment levels make future demand difficult to assess.
- COVID-19 had caused facility shutdowns or reduced capacity, supply constraints and added costs. Management said the pandemic had not materially affected liquidity, capital access or covenant compliance through the period, but its future effect on operations, results and cash generation remained uncertain.
- Management expects some COVID-related costs to continue. The company also identified risks from trade restrictions and tariffs, customer and end-market cyclicality, customer concentration, integration and synergy execution, and reliance on limited-source suppliers and specialized manufacturing sites.
- The company was notified that it must relocate its Shenzhen manufacturing facility by December 2021. It is investing in a Penang, Malaysia facility to mitigate continuity and regional risks; achieving full production capacity may take time.
- Firm supplier purchase commitments were approximately $178.1 million. The company disclosed ongoing ordinary-course disputes and legacy inverter warranty/litigation exposure, with no material developments in legal proceedings during the period.
Key facts for investors to verify
- Separate organic performance from Artesyn’s acquired revenue, and assess whether the acquired business’s lower-margin mix continues to weigh on gross margin.
- Track semiconductor, hyperscale data-center and telecom demand, including whether the Q3 backlog and customer demand persist.
- Monitor COVID-related supply, production and cost effects, and the Shenzhen relocation and Malaysia capacity ramp against the December 2021 relocation requirement.
- Review debt repayment, interest-rate swap coverage, covenant compliance and cash generation; $277.6 million of term debt was covered by swaps at a stated total rate of 1.271% at September 30.
- Assess customer concentration: Applied Materials represented 16.9% of Q3 sales, and the ten largest customers accounted for 58.2% of nine-month sales.