Advanced Energy Industries, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unaudited results; comparisons are with Q1 2018 unless stated otherwise. The company designs and sells precision power, measurement and control products and related services. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $140.7 | $195.6 | -28.1% |
| Gross profit / margin | $65.7 / 46.7% | $103.6 / 53.0% | Margin down 6.3 percentage points |
| Operating income / margin | $11.8 / 8.4% | $56.1 / 28.7% | Income down 79.0% |
| Income from continuing operations | $15.4 | $46.4 | -66.8% |
| Net income attributable to Advanced Energy | $15.4 | $46.5 | -66.9% |
| Diluted EPS | $0.40 | $1.16 | -65.5% |
| Operating cash flow | $5.4 | $33.1 | Down $27.7 |
- Sales fell primarily because of the semiconductor capital equipment downturn. Semiconductor-market sales declined 50.4% to $67.5 million; industrial technology sales rose 26.7% to $44.6 million, and global support sales rose 17.3% to $28.6 million.
- Management attributed lower gross margin to reduced operating leverage from lower volume, product mix, and higher freight and customs costs. Q1 2019 included $7.5 million of gross profit from LumaSense, acquired in September 2018; LumaSense contributed $12.0 million in sales and $0.9 million net income.
- Operating expenses increased to $53.9 million from $47.5 million, including $1.7 million in restructuring charges and higher R&D investment and acquired-business costs. R&D was $21.3 million, or 15.1% of sales.
- The income tax provision was a benefit of $2.9 million, versus $9.8 million of tax expense in Q1 2018. The 2019 benefit primarily reflected release of uncertain-tax-position liabilities following additional procedures; the effective tax rate was -22.8% versus 17.4%.
Balance sheet, cash flow and liquidity
- At March 31, 2019, cash and cash equivalents were $351.1 million and marketable securities were $2.5 million. Management reported $353.7 million of cash, cash equivalents and securities; $175.0 million of cash was held outside the United States.
- Total assets were $857.0 million and total liabilities $234.8 million. The company reported no borrowings under its $150.0 million revolving credit facility, which expires July 2022; all covenants were met. The full $150.0 million was available.
- Operating cash flow from continuing operations was $6.9 million; discontinued operations used $1.4 million, yielding total operating cash flow of $5.4 million. Capital expenditures were $2.4 million. Cash and cash equivalents from continuing operations ended the quarter at $351.1 million.
- Operating lease liabilities totaled $36.9 million, including $7.3 million current; adoption of lease accounting in Q1 added right-of-use assets and liabilities. This is not reported as funded debt.
- Backlog was $61.7 million at quarter-end, down from $74.7 million at December 31, 2018. Firm supplier purchase commitments were approximately $99.4 million.
Changes, outlook and risks
- Revenue decreased 28.1% year over year and 8.7% sequentially. The semiconductor slowdown reflected weaker end-market demand, equipment-capacity digestion and customer inventory reductions. Management said the timing, if any, of a return to prior market investment levels was difficult to determine; the filing provides no numerical quarterly or annual guidance.
- Q1 restructuring charges related to manufacturing-footprint optimization and acquisition synergies included costs for excess leased space and inventory. Cumulative restructuring charges through March 31, 2019 were $5.9 million. The company expected to record additional lease assets and liabilities for facilities in Germany and Denver in Q2.
- Key exposures include semiconductor-market cyclicality, customer concentration, tariffs and foreign-exchange movements, supply constraints and inventory commitments. Applied Materials represented 25.8% of Q1 sales and Lam Research 14.0%; the ten largest customers represented 53.2% of sales.
- The company must relocate its Shenzhen manufacturing facility by December 2021 and was evaluating a second Southeast Asian factory. Disruption, execution delays or added transition costs could affect supply and results.
- Legacy inverter operations remain discontinued, but warranty and service obligations continue; the filing identifies customer and supplier claims and litigation risks. Management reported no material developments in legal proceedings during the quarter.
- Management concluded disclosure controls were effective as of March 31, 2019, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether semiconductor demand, customer inventories and backlog recover, and how that affects sales and gross margins.
- Whether the margin decline reflects mainly temporary volume and mix effects or more persistent pricing, freight, customs or competitive pressure.
- Cash conversion and working-capital needs, including the ability to manage $99.4 million of supplier commitments amid uncertain demand.
- Execution, cost and timing of Shenzhen relocation and any Southeast Asia manufacturing expansion.
- Customer concentration, tariff and currency exposure, and the adequacy of legacy inverter warranty reserves and litigation provisions.
- The extent to which Q1 earnings benefited from the one-time uncertain-tax-position release and how future tax rates may differ.