Advanced Energy Industries, Inc. — Q1 2020 Form 10-Q
Reporting period: Unaudited quarter ended March 31, 2020; comparisons are with the three months ended March 31, 2019, unless noted. Advanced Energy designs, manufactures, sells and supports precision power, measurement and control products and related services. It reports one operating segment and sells into semiconductor equipment, industrial and medical, data center computing, and telecom and networking markets. Results include Artesyn Embedded Power, acquired in September 2019.
Key financial results
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Net sales | $315.5 | $140.7 | Up 124.1%; included $153.9 million of Artesyn sales and $20.8 million organic growth, as reported by management |
| Gross profit / margin | $112.2 / 35.6% | $65.7 / 46.7% | Profit increased, but margin declined, primarily reflecting Artesyn’s lower-margin product mix |
| Operating income / margin | $25.8 / 8.2% | $11.8 / 8.4% | Income rose; margin was slightly lower |
| Continuing-operations income, after tax | $18.4 | $15.4 | 2020 effective tax rate was 17.5%, versus a tax benefit and reported rate of (22.8%) in 2019 |
| Net income attributable to Advanced Energy | $18.1 | $15.4 | Includes discontinued-operations losses of $0.3 million and less than $0.1 million, respectively |
| Diluted EPS | $0.47 | $0.40 | Continuing-operations diluted EPS was $0.48 in both periods as reported, reflecting rounding |
| Non-GAAP operating income / margin | $44.4 / 14.1% | $20.4 / 14.5% | Non-GAAP diluted EPS was $0.91 versus $0.58; company-defined measure excluding specified items |
Cash flow, liquidity and capital
- Cash and cash equivalents were $352.5 million at March 31, 2020, compared with $346.4 million at year-end 2019; cash plus marketable securities was approximately $355.0 million.
- Cash provided by operating activities was $28.5 million, compared with $5.4 million in Q1 2019. Continuing-operations operating cash flow was $28.9 million. Capital expenditures were $6.1 million.
- Cash used in investing activities was $7.1 million; cash used in financing activities was $13.8 million, including $7.2 million of share repurchases and $4.4 million of term-loan repayment. Cash increased $6.1 million during the quarter.
- Debt carrying value was $334.8 million, including $17.5 million current; contractual principal was $336.9 million before unamortized issuance costs. The term loan and revolving facility mature September 10, 2024. The full $150 million revolving facility remained available, and the company reported covenant compliance.
- Current assets were $861.2 million and current liabilities $303.8 million. Inventory was $235.3 million, up from $230.0 million at year-end 2019. Operating lease liabilities totaled $113.5 million.
Material changes and business developments
- Sales rose substantially with Artesyn’s contribution and increased semiconductor demand. Semiconductor equipment sales increased 46.1% to $133.6 million. Industrial and medical sales rose 25.7% overall to $62.0 million, but organic sales in that market fell 40.0%, mainly due to a major customer’s product transition and COVID-19 impacts.
- Artesyn contributed $153.9 million of sales and a $1.0 million net loss in Q1 2020. Its acquisition expanded the company into data center computing and telecom and networking, which generated $86.2 million and $33.7 million of sales, respectively, in the quarter.
- Operating expenses increased to $86.4 million from $53.9 million, including $29.0 million attributed to Artesyn; higher research and development, facility costs and professional fees also contributed. Gross margin fell as the acquired product mix carried lower margins.
- Backlog was $300.1 million at March 31, 2020, versus $258.9 million at December 31, 2019. Management attributed the increase to semiconductor and data center demand as well as COVID-related supply and capacity constraints.
Outlook, risks and unusual items
- Outlook: The filing provides no quantified revenue or earnings guidance. Management said supply and capacity constraints were expected to continue into Q2 2020. It cited limited visibility and uncertainty in assessing how long semiconductor demand would persist.
- COVID-19: Manufacturing interruptions, reduced facility capacity, supply availability issues and added safety-related costs occurred in Q1. Management said the pandemic had not materially affected Q1 liquidity, capital access, debt-covenant compliance or asset fair values, but could not determine its future impact on operations, earnings or cash generation.
- Market commentary: Management described near-term data center demand as supported by hyperscale growth and cloud/network needs. Telecom investment was pressured by geopolitical factors, provider consolidation and slower global growth; the company cited 5G as a potential longer-term demand driver.
- Acquisition and integration: Artesyn integration, synergy realization, acquired liabilities and potential impairment of acquired goodwill or intangibles remain risks. The purchase price allocation was still preliminary. The company reported $202.1 million of goodwill and $178.5 million of net intangible assets.
- Other risks: The filing highlights customer concentration (the ten largest customers accounted for 59.2% of sales), sole- and limited-source suppliers, trade restrictions and tariffs, foreign exchange exposure, legacy inverter warranty litigation, and manufacturing concentration. The Shenzhen facility must be relocated by December 2021; a Malaysia facility was being developed as an alternative capacity source.
- Unusual financing item: On April 6 and 7, 2020, after quarter-end, the company entered interest-rate swaps covering $286.3 million, or 85% of the term-loan balance. The swaps provided for an average fixed rate of 0.521% against one-month LIBOR; the stated total rate including the current credit spread was 1.271%.
- Other notable items: The company repurchased 170,000 shares for $7.2 million at an average $42.59 per share and had $42.8 million of repurchase authorization remaining. It also lent the buyer of its former inverter service business an additional $1.0 million in Q1 under a loan agreement; up to a further $2.75 million could be borrowed subject to conditions.
Important facts for investors to verify
- How much of reported growth and future performance is attributable to Artesyn versus organic demand, particularly given the decline in organic industrial and medical sales.
- Whether Q1 backlog converts to revenue, and how COVID-related manufacturing and supplier constraints affect Q2 and subsequent periods.
- Whether Artesyn integration delivers expected synergies and improves margins, and whether its preliminary acquisition accounting or asset valuations change.
- Customer and supplier concentration, including the exposure represented by the largest customers and firm purchase commitments of approximately $202.3 million.
- Debt repayment, covenant headroom, and the effect of the post-quarter interest-rate swaps and LIBOR transition on borrowing costs.
- Progress, cost and continuity risks associated with relocating Shenzhen manufacturing and ramping the Malaysia facility, as well as legacy inverter claims and warranty obligations.