UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2023 | |
or | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to | |
Commission File Number: 000-26966
(Exact name of registrant as specified in its charter)
Delaware | 84-0846841 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1595 Wynkoop Street, Suite 800, Denver, Colorado | 80202 |
(Address of principal executive offices) | (Zip Code) |
(970) 407-6626
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.001 par value | AEIS | NASDAQ Global Select Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ | Accelerated filer ◻ | Non-accelerated filer ◻ | Smaller reporting company ☐ | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
As of July 31, 2023, there were 37,651,044 shares of the registrant’s common stock, par value $0.001 per share, outstanding.
ADVANCED ENERGY INDUSTRIES, INC.
FORM 10-Q
TABLE OF CONTENTS
ITEM 1. | 3 | |
3 | ||
4 | ||
5 | ||
6 | ||
7 | ||
8 | ||
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 22 |
ITEM 3. | 37 | |
ITEM 4. | 38 | |
ITEM 1. | 39 | |
ITEM 1A. | 39 | |
ITEM 2. | 39 | |
ITEM 3. | 39 | |
ITEM 4. | 39 | |
ITEM 5. | 40 | |
ITEM 6. | 41 | |
42 |
2
PART I FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
ADVANCED ENERGY INDUSTRIES, INC.
Unaudited Consolidated Balance Sheets
(In thousands, except per share amounts)
June 30, | December 31, | |||||
| 2023 |
| 2022 | |||
ASSETS |
|
|
|
| ||
Current assets: |
|
|
|
| ||
Cash and cash equivalents | $ | 455,252 | $ | 458,818 | ||
Accounts and other receivables, net |
| 258,752 |
| 300,683 | ||
Inventories |
| 392,349 |
| 376,012 | ||
Other current assets | 46,850 | 53,001 | ||||
Total current assets |
| 1,153,203 |
| 1,188,514 | ||
Property and equipment, net |
| 159,025 |
| 148,462 | ||
Operating lease right-of-use assets | 93,994 | 100,177 | ||||
Other assets |
| 85,500 |
| 84,056 | ||
Intangible assets, net |
| 175,493 |
| 189,526 | ||
Goodwill |
| 282,692 |
| 281,433 | ||
TOTAL ASSETS | $ | 1,949,907 | $ | 1,992,168 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
| ||||
Current liabilities: |
|
| ||||
Accounts payable | $ | 149,259 | $ | 170,467 | ||
Accrued payroll and employee benefits |
| 59,927 |
| 82,733 | ||
Other accrued expenses |
| 44,190 |
| 76,750 | ||
Customer deposits and other |
| 14,633 |
| 26,322 | ||
Current portion of long-term debt | 20,000 | 20,000 | ||||
Current portion of operating lease liabilities | 15,421 | 16,771 | ||||
Total current liabilities |
| 303,430 |
| 393,043 | ||
Long-term debt, net | 343,516 | 353,262 | ||||
Operating lease liabilities | 87,780 | 94,460 | ||||
Pension benefits | 45,518 | 44,031 | ||||
Other long-term liabilities | 44,384 | 41,105 | ||||
Total liabilities |
| 824,628 |
| 925,901 | ||
Commitments and contingencies (Note 17) |
|
| ||||
Stockholders' equity: |
|
| ||||
Preferred stock, $0.001 par value, 1,000 shares authorized, none issued and outstanding |
|
| ||||
Common stock, $0.001 par value, 70,000 shares authorized; 37,650 and 37,429 issued and at and December 31, 2022, respectively |
| 38 |
| 37 | ||
Additional paid-in capital |
| 147,221 |
| 134,640 | ||
Accumulated other comprehensive income |
| 12,281 |
| 16,320 | ||
Retained earnings |
| 965,739 |
| 915,270 | ||
Total stockholders' equity |
| 1,125,279 |
| 1,066,267 | ||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 1,949,907 | $ | 1,992,168 | ||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
ADVANCED ENERGY INDUSTRIES, INC.
Unaudited Consolidated Statements of Operations
(In thousands, except per share amounts)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2023 | 2022 |
| 2023 |
| 2022 | ||||||
Sales, net | $ | 415,508 | $ | 440,949 | $ | 840,548 | $ | 838,408 | ||||
Cost of sales |
| 268,428 |
| 278,791 |
| 538,357 |
| 531,934 | ||||
Gross profit |
| 147,080 |
| 162,158 |
| 302,191 |
| 306,474 | ||||
Operating expenses: |
|
|
|
| ||||||||
Research and development |
| 51,413 |
| 48,009 |
| 103,023 |
| 91,623 | ||||
Selling, general, and administrative |
| 55,613 |
| 55,022 |
| 110,971 |
| 104,340 | ||||
Amortization of intangible assets |
| 7,075 |
| 6,523 |
| 14,137 |
| 12,032 | ||||
Restructuring |
| 3,154 |
| (161) |
| 4,197 |
| 1,057 | ||||
Total operating expenses |
| 117,255 |
| 109,393 |
| 232,328 |
| 209,052 | ||||
Operating income |
| 29,825 |
| 52,765 |
| 69,863 |
| 97,422 | ||||
Other income (expense), net |
| 2,425 |
| 3,249 |
| 1,875 |
| 2,407 | ||||
Income from continuing operations, before income taxes |
| 32,250 |
| 56,014 |
| 71,738 |
| 99,829 | ||||
Provision for income taxes |
| 4,795 |
| 11,203 |
| 12,531 |
| 18,156 | ||||
Income from continuing operations |
| 27,455 |
| 44,811 |
| 59,207 |
| 81,673 | ||||
Income (loss) from discontinued operations, net of income taxes |
| (315) |
| 180 |
| (1,146) |
| 82 | ||||
Net income | $ | 27,140 | $ | 44,991 | $ | 58,061 | $ | 81,755 | ||||
Income from continuing operations attributable to noncontrolling interest |
| - |
| 21 |
| - |
| 7 | ||||
Net income attributable to Advanced Energy Industries, Inc. | $ | 27,140 | $ | 44,970 | $ | 58,061 | $ | 81,748 | ||||
Basic weighted-average common shares outstanding |
| 37,573 |
| 37,520 |
| 37,524 |
| 37,535 | ||||
Diluted weighted-average common shares outstanding |
| 37,803 |
| 37,710 |
| 37,804 |
| 37,754 | ||||
Earnings per share: |
|
|
|
|
|
| ||||||
Continuing operations: |
|
|
|
|
|
| ||||||
Basic earnings per share | $ | 0.73 | $ | 1.19 | $ | 1.58 | $ | 2.18 | ||||
Diluted earnings per share | $ | 0.73 | $ | 1.19 | $ | 1.57 | $ | 2.16 | ||||
Discontinued operations: |
|
|
|
| ||||||||
Basic loss per share | $ | (0.01) | $ | — | $ | (0.03) | $ | — | ||||
Diluted loss per share | $ | (0.01) | $ | — | $ | (0.03) | $ | — | ||||
Net income: |
|
|
|
| ||||||||
Basic earnings per share | $ | 0.72 | $ | 1.20 | $ | 1.55 | $ | 2.18 | ||||
Diluted earnings per share | $ | 0.72 | $ | 1.19 | $ | 1.54 | $ | 2.17 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
ADVANCED ENERGY INDUSTRIES, INC.
Unaudited Consolidated Statements of Comprehensive Income
(In thousands)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Net income | $ | 27,140 | $ | 44,991 | $ | 58,061 | $ | 81,755 | ||||
Other comprehensive income (loss), net of income taxes |
|
|
|
|
|
|
|
| ||||
Foreign currency translation |
| (1,533) |
| (8,679) |
| (1,729) |
| (12,771) | ||||
Change in fair value of cash flow hedges |
| (201) |
| 2,026 |
| (2,018) |
| 7,939 | ||||
Minimum pension benefit retirement liability |
| (292) |
| 269 |
| (292) |
| 414 | ||||
Comprehensive income | $ | 25,114 | $ | 38,607 | $ | 54,022 | $ | 77,337 | ||||
Comprehensive income attributable to noncontrolling interest |
| — |
| 21 |
| — |
| 7 | ||||
Comprehensive income attributable to Advanced Energy Industries, Inc. | $ | 25,114 | $ | 38,586 | $ | 54,022 | $ | 77,330 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
ADVANCED ENERGY INDUSTRIES, INC.
Unaudited Consolidated Statements of Stockholders' Equity
(In thousands, except per share amounts)
Advanced Energy Industries, Inc. Stockholders' Equity | ||||||||||||||||||||
Common Stock | ||||||||||||||||||||
Accumulated | ||||||||||||||||||||
Additional | Other | Non- | Total | |||||||||||||||||
Paid-in | Comprehensive | Retained | controlling | Stockholders' | ||||||||||||||||
Shares | Amount | Capital | Income (Loss) | Earnings | Interest | Equity | ||||||||||||||
Balances, December 31, 2021 |
| 37,589 | $ | 38 | $ | 115,706 | $ | (1,216) | $ | 756,323 | $ | 645 | $ | 871,496 | ||||||
Stock issued from equity plans | 52 | — | (2,430) | — | — | — | (2,430) | |||||||||||||
Stock-based compensation | — | — | 3,906 | — | — | — | 3,906 | |||||||||||||
Share repurchases | (82) | — | (254) | — | (6,340) | (6,594) | ||||||||||||||
Dividends declared ($0.10 per share) | — | — | — | — | (3,789) | — | (3,789) | |||||||||||||
Other comprehensive income | — | — | — | 1,966 | — | — | 1,966 | |||||||||||||
Net income (loss) | — | — | — | — | 36,778 | (14) | 36,764 | |||||||||||||
Balances, March 31, 2022 | 37,559 | 38 | 116,928 | 750 | 782,972 | 631 | 901,319 | |||||||||||||
Stock issued from equity plans | 63 | — | 763 | — | — | — |
| 763 | ||||||||||||
Stock-based compensation | — | — | 5,016 | — | — | — |
| 5,016 | ||||||||||||
Share repurchases | (230) | (1) | (725) | — | (16,293) | — | (17,019) | |||||||||||||
Dividends declared ($0.10 per share) | — | — | — | — | (3,806) | (3,806) | ||||||||||||||
Other comprehensive loss | — | — | — | (6,384) | — | — |
| (6,384) | ||||||||||||
Net income | — | — | — | — | 44,970 | 21 |
| 44,991 | ||||||||||||
Balances, June 30, 2022 | 37,392 | $ | 37 | $ | 121,982 | $ | (5,634) | $ | 807,843 | $ | 652 | $ | 924,880 | |||||||
Balances, December 31, 2022 | 37,429 | $ | 37 | $ | 134,640 | $ | 16,320 | $ | 915,270 | $ | — | $ | 1,066,267 | |||||||
Stock issued from equity plans | 100 | — | (1,991) | — | — | — | (1,991) | |||||||||||||
Stock-based compensation | — | — | 6,543 | — | — | — | 6,543 | |||||||||||||
Dividends declared ($0.10 per share) | — | — | — | — | (3,814) | — | (3,814) | |||||||||||||
Other comprehensive loss | — | — | — | (2,013) | — | — | (2,013) | |||||||||||||
Net income | — | — | — | — | 30,921 | — | 30,921 | |||||||||||||
Balances, March 31, 2023 | 37,529 | 37 | 139,192 | 14,307 | 942,377 | — | 1,095,913 | |||||||||||||
Stock issued from equity plans | 121 | 1 | 606 | — | — | — | 607 | |||||||||||||
Stock-based compensation | — | — | 7,423 | — | — | — | 7,423 | |||||||||||||
Dividends declared ($0.10 per share) | — | — | — | — | (3,778) | — | (3,778) | |||||||||||||
Other comprehensive loss | — | — | — | (2,026) | — | — | (2,026) | |||||||||||||
Net income | — | — | — | — | 27,140 | — | 27,140 | |||||||||||||
Balances, June 30, 2023 | 37,650 | $ | 38 | $ | 147,221 | $ | 12,281 | $ | 965,739 | $ | — | $ | 1,125,279 | |||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
ADVANCED ENERGY INDUSTRIES, INC.
Unaudited Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended June 30, | ||||||
| 2023 |
| 2022 | |||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
| ||
Net income | $ | 58,061 | $ | 81,755 | ||
Less: income (loss) from discontinued operations, net of income taxes |
| (1,146) |
| 82 | ||
Income from continuing operations, net of income taxes |
| 59,207 |
| 81,673 | ||
Adjustments to reconcile net income to net cash from operating activities: |
|
|
|
| ||
Depreciation and amortization |
| 32,966 |
| 28,877 | ||
Stock-based compensation |
| 14,738 |
| 8,986 | ||
Benefit for deferred income taxes |
| (786) |
| (1,977) | ||
Loss on disposal and sale of assets |
| 192 |
| 374 | ||
Changes in operating assets and liabilities, net of assets acquired |
|
| ||||
Accounts and other receivable, net |
| 46,044 |
| (27,790) | ||
Inventories |
| (17,688) |
| (52,109) | ||
Other assets |
| 2,859 |
| (5,402) | ||
Accounts payable |
| (17,448) |
| 2,491 | ||
Other liabilities and accrued expenses |
| (64,580) |
| 12,418 | ||
Net cash from operating activities from continuing operations |
| 55,504 |
| 47,541 | ||
Net cash from operating activities from discontinued operations |
| (3,090) |
| 55 | ||
Net cash from operating activities |
| 52,414 |
| 47,596 | ||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
| ||
Purchases of investments | (3,128) | — | ||||
Purchases of property and equipment |
| (33,623) |
| (25,476) | ||
Acquisitions, net of cash acquired | — | (145,779) | ||||
Net cash from investing activities |
| (36,751) |
| (171,255) | ||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
| ||
Payments on long-term borrowings | (10,000) | (10,000) | ||||
Dividend payments | (7,592) | (7,595) | ||||
Purchase and retirement of common stock | — | (23,578) | ||||
Net payments related to stock-based awards |
| (1,384) |
| (1,667) | ||
Net cash from financing activities |
| (18,976) |
| (42,840) | ||
EFFECT OF CURRENCY TRANSLATION ON CASH AND CASH EQUIVALENTS |
| (253) |
| (5,188) | ||
NET CHANGE IN CASH AND CASH EQUIVALENTS |
| (3,566) |
| (171,687) | ||
CASH AND CASH EQUIVALENTS, beginning of period |
| 458,818 |
| 544,372 | ||
CASH AND CASH EQUIVALENTS, end of period | $ | 455,252 | $ | 372,685 | ||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
| ||
Cash paid for interest | $ | 5,291 | $ | 2,461 | ||
Cash paid for income taxes | $ | 38,008 | $ | 9,982 | ||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
7
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Advanced Energy Industries, Inc., a Delaware corporation, and its consolidated subsidiaries (“we,” “us,” “our,” “Advanced Energy,” or the “Company”) design, manufacture, sell, and support precision power products that transform, refine, and modify the raw electrical power coming from either the utility or the building facility and convert it into various types of highly controllable, usable power that is predictable, repeatable, and customizable to meet the necessary requirements for powering a wide range of complex equipment.
Our plasma power solutions enable innovation in complex semiconductor and thin film plasma processes such as dry etch and deposition. Our broad portfolio of high and low voltage power products is used in a wide range of applications, such as semiconductor equipment, industrial production, medical and life science equipment, data centers computing, networking, and telecommunications. We also supply related sensing, controls, and instrumentation products primarily for advanced measurement and calibration of power and temperature for multiple industrial markets. Our network of global service support centers provides repair services, calibration, conversions, upgrades, refurbishments, and used equipment to companies using our products.
In management's opinion, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal, recurring adjustments, necessary to present fairly Advanced Energy’s financial position as of June 30, 2023, and the results of our operations and cash flows for the three and six months ended June 30, 2023 and 2022.
The unaudited consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted pursuant to such rules and regulations. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2022 and other financial information filed with the SEC.
Use of Estimates in the Preparation of the Consolidated Financial Statements
The preparation of our consolidated financial statements in conformity with U.S. GAAP requires us to make estimates, assumptions, and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The significant estimates, assumptions, and judgments include, but are not limited to:
● excess and obsolete inventory; ● pension obligations; | ● acquisitions and asset valuations; and ● income taxes and other provisions. |
Significant Accounting Policies
Our accounting policies are described in Note 1 to our audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2022.
New Accounting Standards
From time to time, the Financial Accounting Standards Board (“FASB”) or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through issuance of an Accounting Standards Update (“ASU”). Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, will not have a material impact on the consolidated financial statements upon adoption.
8
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
New Accounting Standards Adopted
The FASB issued the following ASUs that we adopted in the current year:
Issuance Date | ASU | Title |
March 2020 | 2020-04 | Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting |
January 2021 | 2021-01 | Reference Rate Reform (Topic 848): Scope |
December 2022 | 2022-06 | Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 |
This collective guidance provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria that reference LIBOR or another reference rate that is expected to be discontinued.
Our Credit Facility (refer to Note 18. Credit Facility) and interest rate swap agreements (refer to Note 7. Derivative Financial Instruments) referenced the one-month USD LIBOR rate. On March 31, 2023, we executed agreements with our debt holders and the counterparties to our interest rate swap agreements to transition the benchmark interest rate from LIBOR to the one-month-USD Term Secured Overnight Financing Rate (“SOFR”). The impact of this transition and the adoption of the above guidance was not material to our consolidated financial statements.
9
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
NOTE 2. ACQUISITIONS
SL Power Electronics Corporation
On April 25, 2022, we acquired 100% of the issued and outstanding shares of capital stock of SL Power Electronics Corporation (“SL Power”), which is based in Calabasas, California. We accounted for this transaction as a business combination. This acquisition added complementary products to Advanced Energy’s medical power offerings and extends our presence in several advanced industrial markets.
The components of the fair value of the total consideration transferred were as follows:
Cash paid for acquisition | $ | 145,693 | |
Less cash acquired | (3,484) | ||
Total fair value of purchase consideration | $ | 142,209 |
We allocated the purchase price consideration to the assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, with the excess allocated to goodwill.
The following table summarizes the intangible assets acquired:
|
| Amortization |
| Useful Life | |||
Fair Value | Method | (in years) | |||||
Customer relationships | $ | 50,500 |
| Straight-line |
| ||
Technology |
| 7,100 |
| Straight-line |
| ||
Total | $ | 57,600 |
|
|
|
| |
To estimate the fair value of intangible assets, we used a multi-period excess earnings approach for the customer relationships and a relief from royalty approach for developed technology. Goodwill represents SL Power’s assembled workforce and the expected operating synergies from combining operations. We expect virtually all of the goodwill to be deductible for tax purposes.
10
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
NOTE 3. REVENUE
Disaggregation of revenue
The following tables present additional information regarding our revenue:
Revenue by Market
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2023 | 2022 |
| 2023 |
| 2022 | ||||||
Semiconductor Equipment | $ | 173,177 | $ | 228,797 | $ | 367,386 | $ | 431,754 | ||||
Industrial and Medical |
| 127,603 |
| 104,951 |
| 250,623 |
| 187,849 | ||||
Data Center Computing | 59,076 | 69,161 | 118,735 | 145,399 | ||||||||
Telecom and Networking | 55,652 | 38,040 | 103,804 | 73,406 | ||||||||
Total | $ | 415,508 | $ | 440,949 | $ | 840,548 | $ | 838,408 | ||||
Revenue by Region
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2023 | 2022 |
| 2023 |
| 2022 | ||||||
North America | $ | 171,516 | $ | 206,117 | $ | 352,458 | $ | 388,838 | ||||
Asia | 186,498 | 180,181 | 365,681 | 342,228 | ||||||||
Europe | 56,213 | 49,851 | 118,779 | 96,516 | ||||||||
Other |
| 1,281 |
| 4,800 | 3,630 |
| 10,826 | |||||
Total | $ | 415,508 |
| $ | 440,949 | $ | 840,548 |
| $ | 838,408 | ||
Revenue by Significant Countries
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2023 | 2022 |
| 2023 |
| 2022 | ||||||
United States | $ | 147,109 | $ | 174,293 | $ | 300,615 | $ | 333,035 | ||||
China | 53,192 | 41,438 | 90,648 | 86,130 | ||||||||
All others | 215,207 | 225,218 | 449,285 | 419,243 | ||||||||
Total | $ | 415,508 |
| $ | 440,949 | $ | 840,548 |
| $ | 838,408 | ||
We attribute sales to individual countries and regions based on the customer’s ship to location. Apart from the United States and China, no revenue attributable to any individual country exceeded 10% of our total consolidated revenues in the three and six months ended June 30, 2023 and 2022.
Revenue by Category
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2023 | 2022 |
| 2023 |
| 2022 | ||||||
Product | $ | 369,881 | $ | 403,977 | $ | 749,155 | $ | 766,853 | ||||
Services | 45,627 |
| 36,972 | 91,393 |
| 71,555 | ||||||
Total | $ | 415,508 |
| $ | 440,949 | $ | 840,548 |
| $ | 838,408 | ||
Remaining Performance Obligations
Our remaining performance obligations primarily relate to customer purchase orders for products we have not yet shipped. We expect to fulfill the majority of these performance obligations within one year.
11
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
NOTE 4. INCOME TAXES
The following table summarizes tax expense and the effective tax rate for our income from continuing operations:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Income from continuing operations, before income taxes | $ | 32,250 | $ | 56,014 | $ | 71,738 | $ | 99,829 | |||||
Provision for income taxes | $ | 4,795 | $ | 11,203 | $ | 12,531 | $ | 18,156 | |||||
Effective tax rate | 14.9 | % | 20.0 | % | 17.5 | % | 18.2 | % | |||||
Our effective tax rates differ from the U.S. federal statutory rate of 21% for the three and six months ended June 30, 2023 and 2022, respectively, primarily due to the benefit of earnings in foreign jurisdictions which are subject to lower tax rates, as well as tax credits, partially offset by net U.S. tax on foreign operations. The effective tax rate for the three and six months ended June 30, 2023 was lower than the same periods in 2022 primarily due to the impact of beneficial discrete items in the three months ended June 30, 2023 relative to unfavorable discrete items recorded in the three months ended June 30, 2022.
NOTE 5. EARNINGS PER SHARE
We compute basic earnings per share (“EPS”) by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. The diluted EPS computation is similar to basic EPS except we increase the denominator to include the number of additional common shares that would have been outstanding (using the treasury stock method) if our outstanding stock options and restricted stock units had been converted to common shares (when such conversion is dilutive).
The following table summarizes our earnings per share:
12
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
Share Repurchase
To execute the repurchase of shares of our common stock, we periodically enter into stock repurchase agreements. The following table summarizes these repurchases:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(in thousands, except per share amounts) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Amount paid or accrued to repurchase shares | $ | — | $ | 17,019 | $ | — | $ | 23,613 | ||||
Number of shares repurchased |
| — |
| 230 |
| — |
| 312 | ||||
Average repurchase price per share | $ | — | $ | 74.12 | $ | — | $ | 75.68 | ||||
There were no shares repurchased from related parties. Repurchased shares were retired and assumed the status of authorized and unissued shares.
At June 30, 2023, the remaining amount authorized by the Board of Directors for future share repurchases was $199.3 million with no time limitation.
NOTE 6. FAIR VALUE MEASUREMENTS
The following tables present information about our assets and liabilities measured at fair value on a recurring basis.
June 30, 2023 | ||||||||||||||
Description | Balance Sheet Classification | Level 1 | Level 2 | Level 3 | Total | |||||||||
Certificates of deposit | Other current assets | $ | — | $ | 175 | $ | — | $ | 175 | |||||
Foreign currency forward contracts | Other current liabilities | — | (68) | — | (68) | |||||||||
Interest rate swaps | Other assets | — | 12,630 | — | 12,630 | |||||||||
Net assets measured at fair value on a recurring basis | $ | — | $ | 12,737 | $ | — | $ | 12,737 | ||||||
December 31, 2022 | ||||||||||||||
Description | Balance Sheet Classification | Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||||
Certificates of deposit | Other current assets | $ | — | $ | 2,128 | $ | — | $ | 2,128 | |||||
Interest rate swaps | Other assets | — | 15,310 | — | 15,310 | |||||||||
Net assets measured at fair value on a recurring basis | $ | — | $ | 17,438 | $ | — | $ | 17,438 | ||||||
For all periods presented, there were no transfers into or out of Level 3.
13
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS
Changes in foreign currency exchange rates impact us. We may manage these risks through the use of derivative financial instruments, primarily forward contracts with banks. These forward contracts manage the exchange rate risk associated with assets and liabilities denominated in nonfunctional currencies. Typically, we execute these derivative instruments for one-month periods and do not designate them as hedges; however, they do partially offset the economic fluctuations of certain of our assets and liabilities due to foreign exchange rate changes.
The following table summarizes the notional amount of outstanding foreign currency forward contracts:
June 30, | December 31, | |||||
| 2023 |
| 2022 | |||
Foreign currency forward contracts | $ | 81,403 | $ | — | ||
Gains and losses related to foreign currency exchange contracts were offset by corresponding gains and losses on the revaluation of the underlying assets and liabilities. Both are included as a component of other income (expense), net in our Consolidated Statements of Operations.
In April 2020, we executed interest rate swap contracts with independent financial institutions to partially reduce the variability of cash flows in LIBOR indexed debt interest payments on our Term Loan Facility (under our existing Credit Agreement dated September 10, 2019, as amended, refer to Note 18. Credit Facility). On March 31, 2023, we executed agreements with our debt holders and the counterparties to our interest rate swap agreements to transition the benchmark interest rate from LIBOR to SOFR. The interest rate swap contracts expire on September 10, 2024 and are accounted for as cash flow hedging instruments.
The interest rate swap contracts fix a portion of the outstanding principal balance on our Term Loan Facility to a total interest rate of 1.172%. This is comprised of a 0.322% average fixed rate per annum in exchange for a variable interest rate based on SOFR plus the credit spread in our existing Credit Agreement (see Note 18. Credit Facility), which is 75 basis points at current leverage ratios plus a LIBOR to SOFR transitional rate adjustment of 0.10%.
The following table summarizes the notional amount of our qualified hedging instruments:
June 30, | December 31, | |||||
| 2023 |
| 2022 | |||
Interest rate swap contracts | $ | 229,469 | $ | 238,219 | ||
The following table summarizes the amounts recorded in accumulated other comprehensive income on the Consolidated Balance Sheets for qualifying hedges.
June 30, | December 31, | |||||
| 2023 |
| 2022 | |||
Interest rate swap contract gains | $ | 9,707 | $ | 11,779 | ||
See Note 6. Fair Value Measurements for information regarding fair value of derivative instruments.
As a result of using derivative financial instruments, we are exposed to the risk that counterparties to contracts could fail to meet their contractual obligations. We manage this credit risk by reviewing counterparty creditworthiness on a regular basis and limiting exposure to any single counterparty.
14
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
NOTE 8. ACCOUNTS AND OTHER RECEIVABLES, NET
We record accounts and other receivables at net realizable value. The following table summarizes the changes in expected credit losses related to receivables:
December 31, 2022 |
| $ | 1,814 |
Additions |
| 123 | |
Deductions - write-offs, net of recoveries | (251) | ||
Foreign currency translation | 8 | ||
June 30, 2023 | $ | 1,694 |
NOTE 9. INVENTORIES
We value inventories at the lower of cost or net realizable value and computed on a first-in, first-out basis. Components of inventories were as follows:
June 30, | December 31, | |||||
| 2023 |
| 2022 | |||
Parts and raw materials | $ | 292,430 | $ | 286,955 | ||
Work in process |
| 18,080 |
| 23,002 | ||
Finished goods |
| 81,839 |
| 66,055 | ||
Total | $ | 392,349 | $ | 376,012 | ||
NOTE 10. PROPERTY AND EQUIPMENT, NET
Property and equipment, net is comprised of the following:
Estimated Useful | June 30, | December 31, | ||||||
| Life (in years) |
| 2023 |
| 2022 | |||
Buildings, machinery, and equipment | 5 to 25 | $ | 180,331 | $ | 165,673 | |||
Computer equipment, furniture, fixtures, and vehicles | 3 to 5 |
| 39,926 |
| 36,281 | |||
Leasehold improvements | 2 to 10 |
| 70,937 |
| 63,103 | |||
Construction in process |
| 19,396 |
| 18,226 | ||||
| 310,590 |
| 283,283 | |||||
Less: Accumulated depreciation |
| (151,565) |
| (134,821) | ||||
Property and equipment, net | $ | 159,025 | $ | 148,462 | ||||
The following table summarizes depreciation expense. All depreciation expense is recorded in income from continuing operations:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Depreciation expense | $ | 9,368 | $ | 8,466 | $ | 18,829 | $ | 16,845 | ||||
15
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
NOTE 11. GOODWILL
The following table summarizes the changes in goodwill:
December 31, 2022 | $ | 281,433 | ||
Measurement period adjustments | 353 | |||
Foreign currency translation | 906 | |||
June 30, 2023 |
| $ | 282,692 |
NOTE 12. INTANGIBLE ASSETS
Intangible assets consisted of the following:
June 30, 2023 | |||||||||
| Gross Carrying |
| Accumulated |
| Net Carrying | ||||
Amount | Amortization | Amount | |||||||
Technology | $ | 97,659 | $ | (53,838) | $ | 43,821 | |||
Customer relationships |
| 168,116 | (51,809) |
| 116,307 | ||||
Trademarks and other |
| 27,122 | (11,757) |
| 15,365 | ||||
Total | $ | 292,897 | $ | (117,404) | $ | 175,493 | |||
December 31, 2022 | |||||||||
| Gross Carrying |
| Accumulated |
| Net Carrying | ||||
Amount | Amortization | Amount | |||||||
Technology | $ | 97,237 | $ | (47,196) | $ | 50,041 | |||
Customer relationships |
| 167,631 | (44,774) |
| 122,857 | ||||
Trademarks and other |
| 27,036 | (10,408) |
| 16,628 | ||||
Total | $ | 291,904 | $ | (102,378) | $ | 189,526 | |||
At June 30, 2023, the weighted average remaining useful life of intangibles subject to amortization was approximately 8.8 years.
Amortization expense related to intangible assets is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Amortization expense | $ | 7,075 | $ | 6,523 | $ | 14,137 | $ | 12,032 | ||||
Estimated amortization expense related to intangibles is as follows:
Year Ending December 31, |
| ||
2023 (remaining) | $ | 14,153 | |
2024 |
| 25,212 | |
2025 |
| 20,997 | |
2026 |
| 19,282 | |
2027 | 17,372 | ||
Thereafter |
| 78,477 | |
Total | $ | 175,493 |
16
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
NOTE 13. RESTRUCTURING COSTS
In the fourth quarter of 2022, we approved a restructuring plan (the “2022 Plan”), which is expected to further improve our operating efficiencies and drive the realization of synergies from business combinations by consolidating our operations, optimizing our factory footprint, including moving certain production into our higher volume factories, and reducing redundancies. We anticipate the 2022 Plan will be substantially completed, and associated expenses will be incurred, by early 2024.
In 2018, we committed to a restructuring plan (the “2018 Plan”) to optimize our manufacturing footprint and improve operating efficiencies and synergies related to business combinations. We incurred severance costs primarily related to the transition and exit of our facility in Shenzhen, China and actions associated with synergies related to the acquisition of Artesyn Embedded Technologies, Inc.’s embedded power business. The Shenzhen facility closed in the first quarter of 2023, and the 2018 Plan is substantially complete.
The tables below summarize the charges related to our restructuring plans:
Cumulative Cost Through | |||||||||
June 30, 2023 | |||||||||
| 2022 Plan |
| 2018 Plan |
| Total | ||||
Severance and related charges |
| $ | 9,921 | $ | 21,125 | $ | 31,046 | ||
Facility relocation and closure charges | — | 7,160 | 7,160 | ||||||
Total restructuring charges | $ | 9,921 | $ | 28,285 | $ | 38,206 | |||
Our restructuring liabilities are included in other accrued expenses in our Consolidated Balance Sheets. Changes in restructuring liabilities were as follows:
17
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
NOTE 14. WARRANTIES
Our sales agreements include customary product warranty provisions, which generally range from 12 to 24 months after shipment. We record the estimated warranty obligations cost when we recognize revenue. This estimate is based on historical experience by product and configuration.
Our estimated warranty obligation is included in other accrued expenses in our Consolidated Balance Sheets. Changes in our product warranty obligation were as follows:
December 31, 2022 | $ | 5,702 | ||
Net increases to accruals |
| 1,375 | ||
Warranty expenditures |
| (2,229) | ||
Effect of changes in exchange rates |
| (16) | ||
June 30, 2023 | $ | 4,832 |
NOTE 15. LEASES
Components of operating lease cost were as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Operating lease cost | $ | 5,656 | $ | 5,729 | $ | 11,336 | $ | 11,448 | ||||
Short-term and variable lease cost | 987 | 1,249 | 2,070 | 2,339 | ||||||||
Total operating lease cost | $ | 6,643 | $ | 6,978 | $ | 13,406 | $ | 13,787 | ||||
Maturities of our operating lease liabilities are as follows:
The following tables present additional information about our lease agreements:
June 30, | December 31, | |||||||
| 2023 |
|
| 2022 | ||||
Weighted average remaining lease term (in years) | 8.8 | 8.9 | ||||||
Weighted average discount rate |
| 4.7 | % | 4.6 | % | |||
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Cash paid for operating leases | $ | 5,824 | $ | 5,471 | $ | 11,668 | $ | 11,097 | |||
Right-of-use assets obtained in exchange for operating lease liabilities | $ | 2,420 | $ | 7,681 | $ | 2,628 | $ | 12,222 | |||
18
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
NOTE 16. STOCK-BASED COMPENSATION
The Compensation Committee of our Board of Directors administers our stock plans. As of June 30, 2023, we have two active stock-based incentive compensation plans: the 2023 Omnibus Incentive Plan (“the 2023 Plan”) and the Employee Stock Purchase Plan (“ESPP”). The 2023 Plan was approved on April 27, 2023. We issue all new equity compensation grants under these two plans; however, outstanding awards previously issued under inactive plans will continue to vest and remain exercisable in accordance with the terms of the respective plans.
The 2023 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, stock units, unrestricted stock, and dividend equivalent rights. Any of the awards issued may be issued as performance-based awards to align stock compensation awards to the attainment of annual or long-term performance goals.
The following table summarizes information related to our stock-based incentive compensation plans:
June 30, 2023 | ||
Shares available for future issuance under the 2023 Omnibus Incentive Plan | 2,383 | |
Shares available for future issuance under the Employee Stock Purchase Plan | 598 |
Generally, we grant restricted stock units (“RSUs”) with a three-year time-based vesting schedule. Certain RSUs contain performance-based or market-based vesting conditions in addition to the time-based vesting requirements. RSUs are generally granted with a grant date fair value based on the market price of our stock on the date of grant.
Generally, we grant stock option awards with an exercise price equal to the market price of our stock at the date of grant and with either a or vesting schedule or performance-based vesting. Stock option awards generally have a term of ten years.
We recognize stock-based compensation expense based on the fair value of the awards issued and the functional area of the employee receiving the award. Stock-based compensation was as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Stock-based compensation expense | $ | 7,937 | $ | 5,058 | $ | 14,738 | $ | 8,986 | ||||
Changes in our RSUs were as follows:
19
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
Changes in our stock options were as follows:
Six Months Ended June 30, 2023 | ||||||
|
| Weighted- |
| |||
Average | ||||||
Number of | Exercise Price | |||||
Options | per Share | |||||
Options outstanding at beginning of period |
| 151 | $ | 55.48 | ||
Options exercised |
| (62) | $ | 24.67 | ||
Options outstanding at end of period |
| 89 | $ | 76.69 | ||
NOTE 17. COMMITMENTS AND CONTINGENCIES
We are involved in disputes and legal actions arising in the normal course of our business. While we currently believe that the amount of any ultimate loss would not be material to our financial position, the outcome of these actions is inherently difficult to predict. In the event of an adverse outcome, the ultimate loss could have a material adverse effect on our financial position or reported results of operations. An unfavorable decision in intellectual property litigation also could require material changes in production processes and products or result in our inability to ship products or components found to have violated third-party intellectual property rights. We accrue loss contingencies in connection with our commitments and contingencies, including litigation, when it is probable that a loss has occurred, and the amount of the loss can be reasonably estimated. We are not currently a party to any legal action that we believe would reasonably have a material adverse impact on our business, financial condition, results of operations or cash flows.
NOTE 18. CREDIT FACILITY
Our credit agreement (“Credit Agreement”) consists of a senior unsecured term loan facility (“Term Loan Facility”) and a senior unsecured revolving facility (“Revolving Facility”). Both mature on September 9, 2026.
On March 31, 2023, we executed agreements pursuant to the Credit Agreement to transition the benchmark interest rate from LIBOR to SOFR. The impact of this transition was not material to our consolidated financial statements.
The following table summarizes borrowings under our Credit Agreement and the associated interest rate.
| June 30, 2023 | ||||||
Balance |
| Interest Rate |
| Unused Line Fee | |||
Term Loan Facility subject to a fixed interest rate due to interest rate swap | $ | 229,469 | 1.172% | — | |||
Term Loan Facility subject to a variable interest rate | 135,531 | 5.952% | — | ||||
Revolving Facility subject to a variable interest rate | — | 5.952% | 0.10% | ||||
Total borrowings under the Credit Agreement | $ | 365,000 | |||||
For more information on the interest rate swap that fixes the interest rate for a portion of our Term Loan Facility, see Note 7. Derivative Financial Instruments. The Term Loan Facility and Revolving Facility bear interest, at our option, at a rate based on the Base Rate or SOFR, as defined in the Credit Agreement, plus an applicable margin.
For all periods presented, we were in compliance with the Credit Agreement covenants. The following table summarizes our availability to withdraw on the Revolving Facility.
June 30, | December 31, | |||||
| 2023 |
| 2022 | |||
Available capacity on Revolving Facility | $ | 200,000 | $ | 200,000 | ||
20
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except per share data)
In addition to the available capacity on the Revolving Facility, prior to the maturity date of our Credit Agreement, we may also request an increase to the financing commitments in either the Term Loan Facility or Revolving Facility by an aggregate amount not to exceed $115.0 million.
The fair value of the Term Loan Facility approximates the outstanding balance of $365.0 million as of June 30, 2023.
The debt obligation on our Consolidated Balance Sheets consists of the following:
Contractual maturities of our debt obligations, excluding amortization of debt issuance costs, are as follows:
Year Ending December 31, |
| ||
2023 (remaining) | $ | 10,000 | |
2024 | 20,000 | ||
2025 | 20,000 | ||
2026 | 315,000 | ||
Total | $ | 365,000 | |
Interest expense and unused line of credit fees were recorded in other income (expense), net in our Consolidated Statements of Operations as follows:
21
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 17, 2023.
Special Note on Forward-Looking Statements
This Quarterly Report on Form 10-Q contains, in addition to historical information, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements in this report that are not historical information are forward-looking statements. For example, statements relating to our beliefs, expectations and plans are forward-looking statements, as are statements that certain actions, conditions, or circumstances will continue. The inclusion of words such as “anticipate,” “expect,” “estimate,” “can,” “may,” “might,” “continue,” “enable,” “plan,” “intend,” “should,” “could,” “would,” “likely,” “potential,” or “believe,” as well as statements that events or circumstances “will” occur or continue, indicate forward-looking statements. Forward-looking statements involve risks and uncertainties, which are difficult to predict and many of which are beyond our control.
Risks and uncertainties to which our forward-looking statements are subject include:
| ● | macroeconomic risks, including supply chain cost increases and other inflationary pressures; recession; economic volatility and cyclicality; the length, severity, or nature of any market deterioration or improvement; changes in financial markets; higher interest rates; labor shortages and expense; foreign currency fluctuations and pricing controls; |
| ● | political and geographical risks, including trade and export controls, war, terrorism, international disputes and geopolitical tensions, natural disasters, public health issues, and industrial accidents; |
| ● | sufficiency and availability of components and materials; |
| ● | our level of and ability to manage backlog orders; |
| ● | our ability to develop new products expeditiously and be successful in the design win process with our customers; |
| ● | the ability to stay on the leading edge of innovation, and obtain and defend necessary intellectual property protections; |
| ● | the ability to protect our trade secrets and confidential information from misappropriation or infringement; |
| ● | our future sales; |
| ● | our future profitability; |
| ● | our competition; |
| ● | market acceptance of, and demand for, our products; |
| ● | the fair value of our assets and financial instruments; |
| ● | research and development expenses; |
| ● | selling, general, and administrative expenses; |
| ● | sufficiency and availability of capital resources; |
| ● | ability to obtain equity or debt financing on favorable terms; |
| ● | capital expenditures; |
22
| ● | our production and operations strategy; |
| ● | our share repurchase program; |
| ● | our tax assets and liabilities; |
| ● | our other commitments and contingent liabilities; |
| ● | adequacy of our reserve for excess and obsolete inventory; |
| ● | unanticipated costs in fulfilling our warranty obligations (including of solar inventers or other discontinued businesses), and adequacy of our warranty reserves; |
| ● | adequacy of reserves for bad debt, sales returns, and other reserves or impairments; |
| ● | our estimates of the fair value of assets acquired; |
| ● | restructuring activities and expenses; |
| ● | our acquisition, divestiture, and joint venture activities; |
| ● | the integration of our acquisitions; |
| ● | industry and market trends; and |
| ● | cost fluctuations and pressures, including prices of components, commodities and raw materials, and costs of labor, transportation, energy, and insurance. |
Actual results could differ materially and adversely from those expressed in any forward-looking statements. Neither we nor any other person assumes responsibility for the accuracy and completeness of such forward-looking statements and readers are cautioned not to place undue reliance on forward-looking statements. Factors that could contribute to these differences or prove our forward-looking statements, by hindsight, to be overly optimistic or unachievable include the factors described in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2022. Other factors might also contribute to the differences between our forward-looking statements and our actual results. We assume no obligation to update any forward-looking statement or provide the reasons why our actual results might differ.
BUSINESS AND MARKET OVERVIEW
Advanced Energy provides highly engineered, mission-critical, precision power conversion, measurement, and control solutions to our global customers. We design, manufacture, sell and support precision power products that transform, refine, and modify the raw electrical power coming from either the utility or the building facility and convert it into various types of highly controllable, usable power that is predictable, repeatable, and customizable to meet the necessary requirements for powering a wide range of complex equipment. Many of our products enable customers to reduce or optimize their energy consumption through increased power conversion efficiency, power density, power coupling, and process control across a wide range of applications.
Our plasma power solutions enable innovation in complex semiconductor and thin film plasma processes such as dry etch and deposition. Our broad portfolio of high and low voltage power products is used in a wide range of applications, such as semiconductor equipment, industrial production, medical and life science equipment, data center computing, networking, and telecommunications. We also supply related sensing, control, and instrumentation products primarily for advanced measurement and calibration of power and temperature for multiple industrial markets. Our network of global service support centers provides repair services, calibration, conversions, upgrades, refurbishments, and used equipment to companies using our products.
23
Advanced Energy is organized on a global, functional basis and operates in the single segment for power electronics conversion products. Within this segment, our products are sold into the Semiconductor Equipment, Industrial and Medical, Data Center Computing, and Telecom and Networking markets.
On April 25, 2022, we acquired 100% of the issued and outstanding shares of capital stock of SL Power Electronics Corporation (“SL Power”), which is based in Calabasas, California. See Note 2. Acquisitions in Part I, Item 1 “Unaudited Consolidated Financial Statements.” This acquisition added complementary products to Advanced Energy’s medical power offerings and extends our presence in several advanced industrial markets.
The demand environment in each of our markets is impacted by various market trends, customer buying patterns, design wins, macroeconomic conditions, and other factors. Fulfilling demand was difficult in 2022, as we were constrained by supply chain shortages for critical integrated circuits, resulting in longer lead times for our products. Some of these supply constraints continued into 2023. We implemented measures to improve the supply of critical materials and components and to mitigate the impact of these higher input costs, and these actions have enabled us to better meet customer demand. Due to improved component supply, lead times for our products declined, which resulted in our 12-month backlog normalizing from $875.3 million at the end of 2022 to $644.7 million at the end of the second quarter of 2023. Since the fourth quarter of 2022, demand in some of our markets has declined, most notably due to the semiconductor cyclical downturn and reduced investments in the data center market. Moreover, our ability to fulfill demand continues to be limited by ongoing supply constraints for some products. In addition, although the amounts are lower than in 2022, we continue to pay premiums for some critical parts, which are partially reimbursed by our customers. While we expect these premiums to abate by the end of 2023, it is not clear how quickly the global supply constraints will fully recover, the extent to which our mitigating actions will be successful, or to what extent we can recover our higher costs.
Semiconductor Equipment Market
The Semiconductor Equipment market is driven by the long-term growing need for more semiconductor production capacity and new process technologies. While the semiconductor and semiconductor equipment industries are inherently cyclical, over the long-term, integrated circuit content is growing across many industries driven by increased demand for processing, storing, and transmitting the growing amount of data. To meet the growing demand, the chip industry continues to invest in production capacity for both leading-edge and trailing-edge node logic devices, the latest memory devices, back-end test, and advanced wafer-level packaging. The industry’s transition to advanced technology nodes and to increased layers in memory devices require an increased number of plasma-based etch and deposition process tools and higher content of our advanced power solutions per tool. As etch and deposition processes become more challenging due to shrinking device geometry and increasing aspect ratios in advanced 3D devices, more advanced Radio Frequency (“RF”) and Direct Current (“DC”) plasma generation technologies are needed. We strive to provide a broad range of best-in-class, industry-leading RF and DC power solutions. Beyond etch and deposition processes, growing complexity at advanced nodes also drives a higher number of other process steps across the wafer fab, including inspection, metrology, thermal, ion implantation, and semiconductor test and assembly, where Advanced Energy is actively participating as a critical technology provider. In addition, our global support services group offers comprehensive local repair service, upgrade, and retrofit offerings to extend the usable life of our customers’ capital equipment for additional technology generations. Our strategy in the Semiconductor Equipment market is to defend our proprietary positions in our core applications by capturing new design and product generations, growing our market position in applications where we have lower market share, such as remote plasma source and dielectric etch, and leveraging our product portfolio in areas including embedded power, high voltage power systems, and critical sensing and controls to grow our market share and content at our original equipment manufacturer (“OEM”) customers.
24
The Semiconductor Equipment market experienced demand growth driven by investments in both leading and trailing edge semiconductor capacity throughout the first three quarters of 2022. Starting in the fourth quarter of 2022, the market entered a downturn due to deteriorating macroeconomic conditions, overcapacity in the market for memory devices, general semiconductor inventory digestion resulting in falling fab utilization and reduced fab expansion plans, and new U.S. export restrictions to China for certain semiconductor equipment. During the first half of 2023, these factors continued to impact our demand, backlog, and revenue, and they are expected to continue throughout 2023. We believe long-term drivers for demand growth in this market will eventually resume, due to the need to invest in new fab capacity to support growing demand for semiconductor devices in a wide range of applications, the continued transition to next generation processing nodes, increased complexity of advanced processes requiring more complex and innovative power solutions, and the regionalization of some semiconductor capacity.
Industrial and Medical Markets
Advanced Energy serves the Industrial and Medical market with mission-critical power components that deliver high reliability, precise, low noise or differentiated power to the equipment they serve. Growth in the Industrial and Medical market is driven by investment in complex manufacturing processes or automation, increased adoption of smart power, sensing, and control solutions across many industrial applications, new investments in clean and sustainable technologies, and growing investment in medical devices and life science equipment. Our customers in the Industrial and Medical market are primarily global and regional original equipment manufacturers, who incorporate incorporating our advanced power, embedded power, and measurement products into a wide variety of equipment used in applications, such as advanced material fabrication, medical devices, analytical instrumentation, test and measurement equipment, robotics, industrial production, and large-scale connected light-emitting diode applications. Examples of products sold into the Industrial and Medical market include high voltage and low voltage power supplies used in applications such as medical devices, scientific instrumentation and industrial equipment, power control modules and thermal instrumentation products for material fabrication, production process control, and many precision industrial sensing applications. Our strategy in the Industrial and Medical market is to expand our product offerings and channel reach, leveraging common platforms, derivatives, and customizations to further penetrate a broader set of applications.
During 2022, we saw increased demand in the Industrial and Medical market as our customers increased investments in their production capacity and the medical technology industry recovered from the pandemic-related slowdown. Although overall customer demand increased, supply constraints of critical components limited our ability to fulfill product shipments at the level of customer demand and resulted in increased backlog. During the first half of 2023, we saw continued demand across a number of industrial and medical applications, and we were able to secure additional critical components, enabling us to deliver record quarterly revenues in both the first and second quarter of 2023 in this market. However, it is unclear how the macroeconomic conditions, including higher interest rates and potential recession, may affect our revenue in the remainder of 2023. In addition, product delivery and revenue levels will also be dependent on our ability to secure supply of critical components.
Data Center Computing Markets
Advanced Energy serves the Data Center Computing market with industry leading power conversion products and technologies, which we sell to OEMs and original design manufacturers (“ODMs”) of data center server and storage systems, as well as cloud service providers and their partners. Driven by the growing adoption of cloud computing, market demand for server and storage equipment has shifted from traditional enterprise on-premises computing to the data center, driving investments in data center infrastructure. Beyond the cloud, demand for edge computing is also growing, driven by the need for faster processing, lower latency, and higher data security at edge applications. In addition, the data center industry has begun transitioning from 12 Volt to 48 Volt infrastructure in server racks to improve overall power efficiency. Advanced Energy benefits from these trends by being an industry leader in providing high-efficiency 48 Volt server power solutions to the data center industry. Further, the rapid growth and adoption of artificial intelligence and machine learning are accelerating demand for server and storage racks with increased power density and higher efficiency, which complements Advanced Energy’s strengths. With a growing presence at both cloud service providers and industry-leading data center server and storage vendors, our strategy in the Data Center and Computing market is to penetrate selected customers and applications based on our differentiated capabilities and competitive strengths in power density, efficiency, and controls.
25
In the first half of 2023, we saw reduced revenues due to slowing demand in the server and storage market on customers delaying investments and ongoing supply constraints limiting our ability to meet the full demand. It is not clear how long these supply chain constraints will persist or how quickly those customers will return to their historical level of investments.
Telecom and Networking Markets
Our customers in the Telecom and Networking market include many leading vendors of wireless infrastructure equipment, telecommunication equipment and computer networking. The wireless telecom market continues to evolve with more advanced mobile standards. 5G wireless technology promises to drive substantial growth opportunities for the telecom industry as it enables new advanced applications such as autonomous vehicles and virtual/augmented reality. Telecom service providers are investing in 5G infrastructure, and this trend is expected to drive demand for our products into the Telecom and Networking market. In datacom, demand is driven by networking investments by telecom service providers and enterprises upgrading their networks, as well as cloud service providers and data centers investing in their networks for increased bandwidth. Our strategy in the Telecom and Networking market is to optimize our portfolio of products to more differentiated applications, and to focus on 5G infrastructure applications.
During the first half of 2023, substantially improved supply of critical components allowed us to partially fulfill outstanding demand from the prior year and drove strong revenue growth in the Telecom and Networking market. However, leading companies in this market have reported end user market weakness, and it is not clear if we can sustain the first half 2023 revenue level through the remainder of 2023.
26
Results of Continuing Operations
The analysis presented below is organized to provide the information we believe will be helpful for understanding of our historical performance and relevant trends going forward and should be read in conjunction with our “Unaudited Consolidated Financial Statements” in Part I, Item 1 of this report, including the notes thereto. Also included in the following analysis are measures that are not in accordance with U.S. GAAP. A reconciliation of the non-GAAP measures to U.S. GAAP is provided below.
The following table sets forth certain data derived from our Consolidated Statements of Operations (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2023 |
| 2022 | 2023 |
| 2022 | ||||||||
Sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Gross profit |
| 35.4 |
|
| 36.8 |
|
| 36.0 |
|
| 36.6 |
| ||
Operating expenses |
| 28.2 |
|
| 24.8 |
|
| 27.6 |
|
| 24.9 |
| ||
Operating income from continuing operations |
| 7.2 |
|
| 12.0 |
|
| 8.3 |
|
| 11.6 |
| ||
Other income (expense), net |
| 0.6 |
|
| 0.7 |
|
| 0.2 |
|
| 0.3 |
| ||
Income from continuing operations, before income taxes |
| 7.8 |
|
| 12.7 |
|
| 8.5 |
|
| 11.9 |
| ||
Provision for income taxes |
| 1.2 |
|
| 2.5 |
|
| 1.5 |
|
| 2.2 |
| ||
Income from continuing operations | 6.6 | % | 10.2 | % | 7.0 | % | 9.7 | % | ||||||
27
SALES, NET
The following tables summarize net sales and percentages of net sales, by markets (in thousands):
Three Months Ended June 30, | Change 2023 v. 2022 | ||||||||||||
| 2023 |
| 2022 |
|
| Dollar |
| Percent | |||||
Semiconductor Equipment | $ | 173,177 | $ | 228,797 | $ | (55,620) |
| (24.3) | % | ||||
Industrial and Medical |
| 127,603 |
| 104,951 |
| 22,652 |
| 21.6 | % | ||||
Data Center Computing | 59,076 | 69,161 | (10,085) | (14.6) | % | ||||||||
Telecom and Networking |
| 55,652 |
| 38,040 |
| 17,612 |
| 46.3 | % | ||||
Total | $ | 415,508 | $ | 440,949 | $ | (25,441) |
| (5.8) | % | ||||
Six Months Ended June 30, | Change 2023 v. 2022 | ||||||||||||
2023 |
| 2022 |
|
| Dollar |
| Percent | ||||||
Semiconductor Equipment | $ | 367,386 | $ | 431,754 | $ | (64,368) |
| (14.9) | % | ||||
Industrial and Medical |
| 250,623 |
| 187,849 |
| 62,774 |
| 33.4 | % | ||||
Data Center Computing | 118,735 | 145,399 | (26,664) |
| (18.3) | % | |||||||
Telecom and Networking |
| 103,804 |
| 73,406 |
| 30,398 |
| 41.4 | % | ||||
Total | $ | 840,548 | $ | 838,408 | $ | 2,140 |
| 0.3 | % | ||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
2023 |
| 2022 | 2023 |
| 2022 | |||||||||
Semiconductor Equipment |
| 41.7 | % | 51.9 | % |
| 43.7 | % | 51.5 | % | ||||
Industrial and Medical |
| 30.7 |
| 23.8 |
|
| 29.8 |
| 22.4 |
| ||||
Data Center Computing | 14.2 | 15.7 | 14.1 | 17.3 | ||||||||||
Telecom and Networking |
| 13.4 |
| 8.6 |
|
| 12.4 |
| 8.8 |
| ||||
Total |
| 100.0 | % | 100.0 | % |
| 100.0 | % | 100.0 | % | ||||
OPERATING EXPENSES
The following tables summarize our operating expenses (in thousands) and as a percentage of sales:
Three Months Ended June 30, | ||||||||||||
| 2023 |
| 2022 | |||||||||
Research and development | $ | 51,413 |
| 12.4 | % |
| $ | 48,009 |
| 10.9 | % | |
Selling, general, and administrative |
| 55,613 | 13.4 |
| 55,022 | 12.5 | ||||||
Amortization of intangible assets |
| 7,075 | 1.7 |
| 6,523 | 1.5 | ||||||
Restructuring charges |
| 3,154 | 0.8 |
| (161) | - | ||||||
Total operating expenses | $ | 117,255 | 28.2 | % |
| $ | 109,393 | 24.8 | % | |||
Six Months Ended June 30, | ||||||||||||
| 2023 |
| 2022 | |||||||||
Research and development | $ | 103,023 |
| 12.3 | % |
| $ | 91,623 |
| 10.9 | % | |
Selling, general, and administrative |
| 110,971 | 13.2 |
| 104,340 | 12.4 | ||||||
Amortization of intangible assets |
| 14,137 | 1.7 |
| 12,032 | 1.4 | ||||||
Restructuring charges |
| 4,197 | 0.5 |
| 1,057 | 0.1 | ||||||
Total operating expenses | $ | 232,328 | 27.6 | % |
| $ | 209,052 | 24.9 | % | |||
28
SALES AND BACKLOG
Total Sales
Sales decreased $25.4 million, or 5.8%, to $415.5 million for the three months ended June 30, 2023 and increased $2.1 million, or 0.3%, to $840.5 million for the six months ended June 30, 2023 as compared to the same periods in the prior year.
Improved material availability and capacity allowed us to better meet overall demand and reduce backlog across our markets, which enabled us to partially mitigate the impact of the market decline in the Semiconductor and Data Center markets. Although the supply environment has improved, revenues in the first half of 2023 were also impacted by supply constraints for certain integrated circuits and other components, which limited our ability to fulfill product shipments to meet our total demand.
Backlog
The following table summarizes our backlog (in thousands):
| June 30, | December 31, | Change from | |||||||||
| 2023 |
| 2022 | Dollar |
| Percent | ||||||
Backlog | $ | 644,672 | $ | 875,346 | $ | (230,674) | (26.4) | % | ||||
Backlog represents outstanding orders for products we expect to deliver within the next 12 months. Backlog at June 30, 2023 decreased from the end of 2022 due primarily to lower demand in some of our markets and improved lead times, which allowed our customers to reduce placing new orders for products with targeted deliveries in the later part of the 12-month backlog period.
We believe the current backlog levels provide some level of revenue protection should demand decrease due to macroeconomic factors. We continue to expect to bring our backlog back to a more normalized range of $400 million to $500 million over the next several quarters as parts availability improves and lead times are reduced.
Backlog at any particular date is not necessarily indicative of actual sales which may be generated for any succeeding period and may be adversely impacted by factors such as decreased demand or cancellations or export controls. In addition, there is uncertainty of the timing of when backlog can convert into revenue due to continuing supply constraints. Our customers can typically cancel, change, or delay product purchase commitments with little or no notice.
Sales by Market
Sales in the Semiconductor Equipment market decreased $55.6 million, or 24.3%, to $173.2 million for the three months ended June 30, 2023 and $64.4 million, or 14.9%, to $367.4 million for the six months ended June 30, 2023 as compared to the same periods in the prior year. The decrease in sales compared to the same periods in the prior year was primarily due to a cyclical downturn in the semiconductor industry and the U.S. export controls restricting shipments of equipment to Chinese semiconductor customers. The revenue decline in the first half was partially mitigated by strong service revenues, growth in certain applications such as high voltage power supplies, and reduction of backlog as customers returned to normalized inventory level.
Sales in the Industrial and Medical market increased $22.7 million, or 21.6%, to $127.6 million for the three months ended June 30, 2023 and $62.8 million, or 33.4%, to $250.6 million for the six months ended June 30, 2023 as compared to the same periods in the prior year. The increase in sales compared to the same periods in the prior year was primarily due to continued demand for our portfolio of products across several industrial and medical applications and improved material availability.
29
Sales in the Data Center Computing market decreased $10.1 million, or 14.6%, to $59.1 million for the three months ended June 30, 2023 and $26.7 million, or 18.3%, to $118.7 million for the six months ended June 30, 2023 as compared to the same periods in the prior year. The decrease in Data Center Computing market sales was due to slowing demand with some of our data center customers and supply constraints of certain components to meet our full demand.
Sales in the Telecom and Networking market increased $17.6 million, or 46.3%, to $55.7 million for the three months ended June 30, 2023 and $30.4 million, or 41.4%, to $103.8 million for the six months ended June 30, 2023 as compared to the same periods in the prior year. The increase in sales was primarily due to substantially improved material availability, allowing us to partially fulfill outstanding demand from the prior year.
GROSS PROFIT
For the three months ended June 30, 2023, gross profit decreased $15.1 million to $147.1 million, or 35.4% of revenue, as compared to $162.2 million, or 36.8% of revenue, in the same period in the prior year. For the six months ended June 30, 2023, gross profit decreased $4.3 million to $302.2 million, or 36.0% of revenue, as compared to $306.5 million, or 36.6% of revenue, in the same period in the prior year.
The decrease in gross profit as a percentage of revenue for the three and six months ended June 30, 2023 is largely due to the decline in sales, unfavorable product mix, and higher operating costs based on investments made in 2022, partially offset by lower premiums and related recoveries for securing critical parts.
OPERATING EXPENSE
Research and Development
We perform R&D of products to develop new or emerging applications, technological advances to provide higher performance, lower cost, or other attributes that we may expect to advance our customers’ products. We believe that continued development of technological applications, as well as enhancements to existing products and related software to support customer requirements, are critical for us to compete in the markets we serve. Accordingly, we devote significant personnel and financial resources to the development of new products and the enhancement of existing products, and we expect these investments to continue.
R&D expenses increased $3.4 million to $51.4 million for the three months ended June 30, 2023 and increased $11.4 million to $103.0 million for the six months ended June 30, 2023 as compared to the same periods in the prior year. The increase in research and development expense is primarily driven by increased headcount and compensation costs of $3.2 million for the three months ended June 30, 2023 and $7.5 million for the six months ended June 30, 2023, both of which are partially due to the SL Power acquisition.
In addition, we incurred higher program and material costs as we invest in new programs to maintain and increase our technological leadership and provide solutions to our customers’ evolving needs of $0.2 million for the three months ended June 30, 2023 and $3.9 million for the six months ended June 30, 2023.
Selling, General, and Administrative
Our selling expenses support domestic and international sales and marketing activities that include personnel, trade shows, advertising, third-party sales representative commissions, and other selling and marketing activities. Our general and administrative expenses support our worldwide corporate, legal, tax, financial, governance, administrative, information systems, corporate development, and human resource functions.
Selling, general and administrative (“SG&A”) expenses increased $0.6 million to $55.6 million for the three months ended June 30, 2023 and increased $6.6 million to $111.0 million for the six months ended June 30, 2023 as compared to the same periods in the prior year. The increase in SG&A is primarily related to increased headcount and associated costs, including sales commissions and stock-based compensation.
30
Amortization of Intangibles
Amortization expense increased $0.6 million to $7.1 million during the three months ended June 30, 2023 and increased $2.1 million to $14.1 million for the six months ended June 30, 2023 as compared to the same periods in the prior year. The increase was primarily driven by incremental amortization of acquired intangible assets from the SL Power acquisition. For additional information, see Note 2. Acquisitions and Note 12. Intangible Assets in Part I, Item 1 “Unaudited Consolidated Financial Statements.”
Restructuring
In the fourth quarter of 2022, we approved a restructuring plan (the “2022 Plan”), which is expected to further improve our operating efficiencies and drive the realization of synergies from our business combinations by consolidating our operations, optimizing our factory footprint, including moving certain production into our higher volume factories, and reducing redundancies. The majority of these actions impact our factory operations and should partially mitigate the impact of lower volumes on gross margins. We anticipate the 2022 Plan will be substantially completed, and associated expenses will be incurred, by early 2024.
In 2018, we committed to a restructuring plan (the “2018 Plan”) to optimize our manufacturing footprint and to improve our operating efficiencies and synergies related to business combinations. We incurred severance costs primarily related to the transition and exit of our facility in Shenzhen, China and actions associated with synergies related to the acquisition of Artesyn Embedded Technologies, Inc.’s embedded power business (“Artesyn”). This plan is substantially complete with the closure of our Shenzhen facility in February 2023. For additional information, see Note 13. Restructuring Costs in Part I, Item 1 “Unaudited Consolidated Financial Statements.”
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest income and expense, foreign exchange gains and losses, gains and losses on sales of fixed assets, and other miscellaneous items.
Other income (expense), net decreased $0.8 million to $2.4 million for the three months ended June 30, 2023, and decreased $0.5 million to $1.9 million for the six months ended June 30, 2023 as compared to the same periods in the prior year. The decrease in income between periods is primarily a result of higher unrealized foreign exchange losses and an increase in interest expense due to a higher interest rate on the portion of our Term Loan Facility subject to a variable interest rate (see Note 18. Credit Facility in Part I, Item 1 “Unaudited Consolidated Financial Statements.”). This was partially offset by higher interest income on our cash because of higher interest rates.
PROVISION FOR INCOME TAXES
The following table summarizes tax expense (in thousands) and the effective tax rate for our income from continuing operations:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Income from continuing operations, before income taxes | $ | 32,250 | $ | 56,014 | $ | 71,738 | $ | 99,829 | |||||
Provision for income taxes | $ | 4,795 | $ | 11,203 | $ | 12,531 | $ | 18,156 | |||||
Effective tax rate | 14.9 | % | 20.0 | % | 17.5 | % | 18.2 | % | |||||
Our effective tax rates differ from the U.S. federal statutory rate of 21% for the three and six months ended June 30, 2023 and 2022, respectively, primarily due to the benefit of earnings in foreign jurisdictions which are subject to lower tax rates, as well as tax credits, partially offset by net U.S. tax on foreign operations. The effective tax rate for the three and six months ended June 30, 2023 was lower than the same periods in 2022 primarily due to the impact of beneficial discrete items in the three months ended June 30, 2023 relative to unfavorable discrete items recorded in the three months ended June 30, 2022.
31
Our future effective income tax rate depends on various factors, such as changes in tax laws, regulations, accounting principles, or interpretations thereof, and the geographic composition of our pre-tax income. We carefully monitor these factors and adjust our effective income tax rate accordingly.
Non-GAAP Results
Management uses non-GAAP operating income and non-GAAP earnings per share (“EPS”) to evaluate business performance without the impacts of certain non-cash charges and other charges which are not part of our usual operations. We use these non-GAAP measures to assess performance against business objectives, make business decisions, including developing budgets and forecasting future periods. In addition, management’s incentive plans include these non-GAAP measures as criteria for achievements. These non-GAAP measures are not in accordance with U.S. GAAP and may differ from non-GAAP methods of accounting and reporting used by other companies. However, we believe these non-GAAP measures provide additional information that enables readers to evaluate our business from the perspective of management. The presentation of this additional information should not be considered a substitute for results prepared in accordance with U.S. GAAP.
The non-GAAP results presented below exclude the impact of non-cash related charges, such as stock-based compensation and amortization of intangible assets. In addition, they exclude discontinued operations and other non-recurring items such as acquisition-related costs and restructuring expenses, as they are not indicative of future performance. The tax effect of our non-GAAP adjustments represents the anticipated annual tax rate applied to each non-GAAP adjustment after consideration of their respective book and tax treatments.
32
Reconciliation of non-GAAP measure |
| Three Months Ended |
| Six Months Ended | ||||||||
Per share earnings excluding certain items | June 30, |
| June 30, | |||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Diluted earnings per share from continuing operations, as reported | $ | 0.73 | $ | 1.19 |
| $ | 1.57 | $ | 2.16 | |||
Add back: | ||||||||||||
Per share impact of non-GAAP adjustments, net of tax |
| 0.38 |
| 0.25 | 0.78 | 0.52 | ||||||
Non-GAAP earnings per share | $ | 1.11 | $ | 1.44 | $ | 2.35 | $ | 2.68 | ||||
Impact of Inflation
In previous years, inflation did not have a material impact on our operations. However, more recently, we have experienced inflationary pressure from price increases in select components driven by factors such as higher global demand, supply chain disruptions, higher labor expenses, and increased freight costs. In this environment, we are actively working with our customers to adjust pricing that helps offset the inflationary pressure on the cost of our components. We have also been able to recover some premiums on pricing related to securing scarce materials with our customers, thus limiting the financial impact of inflationary pressures.
Liquidity and Capital Resources
Liquidity
Adequate liquidity and cash generation is important to the execution of our strategic initiatives. Our ability to fund our operations, acquisitions, capital expenditures, and product development efforts may depend on our ability to generate cash from operating activities, which is subject to future operating performance, as well as general economic, financial, competitive, legislative, regulatory, and other conditions, some of which may be beyond our control. Our primary sources of liquidity are our available cash, investments, cash generated from current operations, and available borrowing capacity under the Revolving Facility (defined in Note 18. Credit Facility in Part I, Item 1 “Unaudited Consolidated Financial Statements”).
33
The following table summarizes our cash, cash equivalents, and marketable securities (in thousands):
June 30, 2023 | |||
Cash and cash equivalents | $ | 455,252 | |
Marketable securities |
| 175 | |
Total cash, cash equivalents, and marketable securities | $ | 455,427 | |
We believe the above sources of liquidity will be adequate to meet anticipated working capital needs, anticipated levels of capital expenditures, contractual obligations, debt repayment, share repurchase programs, and dividends for the next 12 months and on a long-term basis. In addition, we may, depending upon the number or size of additional acquisitions, seek additional debt or equity financing from time to time; however, such additional financing may not be available on acceptable terms, if at all.
Credit Facility
For information on our Credit Facility, see Note 18. Credit Facility and Note 7. Derivative Financial Instruments in Part I, Item 1 “Unaudited Consolidated Financial Statements.”
The following table summarizes borrowings under our Credit Facility and the associated interest rate (in thousands, except for interest rates).
| June 30, 2023 | ||||||
Balance |
| Interest Rate |
| Unused Line Fee | |||
Term Loan Facility subject to a fixed interest rate due to interest rate swap | $ | 229,469 | 1.172% | — | |||
Term Loan Facility subject to a variable interest rate | 135,531 | 5.952% | — | ||||
Revolving Facility subject to a variable interest rate | — | 5.952% | 0.10% | ||||
Total borrowings under the Credit Agreement | $ | 365,000 | |||||
As of June 30, 2023, we had $200.0 million in available funding under the Revolving Facility. The Term Loan Facility requires quarterly repayments of $5.0 million plus accrued interest, with the remaining balance due in September 2026.
In addition to the available capacity on the Revolving Facility, prior to the maturity date of our Credit Agreement, we may also request an increase to the financing commitments in either the Term Loan Facility or Revolving Facility by an aggregate amount not to exceed $115.0 million.
Dividends
During the three months ended June 30, 2023, we paid quarterly cash dividends of $0.10 per share, totaling $3.8 million. We currently anticipate that a cash dividend of $0.10 per share will continue to be paid on a quarterly basis, although the declaration of any future cash dividend is at the discretion of the Board of Directors (the “Board”) and will depend on our financial condition, results of operations, capital requirements, business conditions, and other factors.
Share Repurchase
To execute the repurchase of shares of our common stock, we periodically enter into stock repurchase agreements. The following table summarizes these repurchases:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(in thousands, except per share amounts) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Amount paid or accrued to repurchase shares | $ | — | $ | 17,019 | $ | — | $ | 23,613 | ||||
Number of shares repurchased |
| — |
| 230 |
| — |
| 312 | ||||
Average repurchase price per share | $ | — | $ | 74.12 | $ | — | $ | 75.68 | ||||
At June 30, 2023, the remaining amount authorized by the Board for future share repurchases was $199.3 million with no time limitation.
34
Cash Flows
A summary of our cash from operating, investing, and financing activities is as follows (in thousands):
Six Months Ended June 30, | |||||||
| 2023 |
| 2022 | ||||
Net cash from operating activities from continuing operations | $ | 55,504 | $ | 47,541 | |||
Net cash from operating activities from discontinued operations |
| (3,090) |
| 55 | |||
Net cash from operating activities |
| 52,414 |
| 47,596 | |||
Net cash from investing activities |
| (36,751) |
| (171,255) | |||
Net cash from financing activities |
| (18,976) |
| (42,840) | |||
Effect of currency translation on cash and cash equivalents |
| (253) |
| (5,188) | |||
Net change in cash and cash equivalents |
| (3,566) |
| (171,687) | |||
Cash and cash equivalents, beginning of period |
| 458,818 |
| 544,372 | |||
Cash and cash equivalents, end of period | $ | 455,252 | $ | 372,685 | |||
Net Cash From Operating Activities
Net cash from operating activities from continuing operations for the six months ended June 30, 2023, was $55.5 million, as compared to $47.5 million for the same period in the prior year. The increase of $8.0 million in net cash flows from operating activities as compared to the same period in the prior year is primarily due to a favorable decrease in net operating assets driven primarily by a decrease in accounts receivable and inventories. This was partially offset by a decrease in accounts payable and accrued expenses and lower net income from continuing operations.
Net Cash From Investing Activities
Net cash from investing activities for the six months ended June 30, 2023 was ($36.8) million, primarily driven by the following:
| ● | ($33.6) million in purchases of property and equipment largely driven by investments in our manufacturing footprint and capacity; and |
| ● | ($3.1) million in purchases of investments |
Net cash from investing for the six months ended June 30, 2022 was ($171.3) million, primarily driven by the following:
| ● | ($25.5) million in purchases of property and equipment largely driven by investments in our manufacturing footprint and capacity; and |
| ● | ($145.8) million for business combinations. |
Net Cash From Financing Activities
Net cash from financing activities for the six months ended June 30, 2023 was ($19.0) million and included the following:
| ● | ($10.0) million for repayment of long-term debt; |
| ● | ($7.6) million for dividend payments; and |
| ● | ($1.4) million in net payments related to stock-based award activities. |
35
Net cash from financing activities for the six months ended June 30, 2022 was ($42.8) million and included the following:
| ● | ($23.6) million related to repurchases of our common stock; |
| ● | ($10.0) million for repayment of long-term debt; |
| ● | ($7.6) million for dividend payments; and |
| ● | ($1.7) million in net payments related to stock-based award activities. |
Effect of Currency Translation on Cash
During the six months ended June 30, 2023, foreign currency translation had a minimal impact on cash. See “Foreign Currency Exchange Rate Risk” in Part I, Item 3 of this Form 10-Q for more information.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 1. Summary of Operations and Significant Accounting Policies and Estimates to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2022, describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. Our critical accounting estimates, discussed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022, include:
| ● | estimates for the valuation of assets and liabilities acquired in business combinations; |
| ● | accounting for income taxes; |
| ● | inputs to actuarial models that measure our pension obligations; and |
| ● | assessing excess and obsolete inventories. |
Such accounting policies and estimates require significant judgments and assumptions to be used in the preparation of the consolidated financial statements and actual results could differ materially from the amounts reported based on variability in factors affecting these estimates.
36
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk and Risk Management
In the normal course of business, we have exposure to interest rate risk from our investments and Credit Facility. We also have exposure to foreign exchange rate risk related to our foreign operations and foreign currency transactions.
See the “Risk Factors” set forth in Part I, Item 1A of our Annual Report on Form 10-K and Part II of this Form 10-Q, for more information about the market risks to which we are exposed. There have been no material changes in our exposure to market risk from December 31, 2022.
Foreign Currency Exchange Rate Risk
We are impacted by changes in foreign currency exchange rates through sales and purchasing transactions when we sell products and purchase materials in currencies different from the currency in which product and manufacturing costs were incurred.
Our reported financial results of operations, including the reported value of our assets and liabilities, are also impacted by changes in foreign currency exchange rates. Assets and liabilities of substantially all our subsidiaries outside the U.S. are translated at period end rates of exchange for each reporting period. Operating results and cash flow statements are translated at average rates of exchange during each reporting period. Although these translation changes have no immediate cash impact, the translation changes may impact future borrowing capacity, and overall value of our net assets.
The functional currencies of our worldwide facilities primarily include the United States Dollar (USD), Euro, South Korean Won, New Taiwan Dollar, Japanese Yen, Pound Sterling, and Chinese Yuan. Our purchasing and sales activities are primarily denominated in the USD, Japanese Yen, Euro, and Chinese Yuan.
Currency exchange rates vary daily and often one currency strengthens against the USD while another currency weakens. Because of the complex interrelationship of the worldwide supply chains and distribution channels, it is difficult to quantify the impact of a change in one or more particular exchange rates.
As currencies fluctuate against each other we are exposed to foreign currency exchange rate risk on sales, purchasing transactions, and labor. Exchange rate fluctuations could require us to increase prices to foreign customers, which could result in lower net sales. Alternatively, if we do not adjust the prices for our products in response to unfavorable currency fluctuations, our results of operations could be adversely impacted. Changes in the relative buying power of our customers may impact sales volumes.
Acquisitions are a large component of our capital deployment strategy. A significant number of acquisition target opportunities are located outside the U.S., and their value may be denominated in foreign currency. Changes in exchange rates therefore may have a material impact on their valuation in USD and may impact our view of their attractiveness.
From time to time, we may enter into foreign currency exchange rate contracts to hedge against changes in foreign currency exchange rates on assets and liabilities expected to be settled at a future date, including foreign currency, which may be required for a potential foreign acquisition. Market risk arises from the potential adverse effects on the value of derivative instruments that result from a change in foreign currency exchange rates. We may enter into foreign currency forward contracts to manage the exchange rate risk associated with intercompany debt denominated in nonfunctional currencies. We minimize our market risk applicable to foreign currency exchange rate contracts by establishing and monitoring parameters that limit the types and degree of our derivative contract instruments. We enter into derivative contract instruments for risk management purposes only. We do not enter into or issue derivatives for trading or speculative purposes.
37
Interest Rate Risk
Our market risk exposure relates primarily to changes in interest rates on our Credit Facility. The following table summarizes borrowings (in thousands) under our Credit Facility and the associated interest rate.
| June 30, 2023 | ||||||
Balance |
| Interest Rate |
| Unused Line Fee | |||
Term Loan Facility subject to a fixed interest rate due to interest rate swap | $ | 229,469 | 1.172% | — | |||
Term Loan Facility subject to a variable interest rate | 135,531 | 5.952% | — | ||||
Revolving Facility subject to a variable interest rate | — | 5.952% | 0.10% | ||||
Total borrowings under the Credit Agreement | $ | 365,000 | |||||
For more information on the Term Loan Facility see Note 18. Credit Facility in Part I, Item 1 “Unaudited Consolidated Financial Statements.” For more information on the interest rate swap that fixes the interest rate for a portion of our Term Loan Facility, see Note 7. Derivative Financial Instruments in Part I, Item 1 “Unaudited Consolidated Financial Statements.” The Term Loan Facility and Revolving Facility bear interest, at our option, at a rate based on the Base Rate or SOFR, as defined in the Credit Agreement, plus an applicable margin.
Our interest payments are impacted by interest rate fluctuations. With respect to the portion of our Credit Facility that is subject to a variable interest rate, a hypothetical increase of 100 basis points (1%) in interest rates would have a $1.4 million annual impact on our interest expense. A change in interest rates does not have a material impact upon our future earnings and cash flow for fixed rate debt. However, increases in interest rates could impact our ability to refinance existing maturities and acquire additional debt on favorable terms.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures, which are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Principal Executive Officer (Stephen D. Kelley, President and Chief Executive Officer) and Principal Financial Officer (Paul Oldham, Executive Vice President and Chief Financial Officer), as appropriate, to allow timely decisions regarding required disclosures.
As of the end of the period covered by this report, we conducted an evaluation, with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15(b). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2023. The conclusions of the Chief Executive Officer and Chief Financial Officer from this evaluation were communicated to the Audit and Finance Committee. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We intend to continue to review and document our disclosure controls and procedures, including our internal controls over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter covered by this Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
38
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in disputes and legal actions arising in the normal course of our business. Although it is not possible to predict the outcome of these matters, we believe that the results of these proceedings will not have a material adverse effect on our financial condition, results of operations, or liquidity.
ITEM 1A. RISK FACTORS
Information concerning our risk factors is contained in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022. The risks described in our Annual Report on Form 10-K are not the only risks that we face; additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or operating results. There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
To execute the repurchase of shares of our common stock, we periodically enter into stock repurchase agreements. We did not have any repurchases in the six months ended June 30, 2023. The following table summarizes actions by our Board of Directors in relation to the stock repurchase program:
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
None
39
ITEM 5. OTHER INFORMATION
On June 13, 2023, Anne DelSanto, a member of our Board of Directors, adopted a Rule 10b5-1 trading arrangement that is intended to satisfy the affirmative defense of Rule 10b5-1(c) for the sale of up to 1,776 shares of our common stock during the period from October 1, 2023 through September 5, 2024. During the three months ended June 30, 2023, other director or officer adopted or terminated a Rule 10b5-1 trading arrangement or trading arrangement, as each term is defined in Item 408(a) of Regulation S-K.
At its regularly scheduled meeting on July 27, 2023, the Compensation Committee of our Board reviewed and approved non-material changes to the Company’s Amended and Restated Deferred Compensation Plan that curtail eligibility of special bonuses (as defined in the Plan) for deferral under the Plan. For additional information, refer to Exhibit 10.1 in Part II, Item 6 “Exhibits” below.
40
ITEM 6. EXHIBITS
The exhibits listed in the following index are filed as part of this Quarterly Report on Form 10-Q.
Exhibit |
| Incorporated by Reference | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
Number | Description | Form |
| File No. |
| Exhibit |
| Filing Date | ||
10.1 | Filed herewith | |||||||||
10.2 | Advanced Energy Industries, Inc. 2023 Omnibus Incentive Plan, effective April 27, 2023. | 8-K | 000-26966 | 10.1 | April 28, 2023 | |||||
31.1 | Filed herewith | |||||||||
31.2 | Filed herewith | |||||||||
32.1 | Filed herewith | |||||||||
32.2 | Filed herewith | |||||||||
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | Filed herewith | ||||||||
101.SCH | Inline XBRL Taxonomy Extension Schema Document. | Filed herewith | ||||||||
101.CAL | Inline XBRL Taxonomy Extension Calculation Link base Document. | Filed herewith | ||||||||
101.DEF | Inline XBRL Taxonomy Extension Definition Link base Document. | Filed herewith | ||||||||
101.LAB | Inline XBRL Taxonomy Extension Label Link base Document. | Filed herewith | ||||||||
101.PRE | Inline XBRL Taxonomy Extension Presentation Link base Document. | Filed herewith | ||||||||
104 | Cover Page Interactive Data File – formatted in Inline XBRL and contained in Exhibit 101. | Filed herewith | ||||||||
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ADVANCED ENERGY INDUSTRIES, INC. | |||
Dated: | August 3, 2023 | /s/ Paul Oldham | |
Paul Oldham | |||
Chief Financial Officer and Executive Vice President | |||
42