Table of Contents
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 September 30, 2022
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
ADVANCED ENERGY INDUSTRIES, INC.
(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)
Registrant’s telephone number, including area code: (970) 407-6626
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 October 27, 2022, there were 37,383,115 shares of the registrant’s common stock, par value $0.001 per share, outstanding.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3
Consolidated Balance Sheets
Consolidated Statements of Operations
4
Consolidated Statements of Comprehensive Income
5
Consolidated Statements of Stockholders’ Equity
6
Consolidated Statements of Cash Flows
7
Notes to Consolidated Financial Statements
8
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
25
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
39
ITEM 4.
CONTROLS AND PROCEDURES
41
PART II OTHER INFORMATION
LEGAL PROCEEDINGS
ITEM 1A.
RISK FACTORS
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
42
DEFAULTS UPON SENIOR SECURITIES
MINE SAFETY DISCLOSURES
43
ITEM 5.
OTHER INFORMATION
ITEM 6.
EXHIBITS
SIGNATURES
44
2
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheets
(In thousands, except per share amounts)
September 30,
December 31,
2022
2021
ASSETS
Current assets:
Cash and cash equivalents
$
409,053
544,372
Accounts and other receivable, net
307,018
237,227
Inventories
409,422
338,410
Other current assets
56,289
42,225
Total current assets
1,181,782
1,162,234
Property and equipment, net
136,502
114,830
Operating lease right-of-use assets
102,226
101,769
Deposits and other assets
33,364
19,669
Goodwill
279,226
212,190
Intangible assets, net
195,807
159,406
Deferred income tax assets
45,148
47,242
TOTAL ASSETS
1,974,055
1,817,340
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
219,770
193,708
Income taxes payable
33,040
9,226
Accrued payroll and employee benefits
74,035
55,833
Other accrued expenses
44,898
53,445
Customer deposits and other
24,913
22,141
Current portion of long-term debt
20,000
Current portion of operating lease liabilities
16,299
15,843
Total current liabilities
432,955
370,196
Long-term debt, net
358,132
372,733
Operating lease liabilities
94,575
95,180
Pension benefits
58,208
67,255
Deferred income tax liabilities
9,194
9,921
Other long-term liabilities
31,043
30,559
Total liabilities
984,107
945,844
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; 37,393 and 37,589 issued and outstanding at September 30, 2022 and December 31, 2021, respectively
37
38
Additional paid-in capital
128,079
115,706
Accumulated other comprehensive loss
(14,797)
(1,216)
Retained earnings
875,968
756,323
Advanced Energy stockholders' equity
989,287
870,851
Noncontrolling interest
661
645
Total stockholders' equity
989,948
871,496
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Unaudited Consolidated Statements of Operations
Three Months Ended September 30,
Nine Months Ended September 30,
Sales, net
516,274
346,093
1,354,682
1,059,024
Cost of sales
325,056
226,054
856,990
666,449
Gross profit
191,218
120,039
497,692
392,575
Operating expenses:
Research and development
49,760
40,578
141,383
120,865
Selling, general, and administrative
56,716
48,373
161,056
143,214
Amortization of intangible assets
7,049
5,607
19,081
16,504
Restructuring expense
121
1,272
1,178
2,521
Total operating expenses
113,646
95,830
322,698
283,104
Operating income
77,572
24,209
174,994
109,471
Other income (expense), net
8,940
495
11,347
(3,674)
Income from continuing operations, before income taxes
86,512
24,704
186,341
105,797
Provision for income taxes
11,639
3,657
29,795
10,817
Income from continuing operations
74,873
21,047
156,546
94,980
Income (loss) from discontinued operations, net of income taxes
(697)
(37)
(615)
171
Net income
74,176
21,010
155,931
95,151
Income from continuing operations attributable to noncontrolling interest
9
16
70
Net income attributable to Advanced Energy Industries, Inc.
74,167
21,004
155,915
95,081
Basic weighted-average common shares outstanding
37,379
38,183
37,482
38,296
Diluted weighted-average common shares outstanding
37,630
38,363
37,725
38,517
Earnings per share:
Continuing operations:
Basic earnings per share
2.00
0.55
4.18
2.48
Diluted earnings per share
1.99
4.15
2.46
Discontinued operations:
Basic earnings (loss) per share
(0.02)
Diluted earnings (loss) per share
Net income:
1.98
4.16
1.97
4.13
2.47
Unaudited Consolidated Statements of Comprehensive Income
(In thousands)
Other comprehensive income (loss), net of income taxes
Foreign currency translation
(11,671)
(3,661)
(24,442)
(9,534)
Change in fair value of cash flow hedges
2,508
172
10,447
2,179
Minimum pension benefit retirement liability
313
414
246
Comprehensive income
65,013
17,834
142,350
88,042
Comprehensive income attributable to noncontrolling interest
Comprehensive income attributable to Advanced Energy Industries, Inc.
65,004
17,828
142,334
87,972
Unaudited Consolidated Statements of Stockholders' Equity
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, 2020
38,293
105,009
(2,605)
712,297
601
815,340
Stock issued from equity plans
93
(4,645)
Stock-based compensation
5,701
Dividends declared ($0.10 per share)
(3,854)
Other comprehensive loss
(4,968)
38,668
33
38,701
Balances, March 31, 2021
38,386
106,065
(7,573)
747,111
634
846,275
67
956
3,277
Share repurchase
(72)
(199)
(6,304)
(6,503)
(3,874)
Other comprehensive income
1,035
35,409
31
35,440
Balances, June 30, 2021
38,381
110,099
(6,538)
772,342
665
876,606
14
223
3,540
(605)
(1,635)
(50,920)
(52,555)
(3,857)
(3,176)
Balances, September 30, 2021
37,790
112,227
(9,714)
738,569
671
841,791
Balances, December 31, 2021
37,589
52
(2,430)
3,906
(82)
(254)
(6,340)
(6,594)
(3,789)
1,966
Net income (loss)
36,778
(14)
36,764
Balances, March 31, 2022
37,559
116,928
750
782,972
631
901,319
63
763
5,016
(230)
(1)
(725)
(16,293)
(17,019)
(3,806)
(6,384)
44,970
21
44,991
Balances, June 30, 2022
37,392
121,982
(5,634)
807,843
652
924,880
35
256
5,953
(34)
(112)
(2,230)
(2,342)
(3,812)
(9,163)
Balances, September 30, 2022
37,393
Unaudited Consolidated Statements of Cash Flows
CASH FLOWS FROM OPERATING ACTIVITIES:
Less: income (loss) from discontinued operations, net of income taxes
Income from continuing operations, net of income taxes
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization
44,433
39,225
Stock-based compensation expense
15,008
12,819
Provision for deferred income taxes
(2,496)
(1,404)
Gain from discount on notes receivable
(638)
(Gain) loss on disposal and sale of assets
(4,058)
923
Changes in operating assets and liabilities, net of assets acquired
(68,591)
14,957
(70,407)
(118,562)
Other assets
(11,858)
1,958
21,630
63,404
Other liabilities and accrued expenses
7,281
8,963
25,494
(10,215)
Net cash from operating activities from continuing operations
112,982
106,410
Net cash from operating activities from discontinued operations
(81)
(523)
Net cash from operating activities
112,901
105,887
CASH FLOWS FROM INVESTING ACTIVITIES:
Receipt of notes receivable
802
Purchases of property and equipment
(39,507)
(21,184)
Acquisitions, net of cash acquired
(145,779)
(18,739)
Net cash from investing activities
(185,286)
(39,121)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings
85,000
Payment of debt-issuance costs
(1,350)
Payments on long-term borrowings
(15,000)
(8,750)
Dividend payments
(11,407)
(11,585)
Purchase and retirement of common stock
(25,955)
(56,625)
Net payments related to stock-based awards
(1,411)
(3,136)
Net cash from financing activities
(53,773)
3,554
EFFECT OF CURRENCY TRANSLATION ON CASH AND CASH EQUIVALENTS
(9,161)
(2,765)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(135,319)
67,555
CASH AND CASH EQUIVALENTS, beginning of period
480,368
CASH AND CASH EQUIVALENTS, end of period
547,923
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest
2,965
2,896
Cash paid for income taxes
5,393
25,271
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, strip and deposition. Our broad portfolios of high and low voltage power products are used in a wide range of applications, such as semiconductor equipment, industrial production, medical and life science equipment, data center and telecommunication. We also supply related sensing, controls, and instrumentation products for advanced measurement and calibration of radio frequency ("RF") power and temperature, electrostatic instrumentation products for test and measurement applications, and gas sensing and monitoring solutions for multiple industrial markets. Our network of global service support centers provides a recurring revenue opportunity as we offer repair services, 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 September 30, 2022, and the results of our operations and cash flows for the three and nine months ended September 30, 2022 and 2021.
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, 2021 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:
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, 2021.
We reclassified certain prior period amounts within these consolidated financial statements to conform to the current year presentation.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
New Accounting Standards Adopted
In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 806) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers." The amendments in ASU 2021-08 address diversity and inconsistency related to the recognition and measurement of contract assets and contract liabilities acquired in a business combination. ASU 2021-08 requires an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers.
We adopted ASU 2021-08 on a prospective basis effective January 1, 2022. The adoption will impact business combinations subsequent to that date and require recognition and measurement of acquired contract assets and liabilities in accordance with ASC 606. Specifically, we will account for the related revenue contracts of the acquiree as if we originated the contracts. Adoption of ASU 2021-08 did not impact acquired contract assets or liabilities from prior business combinations.
New Accounting Standards Issued But Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" ("ASU 2020-04"). In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope" ("ASU 2021-01"). This collective guidance provides optional expedients and exceptions for applying 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. ASU 2020-04 and ASU 2021-01 will be in effect through December 31, 2022.
Our Credit Facility (refer to Note 18. Credit Facility) and interest rate swap agreements (refer to Note 7. Derivative Financial Instruments) reference the one-month USD LIBOR rate. Both agreements contain provisions for transition to a new reference rate upon discontinuance of LIBOR. We expect the one-month USD LIBOR rate to be available through June 2023. We are currently assessing the potential timing of transitioning to a replacement interest rate benchmark for our Credit Facility and do not expect ASU 2020-04 and ASU 2020-01 to materially impact our consolidated financial statements.
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
146,863
Less cash acquired
(3,484)
Total fair value of purchase consideration
143,379
We allocated the purchase price 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 estimated preliminary values of the assets acquired and liabilities assumed.
PreliminaryFair Value September 30, 2022
Current assets and liabilities, net
12,013
Property and equipment
3,927
4,996
Deferred taxes and other liabilities
(1,164)
Intangible assets
57,600
71,003
Operating lease liability
(4,996)
Total fair value of net assets acquired
The following table summarizes the intangible assets acquired:
Amortization
Useful Life
Fair Value
Method
(in years)
Customer relationships
50,500
Straight-line
10
Technology
7,100
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 expected operating synergies from combining operations and approximately 85% is expected to be deductible for tax purposes. We are still evaluating the fair value for the assets acquired and liabilities assumed. Accordingly, the purchase price allocation presented above is preliminary.
We included SL Power’s results of operations in our consolidated financial statements from the date of acquisition. The following table summarizes SL Power’s contribution to sales in our Consolidated Statements of Operations.
16,659
29,604
TEGAM, Inc.
On June 1, 2021, we acquired 100% of the issued and outstanding shares of capital stock of TEGAM, Inc., which is based in Geneva, Ohio. We accounted for this transaction as a business combination. This acquisition added metrology and calibration instrumentation to Advanced Energy’s RF process power solutions in our Semiconductor and Industrial and Medical markets.
Cash paid at closing
15,430
Cash paid for indemnity holdback released in June 2022
1,800
(177)
17,053
We allocated the purchase price 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 values of the assets acquired and liabilities assumed.
Fair Value
3,475
755
425
6,900
Goodwill (deductible for tax purposes)
5,917
(425)
Goodwill represents TEGAM’s assembled workforce and expected operating synergies from combining operations. We included TEGAM’s results of operations in our consolidated financial statements from the date of acquisition.
NOTE 3. REVENUE
Nature of goods and services
Products
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.
Our power solutions enable innovation in complex semiconductor and thin film plasma processes such as dry etch, strip and deposition, high and low voltage applications such as process control, medical equipment, life science applications, industrial technology and production, scientific instruments, clean technology production, advanced material production, temperature-critical material processing, data center computing, networking, and
11
telecommunication. We also supply related sensing, controls, and instrumentation products for advanced measurement and calibration of RF power and temperature, electrostatic instrumentation products for test and measurement applications, and gas sensing and monitoring solutions for multiple industrial markets. Our network of global service support centers provides a recurring revenue opportunity as we offer repair services, conversions, upgrades, refurbishments, and used equipment to companies using our products.
Services
Our services group offers warranty and after-market repair services in the regions in which we operate, providing us with preventive maintenance opportunities. Our customers continue to pursue low cost of ownership of their capital equipment and are increasingly sensitive to the costs of system downtime. They expect that suppliers offer comprehensive local repair service and customer support. To meet these market requirements, we maintain a worldwide support organization in the U.S., the People’s Republic of China ("PRC"), Japan, Korea, Taiwan, Germany, Ireland, Singapore, Israel, and Great Britain. Support services include warranty and non-warranty repair services, upgrades, and refurbishments on the products we sell.
As part of our ongoing service business, we satisfy our service obligations under preventative maintenance contracts and extended warranties which had previously been offered on our discontinued inverter products. Any up-front fees received for extended warranties or maintenance plans are deferred. Revenue under these arrangements is recognized ratably over the underlying terms as we do not have historical information which would allow us to project the estimated service usage pattern at this time.
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. As a result, we elected not to disclose the amount of these remaining performance obligations.
Disaggregation of revenue
The following tables present additional information regarding our revenue:
Semiconductor Equipment
266,600
173,441
698,354
530,828
Industrial and Medical
119,587
80,800
307,436
242,412
Data Center Computing
87,542
62,231
232,941
190,843
Telecom and Networking
42,545
29,621
115,951
94,941
Product
471,627
312,389
1,238,480
956,790
44,647
33,704
116,202
102,234
12
United States
197,205
139,089
530,240
410,212
North America (excluding U.S.)
40,910
24,708
96,713
77,067
Asia
215,401
135,838
557,629
434,232
Europe
61,456
44,838
157,972
129,751
1,302
1,620
12,128
7,762
During the three months ended September 30, 2022, Applied Materials, Inc. and Lam Research Corporation accounted for 19% and 15%, respectively, of our total revenue compared to 22% and 11%, respectively, of our total revenue during the same period in the prior year. During the nine months ended September 30, 2022, Applied Materials, Inc. and Lam Research Corporation accounted for 20% and 14%, respectively, of our total revenue compared to 21% and 10%, respectively, of our total revenue during the same period in the prior year.
NOTE 4. INCOME TAXES
The following table summarizes tax expense and the effective tax rate for our income from continuing operations:
Effective tax rate
13.5
%
14.8
16.0
10.2
Our effective tax rates differ from the U.S. federal statutory rate of 21% for the three and nine months ended September 30, 2022 and 2021, 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 months ended September 30, 2022 was lower than the same period in 2021 primarily due to the cumulative year to date impact of increased earnings in 2022 and the resulting mix of earnings by geography. The effective tax rate for the nine months ended September 30, 2022 was higher than the same period in 2021 primarily due to beneficial discrete items occurring in 2021 not recurring in 2022, and by the capitalization and amortization of research and development expenses rather than immediately expensing them starting in 2022 as required by the 2017 Tax Cuts and Jobs Act.
Under the 2017 Tax Cuts and Jobs Act enacted in December 2017, research and development expenses incurred for tax years beginning after December 31, 2021 must be capitalized and amortized ratably over five or fifteen years for tax purposes. Although Congress is considering legislation that would defer the capitalization and amortization requirement, there is no assurance that the provision will be repealed or otherwise modified. If the requirement is not modified, it may materially increase future cash taxes beginning in 2023.
The Inflation Reduction Act (“IRA”) and CHIPS and Science Act (“CHIPS Act”) were both enacted in August 2022. The IRA introduced new provisions including a 15% corporate alternative minimum tax for certain large corporations that have at least an average of $1 billion adjusted financial statement income over a consecutive three-tax-year period and a 1% excise tax surcharge on stock repurchases. The CHIPS Act provides a variety of incentives associated with investments in domestic semiconductor manufacturing and related activities. Both Acts are applicable for tax years beginning after December 31, 2022 and had no impact to our consolidated financial statements in the nine months ended September 30, 2022.
13
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 if-converted and treasury stock methods), if our outstanding stock options and restricted stock units had been converted to common shares (when such conversion is dilutive).
The following is a reconciliation of the weighted-average shares outstanding used in the calculation of basic and diluted earnings per share:
Less: income from continuing operations attributable to noncontrolling interest
Income from continuing operations attributable to Advanced Energy Industries, Inc.
74,864
21,041
156,530
94,910
Assumed exercise of dilutive stock options and restricted stock units
251
180
243
221
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:
(in thousands, except per share amounts)
Amount paid or accrued to repurchase shares
2,342
52,555
25,955
59,058
Number of shares repurchased
34
605
346
677
Average repurchase price per share
69.39
86.93
75.07
87.30
There were no shares repurchased from related parties. Repurchased shares were retired and assumed the status of authorized and unissued shares.
In July 2022, the Board of Directors approved an increase to the share repurchase plan that increased the remaining amount authorized for future repurchases to a maximum of $200.0 million with no time limitation. At September 30, 2022, the remaining amount authorized by the Board of Directors for future share repurchases was $200.0 million.
NOTE 6. FAIR VALUE MEASUREMENTS
The following tables present information about our assets and liabilities measured at fair value on a recurring basis.
September 30, 2022
Description
Balance Sheet Classification
Level 1
Level 2
Level 3
TotalFair Value
Assets:
Certificates of deposit
2,120
Foreign currency forward contracts
208
Interest rate swaps
16,113
Total assets measured at fair value on a recurring basis
18,441
Liabilities:
Contingent consideration
Other current liabilities
1,779
Total liabilities measured at fair value on a recurring basis
December 31, 2021
2,296
2,739
5,035
1,738
The fair value of foreign currency forward contracts is based on the movement in the forward rates of foreign currency cash flows in which the hedging instrument is denominated. We determine the fair value of interest rate swaps by estimating the net present value of the expected cash flows based on market rates and associated yield curves, adjusted for non-performance credit risk, as applicable. See Note 7. Derivative Financial Instruments for additional information. The fair value of contingent consideration is determined by estimating the net present value of the expected cash flows based on the probability of expected payment. For all periods presented, there were no transfers into or out of Level 3.
15
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:
83,760
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 components 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). These transactions are accounted for as cash flow hedging instruments.
The interest rate swap contracts fixed a portion of the outstanding principal balance on our term loan to a total interest rate of 1.271%. This is comprised of 0.521% average fixed rate per annum in exchange for a variable interest rate based on one-month USD-LIBOR-BBA plus the credit spread in our existing Credit Agreement (see Note 18. Credit Facility), which is 75 basis points at current leverage ratios.
The following table summarizes the notional amount of our qualified hedging instruments:
Interest rate swap contracts
242,594
255,719
The following table summarizes the balances recorded in accumulated other comprehensive loss on the Consolidated Balance Sheets for qualifying hedges.
Interest rate swap contract gains
12,427
2,107
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.
NOTE 8. ACCOUNTS AND OTHER RECEIVABLES, NET
We record accounts and other receivables at net realizable value. Components of accounts and other receivables, net of reserves, were as follows:
Amounts billed, net
289,007
217,549
Unbilled receivables
18,011
19,678
Total receivables, net
"Amounts billed, net" represents amounts invoiced to customers in accordance with our terms and conditions and includes an allowance for expected credit losses. These receivables are short term in nature and do not include any financing components.
"Unbilled receivables" consist of amounts where we satisfied our contractual obligations associated with customer inventory stocking agreements. Such amounts typically become billable upon the customer’s consumption of the inventory. We anticipate invoicing and collecting substantially all unbilled receivables within the next twelve months.
The following table summarizes the changes in expected credit losses:
5,784
Additions
441
Deductions - write-offs, net of recoveries
(4,170)
(30)
2,025
NOTE 9. INVENTORIES
Inventories are valued at the lower of cost or net realizable value and computed on a first-in, first-out basis. Components of inventories were as follows:
Parts and raw materials
311,748
261,365
Work in process
28,860
24,222
Finished goods
68,814
52,823
17
NOTE 10. PROPERTY AND EQUIPMENT, NET
Property and equipment, net is comprised of the following:
Estimated Useful
Life (in years)
Buildings, machinery, and equipment
5 to 25
149,877
134,635
Computer equipment, furniture, fixtures, and vehicles
3 to 5
34,557
33,490
Leasehold improvements
2 to 10
61,804
48,370
Construction in process
16,787
5,914
263,025
222,409
Less: Accumulated depreciation
(126,523)
(107,579)
The following table summarizes depreciation expense. All depreciation expense is recorded in income from continuing operations:
Depreciation expense
8,507
7,874
25,352
22,721
NOTE 11. GOODWILL
The following table summarizes the changes in goodwill:
Measurement period adjustments
40
Additions from acquisition
(4,007)
18
NOTE 12. INTANGIBLE ASSETS
Intangible assets consisted of the following:
Gross Carrying
Net Carrying
96,027
(43,146)
52,881
166,018
(40,325)
125,693
Trademarks and other
26,864
(9,631)
17,233
288,909
(93,102)
91,461
(35,854)
55,607
118,706
(34,187)
84,519
27,244
(7,964)
19,280
237,411
(78,005)
At September 30, 2022, the weighted average remaining useful life of intangibles subject to amortization was approximately 9.3 years.
Amortization expense related to intangible assets is as follows:
Amortization expense
Estimated amortization expense related to intangibles is as follows:
Year Ending December 31,
2022 (remaining)
7,014
2023
28,058
2024
25,072
2025
20,905
2026
19,189
Thereafter
95,569
19
NOTE 13. RESTRUCTURING COSTS
During 2018, we committed to a restructuring plan to optimize our manufacturing footprint and to improve our operating efficiencies and synergies related to our recent acquisitions. For the periods presented, we incurred severance costs primarily related to the transition and exit of our facility in Shenzhen, PRC and actions associated with synergies related to the Artesyn acquisition. The table below summarizes restructuring charges:
Severance and related charges
676
833
1,270
Facility relocation and closure charges
596
345
1,251
Total restructuring charges
Cumulative Cost
Through
21,213
7,160
28,373
Our restructuring liabilities are included in other accrued expenses in our Consolidated Balance Sheets and related primarily to severance and related charges. Changes in restructuring liabilities were as follows:
9,263
Costs incurred and charged to expense
Costs paid or otherwise settled
(8,623)
Effects of changes in exchange rate
(24)
1,794
NOTE 14. WARRANTIES
Our sales agreements include customary product warranty provisions, which range from 12 to 24 months after shipment. We record the estimated warranty obligations cost when we recognize revenue. This estimate is based on our 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:
3,350
Additions from acquisitions
181
Increases to accruals
4,820
Warranty expenditures
(2,431)
Effect of changes in exchange rates
(98)
5,822
20
NOTE 15. LEASES
Components of operating lease cost were as follows:
Operating lease cost
5,613
5,735
17,061
17,708
Short-term and variable lease cost
1,177
578
3,516
1,704
Total operating lease cost
6,790
6,313
20,577
19,412
Maturities of our operating lease liabilities are as follows:
5,421
20,029
17,518
14,515
13,190
68,353
Total lease payments
139,026
Less: Interest
(28,152)
Present value of lease liabilities
110,874
Weighted average remaining lease term (in years)
9.1
9.8
Weighted average discount rate
4.6
4.5
Cash paid for operating leases
5,557
6,058
16,642
18,037
Right-of-use assets obtained in exchange for operating lease liabilities
2,222
7,169
14,433
14,402
NOTE 16. STOCK-BASED COMPENSATION
As of September 30, 2022, we had two active stock-based incentive compensation plans: the 2017 Omnibus Incentive Plan (the "2017 Plan") and the Employee Stock Purchase Plan ("ESPP"). 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.
On May 4, 2017, the stockholders approved the 2017 Plan and all shares that were then available for issuance under the 2008 Omnibus Incentive Plan ("the 2008 Plan") are now available for issuance under the 2017 Plan. The 2017 Plan and 2008 Plan provide for the grant of stock options, stock appreciation rights, restricted stock, stock units (including deferred 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:
Shares available for future issuance under the 2017 Omnibus Incentive Plan
1,536
Shares available for future issuance under the Employee Stock Purchase Plan
642
Restricted stock units ("RSU’s") are generally granted with a grant date fair value equal to the market price of our stock on the date of grant and with generally a three-year vesting schedule. Certain RSUs contain performance-based or market-based vesting conditions in addition to the time-based requirements.
Stock option awards are generally granted with an exercise price equal to the market price of our stock on the date of grant and with either a three or four-year vesting schedule or performance-based vesting as determined at the time of grant. Stock option awards generally have a term of 10 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:
6,022
3,674
Changes in our RSUs were as follows:
Nine Months Ended September 30, 2022
Weighted-
Average
Number of
Grant Date
RSUs
RSUs outstanding at beginning of period
627
76.37
RSUs granted
525
73.38
RSUs vested
(145)
84.99
RSUs forfeited
(248)
60.74
RSUs outstanding at end of period
759
77.77
Changes in our stock options were as follows:
Exercise Price
Options
per Share
Options outstanding at beginning of period
112
24.41
Options granted
76
85.97
Options exercised
(25)
23.30
Options outstanding at end of period
163
53.10
22
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
In September 2019, in connection with the Artesyn Acquisition Agreement, we entered into a credit agreement ("Credit Agreement") that provided aggregate financing of $500.0 million, consisting of a $350.0 million senior unsecured term loan facility (the "Term Loan Facility") and a $150.0 million senior unsecured revolving facility (the "Revolving Facility" and together with the Term Loan Facility, the "Credit Facility").
In September 2021, we amended the Credit Agreement whereby we borrowed an additional $85.0 million, which increased the aggregate amount outstanding under the Term Loan Facility to $400.0 million. In addition, we increased the Revolving Facility capacity by $50.0 million to $200.0 million. Both the Term Loan Facility and Revolving Facility mature on September 9, 2026.
The following table summarizes borrowings under our Credit Facility and the associated interest rate.
Balance
Interest Rate
Unused Line Fee
Term Loan Facility subject to a fixed interest rate
1.271%
Term Loan Facility subject to a variable interest rate
137,406
3.865%
Revolving Facility subject to a variable interest rate
0.10%
Total borrowings under the Credit Agreement
380,000
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 a reserve adjusted "Eurodollar Rate" or "Base Rate," 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.
Available capacity on Revolving Facility
200,000
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 $250.0 million at identical terms to our existing Credit Facility.
23
The fair value of the Term Loan Facility approximates the outstanding balance of $380.0 million as of September 30, 2022.
The debt obligation on our Consolidated Balance Sheets consists of the following:
Term Loan Facility
395,000
Less: debt discount
(1,868)
(2,267)
Total debt
378,132
392,733
Less current portion of long-term debt
(20,000)
Total long-term debt
Contractual maturities of our debt obligations, excluding amortization of debt issuance costs, are as follows:
5,000
315,000
Interest expense and unused line of credit fees were recorded in other income (expense), net in our Consolidated Statements of Operations as follows:
Interest expense
1,842
1,009
4,303
2,973
Amortization of debt issuance costs
136
420
413
669
Unused line of credit fees and other
51
152
116
Total interest expense
2,029
1,470
4,868
3,758
24
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, 2021, which was filed with the SEC on March 16, 2022.
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," "enables," "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:
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.
For additional information regarding factors that may affect our actual financial condition, results of operations and accuracy of our forward-looking statements, see the information under the caption "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q and, in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2021. We undertake no obligation to revise or update any forward-looking statements for any reason.
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.
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. We provide market revenue data to enable tracking of trends.
26
In April 2022, we acquired SL Power Electronics Corporation ("SL Power"). 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.
At the beginning of 2020 we saw the spread of COVID-19, which grew into a global pandemic. Our focus on providing a healthy and safe working environment for our employees led to intermittent shutdowns of our manufacturing facilities to implement new health and safety protocols and additional investments to comply with government guidelines. Since 2020, there have been periods when some of our manufacturing facilities were not operating or were operating at reduced capacity due to government mandates to restrict travel, maintain social distancing, and implement health and safety procedures. Additionally, during 2022, restrictions related to COVID-19, particularly in China, and disruptions in an already challenged global supply chain that disrupted our workforce and limited the availability of certain materials, parts, subcomponents, and subassemblies needed for production, have impacted our ability to fulfill product shipments to meet customer demand and contributed to increased backlog.
Although COVID-19 has impacted our revenues and manufacturing efficiency for almost three years, COVID-19 has not materially impacted our liquidity, our ability to access capital, our ability to comply with our debt covenants or the fair value of our assets. Additionally, we believe the accommodations we have made to our work environment, including employees utilizing work-from-home arrangements where necessary, will not impact our ability to maintain effective internal controls over financial reporting.
The shortage of critical components was caused by a variety of factors including increased demand for electronic components used in a wide variety of industries, the pandemic-driven rise in consumer demand for technology goods, logistics-related disruptions in shipping, and capacity limitations at some suppliers due to COVID-19 and its variants, labor shortages, and other factors. These supply constraints have led to longer lead times in procuring materials and subcomponents and, in some cases, higher costs and inventory level requirements. We have implemented measures to improve 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. However, it is not clear how long supply constraint conditions will continue, how quickly it may recover, the extent to which our mitigating actions will be successful, or to what extent we can recover our higher costs.
Looking forward, we expect that for the remainder of 2022 customer demand will remain strong across many of our served markets; however, our ability to procure critical components to meet our customers’ needs will continue to be limited by the ongoing constraints in the global supply chain. In addition, recent increases in global inflation, interest rates, financial market volatility, geopolitical tensions, additional export controls, and other factors impacting macroeconomic growth may impact future demand and our cost base. Most recently, in October of 2022, additional restrictions were announced by the US Commerce Department related to the export of semiconductor equipment for advanced computing chips that may have a negative impact on our semiconductor demand, backlog, and revenues. As such, our forward-looking projections of revenues, earnings, and cash flow may be adversely impacted if any of these situations continue or further deteriorates.
27
Semiconductor Equipment Market
Growth in the Semiconductor Equipment market is driven by growing integrated circuits content across many industries such as processing and storage in advanced applications including artificial intelligence, edge and cloud computing, autonomous and electric vehicles, and the rapid adoption of advanced mobile connectivity solutions such as 5G which enhances existing and enables new wireless applications. To address the long-term growing demand for semiconductor devices, the industry continues to invest in production capacities for both leading-edge and trailing-edge nodes, logic devices, the latest memory devices, back-end test, and advanced wafer-level packaging. The industry’s transition to advanced technology nodes in logic and DRAM and to increased layers in 3D NAND 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 etching and deposition processes become more challenging due to increasing aspect ratios in advanced 3D devices, more advanced radio frequency ("RF") and direct current ("DC") plasma generation technologies are needed. We strive to meet these challenges by providing a broader range of more complex RF and DC power solutions. Beyond etch and deposition processes, the growing complexity at the advanced nodes also drive a higher number of other processes 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 useable 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 including with new design and product generations, grow our market position in applications where we have lower share, such as remote plasma source and dielectric etch, and leverage our product portfolio in areas such as embedded power, high voltage power systems, and critical sensing and controls to grow our share and contents at our key original equipment manufacturer ("OEM") customers.
The Semiconductor Equipment market continues to experience demand growth driven by higher semiconductor contents across many industries, increased capital intensity at the leading-edge process nodes, semiconductor device makers investing in the trailing-edge nodes due to supply constraints and increased regional investments of semiconductor capacities. Advanced Energy participated in this market growth by delivering record revenue from the Semiconductor Equipment market in 2021 and in the first nine months of 2022, even with the negative impact of the global supply constraints. While demand continued to be strong through the third quarter of 2022, overcapacity in the memory market, changing macroeconomic conditions, and new export restrictions to China for certain semiconductor equipment may negatively impact our demand, backlog, and revenue levels. Long-term drivers for demand growth in this market include investment in new fab capacities driven by growing demand for semiconductor devices for a wide range of applications, the continued transition to next generation processing nodes, and increased complexity of advanced process requiring more complex and innovative power solutions. Overall, we expect to continue to invest in both increasing our capacity and capability to meet the expected long-term market demand for our products.
Industrial and Medical Markets
Customers in the Industrial and Medical market incorporate 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.
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. Our customers in this market are primarily global and regional original equipment and device manufacturers. These OEM customers incorporate our products and solutions into their equipment. 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, analytical instruments, test and measurement, medical lasers, scientific instrumentation and industrial equipment, power control modules and thermal instrumentation products for material fabrication, production process controls, and many precision industrial sensing applications.
28
Growth in the Industrial and Medical market is driven by growth investments 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 investments in medical devices and life science equipment. 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, such as medical, test and measurement, indoor farming, and many other applications.
During 2021 and the first nine months of 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. In the first nine months of 2022, overall customer demand increased compared to the same period in the prior year, but supply constraints of critical components limited our ability to fulfill product shipments at the level of customer demand. We expect product delivery and revenue levels will continue to be primarily dependent on resolving supply constraints. It is not clear how long these supply constraints will persist or on what timelines our supply may recover.
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 shifted from traditional enterprise on-premises computing to the data center, driving investments in data center infrastructure. In addition, the data center industry started to transition to 48 Volt infrastructure, where 48 Volt DC power replaces 12 Volt in server racks to improve overall power efficiency. Advanced Energy benefits from these trends by leading the industry in providing high-efficiency 48 Volt server power solutions to the data center industry. Further, demand for edge computing is growing, driven by the need for faster processing, lower latency, higher data security, and more reliability than traditional cloud computing. Due to its wide range of many unique configurations and requirements, edge computing creates additional opportunities for Advanced Energy. Lastly, the rapid growth and adoption of artificial intelligence and machine learning are driving accelerated 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, we believe Advanced Energy is well positioned to continue to capitalize on the ongoing shift towards cloud computing. Our strategy in the Data Center and Computing market is to penetrate selected additional customers and profitable applications based on our differentiated capability and competitive strengths in power density, efficiency, and controls.
Customer demand for our products rose during the past two years as COVID-19 accelerated demand for cloud and network applications. However, our 2021 revenue declined year over year due to the limited availability of parts given global supply constraints, which prevented us from producing products to meet the growing customer demand. Revenue in this market in the first nine months of 2022 increased compared to the same period in the prior year as demand grew and we were able to secure additional critical components. However, the supply of the critical components remains highly constrained, impacting our ability to fulfill product shipments at the level of customer demand. It is not clear how long these supply constraints will persist or how quickly our supply may recover.
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 of 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.
29
During 2021, revenue declined on an annual basis as a result of the limited availability of parts given global supply constraints and our internal decision to optimize our portfolio toward higher margin and value-added applications for the Telecom and Networking market. Revenue increased in the first nine months of 2022 compared to the same period in the prior year due to increased customer demand and our ability to secure additional critical components. For the remainder of 2022, we expect demand to remain strong in this market driven by investments in 5G infrastructure in the U.S. and Europe and new design wins but the supply constraint condition continues to negatively impact our ability to fulfill product shipments at the level of customer demand. It is not clear how long these supply shortages will persist or how quickly our supply may recover. In addition, deteriorating macroeconomic conditions including higher interest rates and potential recession may impact our demand levels in 2023.
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):
Sales
Operating expenses
Operating income from continuing operations
Income from continuing operations before income taxes
100.0
37.0
34.7
36.7
37.1
22.0
27.7
23.8
26.7
15.0
7.0
12.9
10.3
1.7
0.1
0.8
(0.3)
16.8
7.1
13.8
10.0
2.3
1.1
2.2
1.0
14.5
6.1
11.6
9.0
30
SALES, NET
The following tables summarize net sales and percentages of net sales, by markets (in thousands):
Change 2022 v. 2021
Dollar
Percent
93,159
53.7
38,787
48.0
25,311
40.7
12,924
43.6
170,181
49.2
167,526
31.6
65,024
26.8
42,098
22.1
295,658
27.9
51.6
50.1
23.2
23.3
22.7
22.9
17.0
18.0
17.2
8.2
8.6
8.5
OPERATING EXPENSES
The following tables summarize our operating expenses (in thousands) and as a percentage of sales:
9.6
11.7
11.0
14.0
1.4
1.6
Restructuring charges
0.4
10.4
11.4
11.9
0.2
SALES AND BACKLOG
Total Sales
Sales increased $170.2 million, or 49.2%, to $516.3 million for the three months ended September 30, 2022 and $295.7 million, or 27.9%, to $1,354.7 million for the nine months ended September 30, 2022 as compared to the same periods in the prior year.
The increase in sales was primarily due to increased demand for our products across all our markets and measures we took to improve material availability and capacity, which allowed us to better meet the higher demand. During the three and nine months ended September 30, 2022, the acquisition of SL Power contributed $16.7 million and $29.6 million, respectively, to our total sales. For additional information, see Note 2. Acquisitions in Part I, Item 1 "Unaudited Consolidated Financial Statements."
Revenues in the first nine months of 2022 continued to be impacted relative to demand across our markets by supply constraints for certain integrated circuits and other components, which limited our ability to fulfill product shipments to meet our total demand. As a result, we saw an increase in backlog, as indicated in the table below.
Backlog
The following table summarizes our backlog (in thousands):
Change from Year End
Change from Same Period One Year Ago
1,093,026
927,810
771,433
165,216
17.8
321,593
41.7
Backlog represents outstanding orders for products we expect to deliver within the next 12 months. Backlog increased from the end of last year and the same period one year ago due to the global supply constraint environment, resulting in customers placing larger orders than historical levels in anticipation of longer-term demand and our lead time extending. We believe these higher backlog levels provide some level of revenue protection if demand levels are reduced due to macroeconomic factors.
Backlog at any particular date is not necessarily indicative of actual sales which may be generated for any succeeding period. In addition, there is uncertainty of the timing of when backlog can convert into revenue due to supply constraints. Because our customers generally order on a purchase order basis, they can typically cancel, change, or delay product purchase commitments with little or no notice.
Sales by Market
Sales in the Semiconductor Equipment market increased $93.2 million, or 53.7%, to $266.6 million for the three months ended September 30, 2022 and $167.5 million, or 31.6%, to $698.4 million for the nine months ended September 30, 2022 as compared to the same periods in the prior year. The increase in sales during 2022 is primarily due to growth in the Semiconductor Equipment market, improving parts availability, increases in factory output, market share gains in selected areas, and expansion of our product portfolio.
Sales in the Industrial and Medical market increased $38.8 million, or 48.0%, to $119.6 million for the three months ended September 30, 2022 and $65.0 million, or 26.8%, to $307.4 million for the nine months ended September 30, 2022, as compared to the same periods in the prior year. The increase in sales relative to the same period in the prior year is primarily due to increased demand for our products, improving material availability, market share gains in selected areas, and the incremental sales from our acquisition of SL Power.
Sales in the Data Center Computing market increased $25.3 million, or 40.7%, to $87.5 million for the three months ended September 30, 2022 and increased $42.1 million, or 22.1%, to $232.9 million for the nine months ended September 30, 2022 as compared to the same periods in the prior year. The increase in Data Center Computing market
32
sales during the nine months ended September 30, 2022 is due in part to the early 2021 digestion of equipment at key accounts and better supply availability, which enabled us to partially fulfill product shipments against higher customer demand.
Sales in the Telecom and Networking market increased $12.9 million, or 43.6%, to $42.5 million for the three months ended September 30, 2022 and $21.0 million, or 22.1%, to $116.0 million for the nine months ended September 30, 2022 as compared to the same periods in the prior year. The increase in sales was primarily due to increased demand in the Telecom and Networking market and improved material availability.
GROSS PROFIT
For the three months ended September 30, 2022, gross profit increased $71.2 million to $191.2 million, or 37.0% of revenue, as compared to $120.0 million, or 34.7% of revenue, in the same period in the prior year. For the nine months ended September 30, 2022, gross profit increased $105.1 million to $497.7 million, or 36.7% of revenue, as compared to $392.6 million, or 37.1% of revenue, in the same period in the prior year.
The increase in gross profit as a percent of revenue for the three months ended September 30, 2022 is largely due to operational leverage on sales growth. The decrease in gross profit as a percent of revenue for the nine months ended September 30, 2022 is largely related to higher material and freight costs, productivity inefficiencies, and other supply chain related costs. These factors began to affect Advanced Energy primarily in the second quarter of 2021.
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.
Research and development expenses increased $9.2 million to $49.8 million for the three months ended September 30, 2022 and increased $20.5 million to $141.4 million for the nine months ended September 30, 2022 as compared to the same periods in the prior year. The increase in research and development expense is related to the acquisitions of SL Power and TEGAM, increased headcount and associated costs, outside technical services, engineering materials and higher variable compensation related costs, as we invest in new programs to maintain and increase our technological leadership and provide solutions to our customers’ evolving needs.
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, and human resource functions in addition to our general management, including acquisition-related activities.
Selling, general and administrative ("SG&A") expenses increased $8.3 million to $56.7 million for the three months ended September 30, 2022 and increased $17.8 million to $161.1 million for the nine months ended September 30, 2022 as compared to the same periods in the prior year. The increase in SG&A is principally related to acquisition related activities, sales commissions driven by higher revenue, an increase in headcount, and an increase in variable compensation.
Amortization of Intangibles
Amortization expense increased $1.4 million to $7.0 million during the three months ended September 30, 2022 and increased $2.6 million to $19.1 million for the nine months ended September 30, 2022, as compared to the same periods in the prior year. The increase is primarily driven by incremental amortization of newly acquired intangible assets. For additional information, see Note 2. Acquisitions and Note 12. Intangible Assets in Part I, Item 1 "Unaudited Consolidated Financial Statements."
Restructuring
Restructuring charges relate to previously announced management plans to optimize our manufacturing footprint to lower cost regions, improvements in operating efficiencies, and synergies related to acquisitions. 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 increased $8.4 million to $8.9 million for the three months ended September 30, 2022 and increased $15.0 million to $11.3 million for the nine months ended September 30, 2022 as compared to the same periods in the prior year. The increase in income between periods is primarily a result of higher unrealized foreign exchange gains due to the strengthening US dollar compared to our other foreign currencies and a one-time gain on the sale of intellectual property from a previous acquisition. This was partially offset by higher interest expense on increasing 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:
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, amortization of intangible assets, and non-economic foreign exchange gains and losses. 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 and effect of adoption of the 2017 Tax Cuts and Jobs Act.
Reconciliation of non-GAAP measure
Operating expenses and operating income from continuing
operations, excluding certain items (in thousands)
Gross profit from continuing operations, as reported
Adjustments to gross profit:
454
218
1,087
783
Facility expansion, relocation costs and other
1,662
1,357
4,133
5,192
Acquisition-related costs
66
3,259
(372)
3,351
Non-GAAP gross profit
193,400
124,873
502,540
401,901
Non-GAAP gross margin
37.5%
36.1%
37.1%
38.0%
Operating expenses from continuing operations, as reported
Adjustments:
(7,049)
(5,607)
(19,081)
(16,504)
(5,568)
(3,456)
(13,921)
(12,036)
(1,150)
(1,768)
(6,977)
(6,124)
(212)
(121)
(1,272)
(1,178)
(2,521)
Non-GAAP operating expenses
99,758
83,629
281,541
245,707
Non-GAAP operating income
93,642
41,244
220,999
156,194
Non-GAAP operating margin
18.1%
11.9%
16.3%
14.7%
Income from continuing operations, excluding certain items
Income from continuing operations, less non-controlling interest, net of income taxes
1,216
5,027
6,605
9,475
Facility expansion, relocation costs, and other
1,455
5,404
Unrealized foreign currency (gain) loss
(6,169)
(2,092)
(13,023)
(3,409)
Acquisition-related costs and other included in other income (expense), net
(4,685)
(79)
(4,600)
907
Tax effect of non-GAAP adjustments
855
(1,036)
(966)
(4,363)
Non-GAAP income, net of income taxes, excluding stock-based compensation
74,913
31,195
168,938
121,949
Stock-based compensation, net of taxes
4,697
2,811
11,668
9,809
Non-GAAP income, net of income taxes
79,610
34,006
180,606
131,758
Non-GAAP diluted earnings per share
2.12
0.89
4.79
3.42
Impact of Inflation
In previous years, inflation has not had a significant impact on our operations. However, more recently we are experiencing 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.
Liquidity and Capital Resources
Liquidity
We believe that 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").
The following table summarizes our cash, cash equivalents, and marketable securities (in thousands):
Marketable securities
Total cash, cash equivalents, and marketable securities
411,173
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 twelve 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.
36
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).
As of September 30, 2022, 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.
Dividends
In March 2021, the Board of Directors (the "Board") declared the first quarterly cash dividend since our inception as a public company. During the nine months ended September 30, 2022, we paid quarterly cash dividends of $0.10 per share totaling $11.4 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 and will depend on our financial condition, results of operations, capital requirements, business conditions, and other factors.
Cash Flows
A summary of our cash from operating, investing, and financing activities is as follows (in thousands):
Net cash from investing activities from continuing operations
Net cash from financing activities from continuing operations
Effect of currency translation on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Net Cash From Operating Activities
Net cash from operating activities from continuing operations for the nine months ended September 30, 2022, was $113.0 million, as compared to $106.4 million for the same period in the prior year. The increase of $6.6 million in net cash flows from operating activities as compared to the same period in the prior year is primarily due to an increase in net income. This was partially offset by an unfavorable increase in net operating assets driven primarily by an increase in accounts receivable due to our strong revenue growth.
Net Cash From Investing Activities
Net cash from investing activities for the nine months ended September 30, 2022 was ($185.3) million, driven by the following:
Net cash from investing for the nine months ended September 30, 2021 was ($39.1) million, driven partially by the following:
Net Cash From Financing Activities
Net cash from financing activities for the nine months ended September 30, 2022 was ($53.8) million and included the following:
Net cash from financing activities for the nine months ended September 30, 2021 was $3.6 million and included the following:
Effect of Currency Translation on Cash
During the nine months ended September 30, 2022, currency translation had an unfavorable impact primarily due to a stronger U.S. dollar. 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. Operation and Summary of Significant Accounting Policies and Estimates to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021, 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, 2021, include:
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk and Risk Management
In the normal course of business, we have exposures 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, Item 1A 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, 2021.
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.
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.
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 a reserve adjusted "Eurodollar Rate" or "Base Rate," 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 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, 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 September 30, 2022. 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.
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, 2021. 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
Month
TotalNumber ofSharesPurchased
AveragePrice PaidPer Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
MaximumDollarValue ofShares thatMay Yet bePurchasedUnder thePlans orPrograms
(in thousands, except price per share data)
January
82
80.02
121,783
February
March
First quarter
April
May
103
76.23
113,969
June
127
72.42
104,765
Second quarter
230
74.12
July
August
September
Third quarter
The following table summarizes actions by our Board of Directors in relation to the stock repurchase program:
Date
Action
September 2015
Authorized a program to repurchase up to $150.0 million of our common stock
May 2018
Approved a $50.0 million increase in the repurchase program
December 2019
Authorized the removal of the expiration date and increased the balance available for the repurchase program by $25.1 million
July 2021
Approved an increase to the repurchase program, which authorized Advanced Energy Industries, Inc. to repurchase up to $200.0 million with no time limitation
July 2022
Approved an increase to the repurchase program from its remaining authorization of $102.4 million, to repurchase up to $200.0 million with no time limitation
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
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
Form
File No.
Filing Date
10.1
Amended and Restated Deferred Compensation Plan
Filed herewith
31.1
Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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.
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104
Cover Page Interactive Data File – formatted in Inline XBRL and contained in Exhibit 101.
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.
Dated:
November 1, 2022
/s/ Paul Oldham
Paul Oldham
Chief Financial Officer and Executive Vice President