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, 2024
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)
(970) 407-6626
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value
AEIS
Nasdaq Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ◻
Non-accelerated filer ◻
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
As of October 28, 2024, there were 37,673,067 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 (Loss)
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
42
ITEM 4.
CONTROLS AND PROCEDURES
43
PART II OTHER INFORMATION
LEGAL PROCEEDINGS
ITEM 1A.
RISK FACTORS
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
44
DEFAULTS UPON SENIOR SECURITIES
MINE SAFETY DISCLOSURES
ITEM 5.
OTHER INFORMATION
ITEM 6.
EXHIBITS
45
SIGNATURES
46
2
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheets
(In thousands, except per share amounts)
September 30,
December 31,
2024
2023
ASSETS
Current assets:
Cash and cash equivalents
$
657,288
1,044,556
Accounts receivable, net
259,399
282,430
Inventories
377,740
336,137
Other current assets
51,281
48,771
Total current assets
1,345,708
1,711,894
Property and equipment, net
181,875
167,665
Operating lease right-of-use assets
86,003
95,432
Other assets
134,948
136,448
Intangible assets, net
145,290
161,478
Goodwill
299,036
283,840
TOTAL ASSETS
2,192,860
2,556,757
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
133,006
141,850
Accrued payroll and employee benefits
62,743
73,595
Other accrued expenses
66,048
66,662
Customer deposits and other
11,351
15,997
Current portion of long-term debt
—
20,000
Current portion of operating lease liabilities
18,360
17,744
Total current liabilities
291,508
335,848
Long-term debt, net
564,000
895,679
Operating lease liabilities
80,264
89,330
Pension benefits
50,374
49,135
Other long-term liabilities
42,322
42,583
Total liabilities
1,028,468
1,412,575
Commitments and contingencies (Note 15)
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; 37,671 and 37,318 issued and outstanding at September 30, 2024 and December 31, 2023, respectively
38
37
Additional paid-in capital
180,529
148,300
Accumulated other comprehensive income
2,089
6,114
Retained earnings
981,736
989,731
Total stockholders' equity
1,164,392
1,144,182
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,
Revenue, net
374,217
409,991
1,066,639
1,250,539
Cost of revenue
240,149
262,650
692,001
801,007
Gross profit
134,068
147,341
374,638
449,532
Operating expenses:
Research and development
53,561
50,391
155,732
153,414
Selling, general, and administrative
56,237
55,131
166,374
166,102
Amortization of intangible assets
6,772
7,049
20,519
21,186
Restructuring, asset impairments, and other charges
28,546
4,709
29,416
8,906
Total operating expenses
145,116
117,280
372,041
349,608
Operating income (loss)
(11,048)
30,061
2,597
99,924
Interest income
11,018
6,396
35,782
14,282
Interest expense
(6,378)
(3,780)
(20,461)
(9,368)
Other income (expense), net
(8,139)
1,848
(6,122)
1,425
Income (loss) from continuing operations, before income tax
(14,547)
34,525
11,796
106,263
Income tax provision (benefit)
(400)
874
4,552
13,405
Income (loss) from continuing operations
(14,147)
33,651
7,244
92,858
Loss from discontinued operations, net of income tax
(758)
(930)
(1,904)
(2,076)
Net income (loss)
(14,905)
32,721
5,340
90,782
Basic weighted-average common shares outstanding
37,532
37,575
37,455
37,541
Diluted weighted-average common shares outstanding
37,854
37,785
37,842
Earnings (loss) per share:
Continuing operations:
Basic earnings per share
(0.38)
0.90
0.19
2.47
Diluted earnings per share
0.89
2.45
Discontinued operations:
Basic loss per share
(0.02)
(0.05)
(0.06)
Diluted loss per share
Net income (loss):
Basic earnings (loss) per share
(0.40)
0.87
0.14
2.42
Diluted earnings (loss) per share
0.86
2.40
Unaudited Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Other comprehensive income (loss), net of income tax
Foreign currency translation
12,401
(5,069)
3,251
(6,798)
Change in fair value of cash flow hedges
(1,738)
(1,822)
(5,474)
(3,840)
Defined employee benefit plan
(1,751)
(1,802)
(292)
Comprehensive income (loss)
(5,993)
25,830
1,315
79,852
Unaudited Consolidated Statements of Stockholders' Equity
Common Stock
Accumulated
Additional
Other
Total
Paid-in
Comprehensive
Retained
Stockholders'
Shares
Amount
Capital
Income (Loss)
Earnings
Equity
Balances, December 31, 2022
37,429
134,640
16,320
915,270
1,066,267
Stock issued from equity plans
100
(1,991)
Stock-based compensation
6,543
Dividends declared ($0.10 per share)
(3,814)
Other comprehensive loss
(2,013)
Net income
30,921
Balances, March 31, 2023
37,529
139,192
14,307
942,377
1,095,913
121
1
606
607
7,423
(3,778)
(2,026)
27,140
Balances, June 30, 2023
37,650
147,221
12,281
965,739
1,125,279
130
7,506
Share repurchases
(378)
(1)
(1,530)
(38,469)
(40,000)
(3,830)
(6,891)
Warrants and note hedges, net
(40,135)
Tax impact of convertible notes and note hedges
26,091
Balances, September 30, 2023
37,280
139,283
5,390
956,161
1,100,871
Balances, December 31, 2023
37,318
116
(5,327)
10,591
(3,810)
(7,969)
Deferred compensation
79
(79)
5,216
Balances, March 31, 2024
37,434
153,643
(1,855)
991,058
1,142,883
93
(173)
Stock issuance (Note 2. Acquisition)
144
4,463
4,464
10,720
(3,848)
(4,968)
1,033
(64)
969
15,029
Balances, June 30, 2024
37,671
169,686
(6,823)
1,002,175
1,165,076
19
(529)
11,481
(19)
(89)
(1,681)
(1,770)
(3,871)
Other comprehensive income
8,912
(20)
18
(2)
Net loss
Balances, September 30, 2024
Unaudited Consolidated Statements of Cash Flows
CASH FLOWS FROM OPERATING ACTIVITIES:
Less: loss from discontinued operations, net of income tax
Income from continuing operations, net of income tax
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization
51,824
49,764
34,303
22,813
Amortization and write off of debt issuance costs and debt discount
3,036
378
Deferred income tax benefit
305
(996)
1,041
394
Changes in operating assets and liabilities, net of assets acquired
23,604
35,135
(41,187)
9,025
576
4,121
(8,778)
(26,203)
Other liabilities and accrued expenses
(21,718)
(59,049)
Net cash from operating activities from continuing operations
50,250
128,240
Net cash from operating activities from discontinued operations
(2,191)
(3,307)
Net cash from operating activities
48,059
124,933
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of long-term investments
(2,698)
(3,447)
Purchases of property and equipment
(44,045)
(46,782)
Acquisitions, net of cash acquired
(13,762)
Net cash from investing activities
(60,505)
(50,229)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings
575,000
Payment of fees for long-term borrowings
(105)
(12,985)
Payments on long-term borrowings
(355,000)
(15,000)
Dividend payments
(11,529)
(11,422)
Payment for purchase of note hedges
(115,000)
Proceeds from sale of warrants
74,865
Purchase and retirement of common stock
Net payments related to stock-based awards
(6,029)
(1,254)
Net cash from financing activities
(374,433)
454,204
EFFECT OF CURRENCY TRANSLATION ON CASH AND CASH EQUIVALENTS
(389)
(1,795)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(387,268)
527,113
CASH AND CASH EQUIVALENTS, beginning of period
458,818
CASH AND CASH EQUIVALENTS, end of period
985,931
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”) provides highly engineered, critical, precision power conversion, measurement, and control solutions to our global customers. We design, manufacture, sell and support precision power products that transform, refine, and modify the raw electrical power coming from either the utility or the building facility and convert it into various types of highly controllable, usable power that is predictable, repeatable, and customizable to meet the necessary requirements for powering a wide range of complex equipment. Many of our products enable customers to reduce or optimize their energy consumption through increased power conversion efficiency, power density, power coupling, and process control across a wide range of applications.
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, 2024, and the results of our operations and cash flows for the three and nine months ended September 30, 2024 and 2023.
The unaudited consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the U.S. 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, 2023 and other financial information filed with the SEC.
Use of Estimates in the Preparation of the Consolidated Financial Statements
The preparation of our consolidated financial statements in conformity with U.S. GAAP requires us to make estimates, assumptions, and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The significant estimates, assumptions, and judgments include, but are not limited to, excess and obsolete inventory, income taxes and other provisions, and acquisitions and asset valuations.
Significant Accounting Policies
Our accounting policies are described in Note 1. Summary of Operations and Significant Accounting Policies and Estimates to our audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2023.
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 Issued But Not Yet Adopted
In November 2023, the FASB issued ASU 2023-07 “Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures.” ASU 2023-07 expands disclosure requirements to require additional information about significant segment expenses. In addition, the ASU enhances interim disclosures, clarifies circumstances in which an entity can disclose multiple segment measures of profit or loss, and provides new disclosures requirements for entities with a single reportable segment. This guidance will be effective for us in our Annual Report on Form 10-K for the year ending December 31, 2024. We do not expect the above guidance to materially impact our consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09 “Improvements to Income Tax Disclosures.” ASU 2023-09 requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional disclosure on income taxes paid. This guidance will be effective for us on January 1, 2025. We do not expect the above guidance to materially impact our consolidated financial statements.
In March 2024, the SEC issued climate-related disclosure rules. These rules do not change accounting treatment, but they significantly expand the climate-related information companies are required to disclose. Several petitions were filed challenging these climate-related disclosure rules and, in April 2024, the SEC voluntarily stayed the rules, pending completion of judicial review. We do not expect the above disclosure requirement to materially impact our consolidated financial statements. We are evaluating the disclosure requirements and changes to our business processes, systems, and controls to support the additional disclosures.
9
NOTE 2. ACQUISITIONS
On June 20, 2024, we acquired 100% of the issued and outstanding shares of capital stock of Airity Technologies, Inc. (“Airity”), which is based in Redwood City, California. We accounted for this transaction as a business combination. Airity focuses on high voltage power conversion technologies and products, which broadens our range of targeted applications in our Semiconductor Equipment and Industrial and Medical markets.
The following table summarizes the consideration paid:
Consideration
Cash paid at closing
14,301
Advanced Energy common stock
Settlement of payables
(654)
Indemnity holdback payable on the one-year anniversary
1,500
Total fair value of purchase consideration
19,610
We are still evaluating the fair value of the assets acquired and liabilities assumed, inclusive of the acquiredintangible assets, including their estimated useful lives, related tax impacts, and resulting goodwill. Our preliminary allocation of the fair value of purchase consideration was as follows:
Fair Value
Cash
539
Current assets and liabilities, net
457
Property and equipment
Deferred tax liability
(2,229)
Intangible assets
4,200
Goodwill (not deductible for tax purposes)
16,601
Total fair value of net assets acquired
We included Airity’s results of operations in our consolidated financial statements from the date of acquisition.
In connection with the acquisition, we entered into agreements with certain former Airity employees. On the closing date, these individuals received a total of 0.1 million shares of Advanced Energy common stock valued at $15.6 million based on the June 20, 2024 closing price, of which $4.5 million was allocated to purchase consideration and $11.1 million will be future compensation. We will record the $11.1 million as stock-based compensation expense over the three-year expected vesting period.
10
NOTE 3. REVENUE
Disaggregation of revenue
The following tables present additional information regarding our revenue:
Revenue by Market
Semiconductor Equipment
197,497
185,033
565,721
552,419
Industrial and Medical
76,837
115,226
239,359
365,849
Data Center Computing
80,653
68,286
195,519
187,021
Telecom and Networking
19,230
41,446
66,040
145,250
Revenue by Region
North America
175,691
47.0
%
184,783
45.1
482,564
45.2
537,241
42.9
Asia
163,212
43.6
178,190
43.5
467,110
43.8
543,871
Europe
34,892
9.3
46,088
11.2
115,258
10.8
164,867
13.2
422
0.1
930
0.2
1,707
4,560
0.4
100.0
Revenue by Significant Countries
United States
134,614
35.9
156,710
38.2
371,925
34.9
457,325
36.6
Mexico
40,953
10.9
27,464
6.7
109,768
10.3
77,953
6.2
Taiwan
40,990
11.0
33,136
8.1
119,571
98,842
7.9
China
28,725
7.7
41,391
10.1
70,298
6.6
132,039
10.6
All others
128,935
34.5
151,290
36.9
395,077
37.0
484,380
38.7
We attribute revenue to individual countries and regions based on the customer’s ship to location. Excluding the specific countries listed above, no individual country exceeded 10% of our total consolidated revenues during the periods presented.
Revenue by Category
Product
332,647
369,129
944,279
1,118,284
Services and other
41,570
40,862
122,360
132,255
Other revenue includes certain spare parts and products sold by our service group.
11
Significant Customers
During the three months ended September 30, 2024, Applied Materials, Inc. and Lam Research Corporation accounted for 25% and 11%, respectively, of our total revenue. During the nine months ended September 30, 2024, Applied Materials, Inc. and Lam Research Corporation accounted for 27% and 10%, respectively, of our total revenue. During the three and nine months ended September 30, 2023, Applied Materials Inc. accounted for 23% and 21%, respectively, of our total revenue. No other customer’s revenue exceeded 10% of our total revenue in the periods presented.
As of September 30, 2024, the account receivable balance from Applied Materials, Inc. accounted for 28% of our total accounts receivable. As of December 31, 2023, the account receivable balance from Applied Materials, Inc. accounted for 26% of our total accounts receivable. No other customer’s account receivable exceeded 10% of our total accounts receivable in the periods presented.
NOTE 4. INCOME TAX
The following table summarizes tax provision (benefit) and the effective tax rate for our income (loss) from continuing operations:
Effective tax rate
(2.7)
2.5
38.6
12.6
Our effective tax rates differ from the U.S. federal statutory rate of 21% 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 previously announced Zhongshan, China factory closure impacted our effective tax rate in both the three and nine months ended September 30, 2024. For the nine months ended September 30, 2024, our effective tax rate was higher than the same period in the prior year due to smaller beneficial discrete items in the current period relative to the larger beneficial discrete items in the prior period.
As of January 1, 2024, the Pillar II minimum global effective tax rate of 15% enacted by the Organization for Economic Cooperation and Development (“OECD”) was effectuated. More than 140 countries agreed to enact the Pillar II global minimum tax. However, the timing of the implementation for each country varies. To date, we have determined that there was an immaterial global minimum tax liability as a result of Pillar II, as certain tax jurisdictions either will not have Pillar II enacted until after December 31, 2024 or satisfied the safe harbor test to prevent any minimum tax under Pillar II. We continue to monitor the jurisdictions for any changes and include any appropriate minimum tax throughout the year.
12
NOTE 5. STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE
Accumulated Other Comprehensive Income (Loss)
The following table summarizes the components of, and changes in, accumulated other comprehensive income(loss), net of income taxes.
Foreign Currency Translation
Change in Fair Value of Cash Flow Hedges
Defined Employee Benefit Plan
Balance at December 31, 2022
(12,823)
11,848
17,295
Other comprehensive income (loss) prior to reclassifications
(196)
595
399
Amounts reclassified from accumulated other comprehensive income (loss)
(2,412)
Balance at March 31, 2023
(13,019)
10,031
(1,533)
2,555
1,022
(2,756)
(3,048)
Balance at June 30, 2023
(14,552)
9,830
17,003
1,036
(4,033)
(2,858)
Balance at September 30, 2023
(19,621)
8,008
Balance at December 31, 2023
(10,796)
5,474
11,436
(6,589)
1,405
(5,184)
(2,785)
Balance at March 31, 2024
(17,385)
4,094
(2,561)
395
(2,166)
(2,751)
(51)
(2,802)
Balance at June 30, 2024
(19,946)
1,738
11,385
10,816
444
(2,228)
9,032
1,585
(2,182)
477
(120)
Balance at September 30, 2024
(7,545)
9,634
13
Amounts reclassified from accumulated other comprehensive income (loss) to the specific caption within theConsolidated Statements of Operations were as follows:
To Caption on Consolidated
Statements of Operations
Cash flow hedges
(7,718)
(8,026)
426
Total reclassifications
(5,707)
(8,318)
Earnings (Loss) Per Share
The following table summarizes our earnings per share (“EPS”):
Dilutive effect of stock awards
279
330
301
EPS from continuing operations
Basic EPS
Diluted EPS
Anti-dilutive shares not included above
Stock awards
371
27
84
Warrants
3,076
3,180
3,212
Total anti-dilutive shares
3,447
3,207
3,216
3,264
We compute basic earnings per share of common stock (“Basic EPS”) by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period.
See Note 18. Long-Term Debt in our Annual Report on Form 10-K for the year ended December 31, 2023 for information regarding our Convertible Notes, Note Hedges, and Warrants. For diluted earnings per share of common stock (“Diluted EPS”), we increase the weighted-average number of common shares outstanding during the period, as needed, to include the following:
14
Share Repurchase
To repurchase 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
1,770
40,000
Number of shares repurchased
Average repurchase price per share
93.58
105.74
At September 30, 2024, the remaining amount authorized by the Board of Directors for future share repurchases was $197.4 million with no time limitation.
NOTE 6. FAIR VALUE MEASUREMENTS
The following tables present information about our assets and liabilities measured at fair value on a recurring basis:
September 30, 2024
Description
Balance Sheet Classification
Level 1
Level 2
Level 3
TotalFair Value
Certificates of deposit
157
Foreign currency forward contracts
168
Investments
9,668
December 31, 2023
163
Interest rate swaps
6,995
5,952
15
NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS
Changes in foreign currency exchange rates impact our results of operations and cash flows. 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.
At September 30, 2024 we have $105.9 million foreign currency forward contracts outstanding. There were no foreign currency forward contracts outstanding at December 31, 2023.
Gains and losses related to foreign currency exchange contracts were offset by corresponding gains and losses on the revaluation of the underlying assets and liabilities. Both are included as a component of other income (expense), net in our Consolidated Statements of Operations.
We had interest rate swap contracts that fixed a portion of the interest payments on our Term Loan Facility. The interest rate swap contracts expired on September 10, 2024. In connection with the expiration, there are no longer any related balances for these contracts within accumulated other comprehensive income on the Consolidated Balance Sheets as of September 30, 2024. See Note 16. Long-Term Debt for information regarding the Term Loan Facility.
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 RECEIVABLE, NET
We record accounts receivable at net realizable value. Our accounts receivable, net balance on the Consolidated Balance Sheets was $259.4 million at September 30, 2024. The following table summarizes the changes in expected credit losses related to receivables:
1,762
Additions
94
Deductions - write-offs, net of recoveries
(399)
1,457
NOTE 9. INVENTORIES
We value inventories at the lower of cost or net realizable value, computed on a first-in, first-out basis. Components of inventories were as follows:
Parts and raw materials
273,793
249,698
Work in process
19,502
14,595
Finished goods
84,445
71,844
16
NOTE 10. INTANGIBLE ASSETS AND GOODWILL
Intangible assets consisted of the following:
Gross Carrying
Net Carrying
Weighted Average Remaining
Amortization
Useful Life (in years)
Technology
100,988
(69,407)
31,581
7.1
Customer relationships
170,486
(68,944)
101,542
8.8
Trademarks and other
27,219
(15,052)
12,167
4.9
298,693
(153,403)
97,961
(60,412)
37,549
6.8
168,685
(58,835)
109,850
9.5
27,141
(13,062)
14,079
5.6
293,787
(132,309)
8.5
Amortization expense related to intangible assets is as follows:
Amortization expense
Estimated future amortization expense related to intangibles is as follows:
Year Ending December 31,
2024 (remaining)
5,573
2025
22,148
2026
20,063
2027
17,815
2028
16,569
Thereafter
63,122
The following table summarizes the changes in goodwill:
Additions from acquisition
Foreign currency translation and other
(1,405)
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NOTE 11. RESTRUCTURING, ASSET IMPAIRMENTS, AND OTHER CHARGES
Details of restructuring, asset impairments, and other charges are as follows:
Restructuring
27,790
27,844
Other charges
756
1,572
Total restructuring, asset impairments, and other charges
We have the following restructuring plans in process:
2024 Plan
On July 29, 2024, we approved actions in furtherance of our previously announced manufacturing consolidation initiatives intended to optimize our manufacturing footprint and cost structure, including the previously announced closure of our Zhongshan, China facility (the “2024 Plan”). In connection with the 2024 Plan, we recorded a $28.5 million charge during the third quarter of 2024 primarily associated with expected employment-related charges for, among other things, one-time cash payments for severance, benefits expenses, payroll taxes, and other ancillary costs. The charge includes estimated liabilities for lease termination and facility exit costs, which could be subject to further adjustments. The remaining contractual rental obligations under the lease agreements are recorded in current portion of operating lease liabilities and operating lease liabilities on our Consolidated Balance Sheets.
We expect to incur $1.0 million to $2.0 million in additional charges related to our announced actions and continue to evaluate our operations and cost structure, which could result in incremental restructuring charges in future periods. We anticipate the 2024 Plan will be substantially completed by the second quarter of 2025, with final activities concluding in 2026.
2023 Plan
In 2023, we approved a plan intended to optimize and further consolidate our manufacturing operations and functional support groups as well as a general reduction-in-force to align our expenses to revenue levels (the “2023 Plan”). We expect to incur approximately $1.0 million in additional charges through the second quarter of 2025. We anticipate the 2023 Plan will be substantially completed by the end of 2024, with the final activities concluding in the second quarter of 2025.
2022 Plan
This plan was approved to improve our operating efficiencies and drive the realization of synergies from our business combinations by consolidating our operations, optimizing our factory footprint, including moving certain production into our higher volume factories, reducing redundancies, and lowering our cost structure. The 2022 Plan is now complete.
Changes in restructuring liabilities were as follows:
14,224
2,930
188
17,342
Costs incurred and charged to expense
28,454
(698)
88
Costs paid
(855)
(7,653)
(3,018)
(188)
(11,714)
28,056
5,873
33,929
$28.3 million of the above restructuring liability is included in other accrued expenses and $5.6 million is included in other long-term liabilities on our Consolidated Balance Sheets.
Charges related to our restructuring plans are as follows:
Severance and related charges
27,356
27,410
Facility relocation and closure charges
434
Total restructuring charges
Cumulative Cost Through
28,020
16,405
14,075
58,500
58,934
Other Charges
Other charges relate to vacating and relocating facilities.
NOTE 12. WARRANTIES
Our sales agreements include customary product warranty provisions, which generally range from 12 to 36 months after shipment. We record the estimated warranty obligations cost when we recognize revenue. This estimate is based on historical experience by product and configuration.
We include warranty obligation in other accrued expenses in our Consolidated Balance Sheets. Changes in our product warranty obligation were as follows:
4,007
Net increases to accruals
2,088
Warranty expenditures
(1,640)
Effect of changes in exchange rates
155
4,610
NOTE 13. LEASES
Components of total operating lease cost were as follows:
Operating lease cost
5,859
5,629
17,575
16,965
Short-term and variable lease cost
897
1,100
2,474
3,170
Total operating lease cost
6,756
6,729
20,049
20,135
Estimated future payments on our operating lease liabilities are as follows:
6,127
22,557
17,077
13,616
13,171
50,930
Total lease payments
123,478
Less: Interest
(24,854)
Present value of lease liabilities
98,624
In addition to the above, we have lease agreements with total payments of $32.8 million that commence on various dates in 2024 and 2025 and extend through 2040.
In connection with the closure of our Zhongshan, China facility under the 2024 Plan (see Note 11. Restructuring, Asset Impairments, and Other Charges), we expect to terminate the facility’s lease agreement before its expiration. During the third quarter of 2024, we reduced both the operating lease right-of-use asset and operating lease liability by $20.7 million.
The following tables present additional information about our lease agreements:
Weighted average remaining lease term (in years)
7.8
8.3
Weighted average discount rate
5.5
5.0
Cash paid for operating leases
5,823
5,683
17,476
17,290
Right-of-use assets obtained in exchange for operating lease liabilities
7,367
9,271
25,784
11,900
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NOTE 14. STOCK-BASED COMPENSATION
The Compensation Committee of our Board of Directors administers our stock plans. As of September 30, 2024, we had two active stock-based incentive compensation plans: the Amended and Restated 2023 Omnibus Incentive Plan (the “2023 Incentive Plan”) and the Employee Stock Purchase Plan (“ESPP”). The 2023 Incentive Plan was approved by stockholders on April 27, 2023 and amended and restated on November 2, 2023. We issue all new equity compensation grants under the 2023 Incentive Plan; however, outstanding awards previously issued under now inactive plans will continue to vest and remain exercisable in accordance with the terms of the respective plans.
The 2023 Incentive Plan provides for the grant of awards including stock options, stock appreciation rights, performance stock units, performance units, stock, restricted stock, restricted stock units, and cash incentive awards.
The following table summarizes information related to our stock-based incentive compensation plans:
Shares available for future issuance under the 2023 Incentive Plan
1,809
Shares available for future issuance under the ESPP
556
Stock-Based Compensation Expense
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. During the nine months ended September 30, 2024, stock-based compensation expense includes $1.8 million related to a modification for accounting purposes of prior awards. Stock-based compensation was as follows:
Stock-based compensation expense
11,914
8,075
See Note 2. Acquisitions for information regarding future stock-based compensation expense related to the Airity acquisition.
Restricted Stock Units
Generally, we grant restricted stock units (“RSUs”) with a three year time-based vesting schedule. Certain RSUs contain performance-based or market-based vesting conditions in addition to the time-based vesting requirements. RSUs are generally granted with a grant date fair value based on the market price of our stock on the date of grant.
Changes in our RSUs were as follows:
Nine Months Ended September 30, 2024
Weighted-
Average
Number of
Grant Date
RSUs
RSUs outstanding at beginning of period
917
85.96
RSUs granted
546
104.79
RSUs vested
(286)
90.22
RSUs forfeited
(87)
77.73
RSUs outstanding at end of period
1,090
94.92
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Stock Options
Generally, we grant stock option awards with an exercise price equal to the market price of our stock at the date of grant and with either a three or four-year vesting schedule or performance-based vesting. Stock option awards generally have a term of ten years.
Changes in our stock options were as follows:
Exercise Price
Options
per Share
Options outstanding at beginning of period
89
76.69
Options exercised
(10)
26.32
Options outstanding at end of period
83.05
NOTE 15. 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 such loss can be reasonably estimated. We are not currently a party to any legal action that we believe would have a material adverse impact on our business, financial condition, results of operations or cash flows.
We maintain defined benefit pension plans for certain of our non-U.S. employees, including the United Kingdom. In light of the United Kingdom’s High Court ruling in the case of Virgin Media Ltd v. NTL Pension Trustees II Ltd & Ors, which was recently upheld on appeal, we are reviewing past amendments made to our United Kingdom pension plans to evaluate whether any changes were implemented in conflict with section 37 of the United Kingdom Pension Schemes Act 1993. Should there be a challenge to any previous amendments to our pension plan in the United Kingdom, we could face potential litigation and compliance risks. We continue to account for our United Kingdom pension arrangements in accordance with the plan agreements and amendments, as we believe they represent a mutual understanding and agreement among all parties.
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NOTE 16. LONG-TERM DEBT
Long-term debt on our Consolidated Balance Sheets consists of the following:
Convertible Notes due 2028
Term Loan Facility
355,000
Gross long-term debt, including current maturities
930,000
Less: debt discount
(11,000)
(14,321)
Net long-term debt, including current maturities
915,679
Less: current maturities
(20,000)
Net long-term debt
For all periods presented, we were in compliance with the covenants under all debt agreements.
The following table summarizes interest expense related to our debt:
5,736
3,528
18,403
8,818
Amortization of debt issuance costs
794
245
2,469
509
Capitalized interest
(157)
(428)
Total interest expense related to debt
6,373
3,773
20,444
9,327
Credit Agreement
Our credit agreement dated as of September 10, 2019, as amended (the “Credit Agreement”) consist of a senior unsecured term loan facility (“Term Loan Facility”) and a senior unsecured revolving facility (“Revolving Facility”), both maturing on September 9, 2026. On September 9, 2024, we entered into an amendment to the Credit Agreement to increase the capacity on the Revolving Facility from $200.0 million to $600.0 million. This amendment was in connection with the concurrent prepayment, using existing cash on hand, of the full $345.0 million outstanding principal balance under our Term Loan Facility.
For all periods presented, no amounts were outstanding on the Revolving Facility. The following table summarizes our availability to withdraw on the Revolving Facility:
Available capacity on Revolving Facility
600,000
200,000
In addition to our available capacity on the Revolving Facility, prior to the maturity date of the Credit Agreement, we may 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. Any requested increase is subject to lender approval.
The interest rate swap contracts previously entered into relative to the Term Loan Facility expired on September 10, 2024. Should we have future borrowings under the Term Loan Facility or Revolving Facility, they will bear interest, at our option, at a rate based on the Base Rate or SOFR, as defined in the Credit Agreement, plus an applicable margin.
Convertible Senior Notes due 2028
On September 12, 2023, we completed a private, unregistered offering of $575.0 million aggregate principal amount of 2.50% convertible senior notes due 2028 (“Convertible Notes”).
23
The $564.0 million remaining outstanding principal amount of the Convertible Notes, net of unamortized issuance costs, continues to be classified as long-term debt as none of the conversion triggers occurred as of September 30, 2024. The redemption price is 100% of the principal amount plus accrued and unpaid interest. The Convertible Notes mature on September 15, 2028, unless earlier repurchased, redeemed, or converted. Interest is payable semi-annually in arrears in March and September.
Concurrent with the Convertible Notes issuance, we entered into hedges and sold warrants with respect to our common stock. In combination, the hedges and warrants synthetically increase the initial conversion price on the Convertible Notes from $137.46 to $179.76, reducing the potential dilutive effect.
We use level 2 measurements to estimate the fair value of our debt. As of September 30, 2024, we estimate the fair value of our Convertible Notes to be $598.2 million.
NOTE 17. SUPPLEMENTAL CASH FLOW INFORMATION AND OTHER DISCLOSURES
Certain of our cash and non-cash activities were as follows:
Non-cash investing activities:
Capital expenditures in accounts payable and other accrued expenses
7,200
7,699
Cash paid for:
17,975
8,060
Income taxes
29,041
45,040
Cash received from income taxes
1,627
828
Depreciation expense
31,305
28,578
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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, 2023, which was filed with the Securities and Exchange Commission (the “SEC”) on February 20, 2024 (the “2023 Form 10-K”).
Special Note on Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “report”) 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 (the “Exchange Act”). 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, events, or circumstances will continue. The inclusion of words such as “anticipate,” “expect,” “estimate,” “can,” “may,” “might,” “continue,” “enable,” “plan,” “intend,” “should,” “could,” “would,” “will,” “likely,” “potential,” “believe,” and similar expressions and the negative versions thereof indicate forward-looking statements; however, not all forward-looking statements may contain such words or expressions. These forward-looking statements are based upon information available as of the date of this report and management’s current estimates, forecasts, and assumptions. Although we believe that our expectations reflected in or suggested by these forward-looking statements are reasonable, we may not achieve the results, performance, plans, or objectives expressed or implied by such 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, and readers are cautioned not to place undue reliance on forward-looking statements. Factors that could contribute to these differences or prove our forward-looking statements, by hindsight, to be overly optimistic or unachievable include, but are not limited to, the risks and uncertainties listed above and described in Part I, Item 1A in the 2023 Form 10-K. We assume no obligation to update any forward-looking statement or provide the reasons why our actual results might differ.
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BUSINESS AND MARKET OVERVIEW
Company Overview
Advanced Energy provides highly engineered, critical, precision power conversion, measurement, and control solutions to our global customers. We design, manufacture, sell and support precision power products that transform, refine, and modify the raw electrical power coming from either the utility or the building facility and convert it into various types of highly controllable, usable power that is predictable, repeatable, and customizable to meet the necessary requirements for powering a wide range of complex equipment. Many of our products enable customers to reduce or optimize their energy consumption through increased power conversion efficiency, power density, power coupling, and process control across a wide range of applications.
We are organized on a global, functional basis and operate as a single segment of 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.
Recent Events
Airity Acquisition
On June 20, 2024, we acquired Airity Technologies, Inc. (“Airity”), which is based in Redwood City, California. This acquisition adds high voltage power conversion technologies and products, which broadens our range of targeted applications within our Semiconductor Equipment and Industrial and Medical markets. See Note 2. Acquisitions in Part I, Item 1 “Unaudited Consolidated Financial Statements.”
2024 Restructuring Plan
In July 2024, we approved further manufacturing consolidation initiatives, including the previously announced closure of our Zhongshan, China facility. In connection with the 2024 Plan, we recorded a $28.5 million charge primarily associated with expected employment-related charges and facility exit costs. We expect to incur $1.0 million to $2.0 million in additional charges related to our announced actions and continue to evaluate our operations and cost structure, which could result in incremental restructuring charges in future periods. For additional information, see Note 11. Restructuring, Asset Impairments, and Other Charges in Part I, Item 1 “Unaudited Consolidated Financial Statements.”
Credit Agreement Amendment
On September 9, 2024, we used existing cash on hand to prepay the full $345.0 million outstanding principal balance under our Term Loan Facility. As of September 30, 2024, our only outstanding debt is the Convertible Notes due in 2028. On the same date, we entered into an additional amendment to the Credit Agreement to increase the capacity on the Revolving Facility from $200.0 million to $600.0 million. See Note 16. Long-Term Debt in Part I, Item 1 “Unaudited Consolidated Financial Statements” for additional information.
Product and Services
Our precision power products and solutions are designed to enable new process technologies, improve productivity, lower the cost of ownership, and provide critical power capabilities for our customers. These products are designed to meet our customers’ demanding requirements in efficiency, flexibility, performance, and reliability. We also provide repair and maintenance services for our products.
Our plasma power products offer solutions to enable innovation in complex semiconductor and thin film plasma processes such as dry etch and deposition. Our broad portfolio of high and low voltage power products is used in a wide range of applications, such as semiconductor equipment, industrial production, medical and life science equipment, data center computing, networking, and telecommunications. We also supply related sensing, controls, and instrumentation products primarily for advanced measurement and calibration of power and temperature for multiple industrial markets.
Our network of global service support centers provides repair services, calibration, conversions, upgrades, refurbishments, and used equipment to companies that use our products.
End Markets Summary
The demand environment in each of our markets is impacted by macroeconomic conditions, various market trends, customer buying patterns, design wins, and other factors. Although we are currently experiencing a lower demand environment in certain markets, we continue to believe that the long-term market growth drivers support our long-term strategy, research and development efforts, and capital investments. However, in the short-term it is unclear how certain macroeconomic conditions, including the effect of higher interest rates impacting end customers’ capital investment, the timing of inventory digestion, and customer buying patterns, will affect customer demand and our revenue.
Semiconductor Equipment Market
The Semiconductor Equipment market is slowly recovering from a cyclical downturn, which began in the fourth quarter of 2022. Since the market bottomed in 2023, demand had modestly recovered in the first nine months of 2024, but a number of external factors continued to limit the market, including unfavorable macroeconomic conditions, prolonged weak demand for consumer electronics, low fab utilization, and U.S. export restrictions to China.
We continue to believe the long-term growth drivers will support cyclical growth for this market as more manufacturing capacity is needed to support increasing demand for semiconductor devices and related capital equipment.
Industrial and Medical Market
Beginning in the second half of 2023, the impact of weaker macroeconomic conditions started to impact demand for our products in the Industrial and Medical Market. In addition, in the first nine months of 2024, elevated inventory levels of our products following the supply chain crisis and extended lead times resulted in high levels of inventory rebalancing by our customers. We expect these factors will continue to limit our revenue levels in the near term, but we believe the long-term growth drivers will enable growth to return to this market after end markets recover and our customer inventories return to normal levels.
Data Center Computing Market
The Data Center Computing Market experienced weak demand starting in the first quarter of 2023 and continued until the first quarter of 2024, driven by reduced investments of our hyperscale customers, lower demand for Enterprise systems and the timing impact of large customer orders on our revenues. Starting in the second quarter of 2024, demand rebounded from both our hyperscale and enterprise customers, driven by accelerated investments in artificial intelligence and improved demand in the traditional server market, which we expect to continue for several quarters.
Telecom and Networking Market
Starting in 2023, leading companies in both the telecom and networking markets reported weakening demand. However, improved supply of critical components in 2023 drove higher customer orders and more than offset weakening market conditions, which continued in 2024. As end demand softens and customers rebalance their elevated inventory levels of our products, demand for our products declined meaningfully in the first nine months of 2024, which we expect to continue for several quarters.
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Results of Continuing Operations
The analysis presented below is organized to provide the information we believe will be helpful for an 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 prepared in accordance with accounting principles generally accepted in the United States of America (“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):
Revenue
35.8
35.1
Operating expenses
38.8
28.6
28.0
Operating income (loss) from continuing operations
(3.0)
7.3
8.0
2.9
1.6
3.4
1.1
(1.7)
(0.9)
(1.9)
(0.7)
(2.2)
0.5
(0.6)
(3.9)
8.4
(0.1)
(3.8)
8.2
0.7
7.4
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The following tables summarize net sales and percentages of net sales, by markets (in thousands):
Change 2024 v. 2023
Dollar
Percent
52.8
12,464
20.5
28.1
(38,389)
(33.3)
21.6
16.7
12,367
18.1
5.1
(22,216)
(53.6)
(35,774)
(8.7)
53.0
44.2
13,302
2.4
22.4
29.3
(126,490)
(34.6)
18.3
15.0
8,498
4.5
6.3
11.5
(79,210)
(54.5)
(183,900)
(14.7)
Total revenues in the three month period decreased from the same period in the prior year due to customer inventory rebalancing, resulting in lower demand in our Industrial and Medical and Telecom and Networking markets. This offset a modest revenue recovery in the Semiconductor Equipment market from the trough level a year ago and a demand recovery in the Data Center Computing market.
Total revenues in the nine month period decreased from the same periods in the prior year due primarily to customer inventory rebalancing, resulting in lower demand in our Industrial and Medical and Telecom and Networking markets. The Semiconductor Equipment market modestly recovered from the cyclical trough in 2023, and revenue in the Data Center Computing market was impacted by weak demand in the first quarter followed by a rebound beginning in the second and third quarter driven by investments in artificial intelligence.
30
(in thousands)
The increase in Semiconductor Equipment revenue for the three month period was primarily due to improved demand for our products compared to the same period in the prior year. The revenue for the nine month period modestly increased from the cyclical trough in 2023.
The decrease in Industrial and Medical revenues for both the three and nine month periods was primarily due to lower demand and customers working down their elevated inventories compared to a record year in 2023 and shortened lead times following the supply chain crisis.
The increase in Data Center Computing revenue for the three and nine month periods was due to increased hyperscale investments mostly driven by artificial intelligence adoption, and, to a lesser degree, a recovery in demand for traditional enterprise servers.
31
The decrease in Telecom and Networking revenues for both the three and nine month periods was due to the prior year benefit of improved supply of critical components. This enabled fulfillment of outstanding orders in 2023, which did not continue in 2024. In addition, we experienced a slow demand environment and inventory rebalancing from our customers, which we expect to continue.
Gross Profit and Gross Margin
(13,273)
(9.0)
Gross margin
(74,894)
(16.7)
For both the three and nine month periods, the decrease in gross profit was largely due to the decline in revenue and higher operating costs based on investments made in 2023. Gross margin declined in both periods due to the decline in volume, which drove manufacturing utilization lower. This was partially offset by more favorable product mix, savings realized from our restructuring programs, and lower premiums paid for scarce parts.
Operating Expenses
The following table summarizes our operating expenses (in thousands) and as a percentage of revenue:
14.3
12.3
13.4
1.8
1.7
7.6
14.6
15.6
13.3
1.9
2.8
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Research and Development
2,318
1.5
During the three and nine month periods we experienced an increase in R&D related to higher stock-based compensation expense as well as higher program and materials cost compared to the same periods in the prior year. This was partially offset by lower variable compensation cost.
Selling, General and Administrative
1,106
2.0
272
Selling, general, and administrative expense remained constant due to actions taken to control costs, including headcount reduction and lower variable employee compensation, partially offset by higher stock-based compensation cost.
Amortization of Intangibles Assets
(277)
(667)
(3.1)
Amortization expense remained constant. We acquired new intangible assets in the Airity acquisition, but this was offset by certain other intangible assets reaching the end of their estimated useful life.
33
Restructuring, Asset Impairments and Other Charges
23,837
506.2
20,510
230.3
The increase in restructuring, asset impairments, and other charges is primarily driven by the timing of our restructuring plan decisions.
In July 2024, we approved further manufacturing consolidation initiatives, including the previously announced closure of our Zhongshan, China facility. In connection with the 2024 Plan, we recorded a $28.5 million charge primarily associated with expected employment-related charges and facility exit costs. We expect to incur $1.0 million to $2.0 million in additional charges related to our announced actions and continue to evaluate our operations and cost structure, which could result in incremental restructuring charges in future periods.
For additional information about this and prior year restructuring plans, see Note 11. Restructuring, Asset Impairments, and Other Charges in Part I, Item 1 “Unaudited Consolidated Financial Statements.”
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Interest Income, Interest Expense, and Other Income (Expenses), net
4,622
72.3
(2,598)
68.7
(9,987)
540.4
21,500
150.5
(11,093)
118.4
(7,547)
529.6
We experienced an increase in interest income on higher cash balances, due in part to proceeds from the issuance of the Convertible Notes in the third quarter of 2023, our ability to concentrate cash in investment accounts, and higher short term market interest rates.
Interest expense increased due to interest associated with the Convertible Notes and a higher interest rate on the portion of our Term Loan Facility subject to a variable interest rate. We prepaid in full the Term Loan Facility on September 9, 2024, and the interest rate swap contracts expired on September 10, 2024. Should we have future borrowings under our Term Loan Facility or Revolving Facility, those borrowings would be subject to a variable rate.
See Note 16. Long-Term Debt in Part I, Item 1 “Unaudited Consolidated Financial Statements” for information regarding our debt.
Other income (expense), net consists primarily of foreign exchange gains and losses and other miscellaneous items. We had unrealized foreign exchange losses during the three and nine months ended September 30, 2024 compared to unrealized gains in the same periods in the prior year. Additionally, during the three months ended September 30, 2024, we incurred costs associated with foreign currency translation adjustments related to liquidated foreign operations and debt discount and fees associated with our Term Loan Facility prepayment. There were no such costs during the same periods in the prior year.
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Income Tax
The following table summarizes tax provision (benefit) (in thousands) and the effective tax rate for our income from continuing operations:
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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 and 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 prepared 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 long-term unrealized foreign exchange gains and losses. In addition, we exclude discontinued operations and other non-recurring items such as acquisition-related costs, facility expansion and 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.
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:
1,046
615
2,931
1,587
Facility expansion, relocation costs and other
868
171
2,337
1,188
Acquisition-related costs
(13)
194
Non-GAAP gross profit
135,982
148,171
379,893
452,501
Non-GAAP gross margin
36.3%
36.1%
35.6%
36.2%
Operating expenses from continuing operations, as reported
Adjustments:
(6,772)
(7,049)
(20,519)
(21,186)
(10,868)
(7,460)
(31,372)
(21,226)
(1,581)
(611)
(4,781)
(2,654)
(488)
(28,546)
(4,898)
(29,416)
(9,095)
Non-GAAP operating expenses
96,861
97,262
285,465
295,447
Non-GAAP operating income
39,121
50,909
94,428
157,054
Non-GAAP operating margin
10.5%
12.4%
8.9%
12.6%
Income from continuing operations, excluding certain items
Income (loss) from continuing operations, less non-controlling interest, net of income tax
1,581
655
4,768
2,848
Facility expansion, relocation costs, and other
1,356
2,825
4,898
9,095
Unrealized foreign currency loss (gain)
3,993
(1,604)
691
(2,817)
Other costs included in other income (expense), net
3,665
(1,516)
Tax effect of non-GAAP adjustments, including certain discrete tax benefits
(4,172)
(1,101)
(5,292)
(3,273)
Non-GAAP income, net of income tax, excluding stock-based compensation
27,594
42,203
63,836
119,569
Stock-based compensation, net of tax
9,412
6,299
27,099
17,794
Non-GAAP income, net of income tax
37,006
48,502
90,935
137,363
Weighted-average common shares adjusted for stock awards
360
-
Non-GAAP diluted weighted-average common shares outstanding
37,892
Per share earnings excluding certain items
Diluted earnings (loss) per share from continuing operations, as reported
Add back:
Per share impact of non-GAAP adjustments, net of tax
1.36
0.39
2.22
1.18
Non-GAAP earnings per share
0.98
1.28
2.41
3.63
Liquidity and Capital Resources
Liquidity
Adequate liquidity and cash generation is important to the execution of our strategic initiatives. Our ability to fund our operations, acquisitions, capital expenditures, and product development efforts may depend on our ability to generate cash from operating activities, which is subject to future operating performance, as well as general economic, financial, competitive, legislative, regulatory, and other conditions, some of which may be beyond our control. Our primary sources of liquidity continue to be our available cash, cash generated from operations, and available borrowing capacity under the Revolving Facility (defined in Note 16. Long-Term Debt in Part I, Item 1 “Unaudited Consolidated Financial Statements”).
As of September 30, 2024, our cash and cash equivalents totaled $657.3 million, while our available funding under our Revolving Facility was $600.0 million. Additionally, we generated $50.3 million of cash flow from continuing operations in the nine months ended September 30, 2024. We believe our sources of liquidity will be adequate to meet anticipated debt service, share repurchase programs, and dividends. During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust our expenditures to reflect the current market conditions and our projected revenue and demand. Our capital expenditures are primarily directed towards manufacturing and operations and can materially influence our available cash for other initiatives.
In addition, we may seek additional debt or equity financing from time to time; however, such additional financing may not be available on acceptable terms, if at all.
Debt
On September 9, 2024, we used existing cash on hand to prepay the full $345.0 million outstanding principal balance under our Term Loan Facility. On the same date, we entered into an additional amendment to the Credit Agreement to increase the capacity on the Revolving Facility from $200.0 million to $600.0 million.
As of September 30, 2024, our only outstanding debt is the $575.0 million Convertible Notes, which mature on September 15, 2028 and carry a 2.5% interest rate.
See Note 16. Long-Term Debt in Part I, Item 1 “Unaudited Consolidated Financial Statements” for additional information.
The interest rate swap contracts previously entered into related to the Term Loan Facility expired on September 10, 2024. Should we have future borrowings under our Term Loan Facility or Revolving Facility, those borrowings would be subject to a variable rate.
As of September 30, 2024, no amounts were outstanding under the Revolving Facility, and we had $600.0 million in available funding.
In addition to the available capacity on the Revolving Facility, prior to the maturity date of our Credit Agreement, we may 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. Any requested increase is subject to lender approval.
For more information see Note 16. Long-Term Debt in Part I, Item 1 “Unaudited Consolidated Financial Statements.”
Dividends
During the nine months ended September 30, 2024, we paid quarterly cash dividends of $0.10 per share, totaling $11.5 million. We currently anticipate that a cash dividend of $0.10 per share will continue to be paid on a quarterly basis, although the declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on our financial condition, results of operations, capital requirements, business conditions, and other factors.
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Cash Flows
A summary of our cash from operating, investing, and financing activities is as follows (in thousands):
Net cash used in operating activities from discontinued operations
Net cash used in investing activities
Net cash used in financing activities
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
Operating Activities
Net cash from operating activities from continuing operations for the nine months ended September 30, 2024 was $50.3 million, as compared to $128.2 million for the same period in the prior year. This $77.9 million decrease was primarily due to lower net income from continuing operations. Additionally, during the current year, we had a significant use of cash for inventories due to a strategic inventory buildup as well as lower cash flow from accounts receivable as a result of a decline in revenue. In addition, we had unfavorable changes in accounts payable, accrued expenses, and other liabilities.
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2024 was $60.5 million, primarily driven by the following:
Net cash used in investing activities for the nine months ended September 30, 2023 was $50.2 million, primarily driven by the following:
Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2024 was $374.4 million and included the following:
40
Net cash from financing activities for the nine months ended September 30, 2023 was $454.2 million and included the following:
Effect of Currency Translation on Cash
During the nine months ended September 30, 2024, foreign currency translation had a minimal impact on cash. See “Foreign Currency Exchange Rate Risk” in Part I, Item 3 for more information.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 1. Summary of Operations and Significant Accounting Policies and Estimates to the consolidated financial statements in the 2023 Form 10-K 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 the 2023 Form 10-K, include assessing excess and obsolete inventories, accounting for income taxes, and estimates for the valuation of assets and liabilities acquired in business combinations.
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.
41
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk and Risk Management
In the normal course of business, we have exposure to interest rate risk from our investments and the Credit Agreement. We also have exposure to foreign exchange rate risk related to our foreign operations and foreign currency transactions.
See “Risk Factors” set forth in Part I, Item 1A of the 2023 Form 10-K and Part II of this report, 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, 2023.
Foreign Currency Exchange Rate Risk
We are impacted by changes in foreign currency exchange rates through revenue 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, Euro, South Korean Won, New Taiwan Dollar, Japanese Yen, Pound Sterling, and Chinese Yuan. We are subject to risks associated with revenue and purchasing activities and costs to operate that are denominated in currencies other than our functional currencies, such as the Singapore Dollar, Malaysian Ringgit, Mexican Peso, Philippine Peso, and Thai Baht. Historically, the impact of changes to these particular exchange rates has not been material to our operating results.
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
At the present time, a change in interest rates does not have an impact upon our future earnings and cash flow because our only outstanding debt is the Convertible Notes, which carry a fixed 2.5% interest rate. However, increases in interest rates could impact the decision to borrow under our Credit Agreement, 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 Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Principal Executive Officer (Stephen D. Kelley, President and Chief Executive Officer) and Principal Financial Officer (Paul Oldham, Executive Vice President and Chief Financial Officer), as appropriate, to allow timely decisions regarding required disclosures.
As of the end of the period covered by this report, we conducted an evaluation, with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15(b). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2024. 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
Our assessment of the effectiveness of internal control over financial reporting excludes Airity, which we acquired in a business combination on June 20, 2024. See Note 2. Acquisitions in Part I, Item 1 “Unaudited Consolidated Financial Statements.” Airity’s total assets and total revenue excluded from management’s assessment represent less than 1% of the related consolidated financial statement amounts as of September 30, 2024.
Aside from the above, there was no change in our internal control over financial reporting that occurred during the quarter covered by this report 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 the 2023 Form 10-K. The risks described in the 2023 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 the 2023 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
To repurchase shares of our common stock, we periodically enter into stock repurchase agreements, open market transactions, and/or other transactions in accordance with applicable federal securities laws. Before repurchasing our shares, we consider the market price of our common stock, the nature of other investment opportunities, available liquidity, cash flows from operations, general business and economic conditions, and other relevant factors.
The following table summarizes these repurchases during the three months ended September 30, 2024:
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)
July 1 to July 31, 2024
199,192
August 1 to August 31, 2024
September 1 to September 30, 2024
197,404
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
Rule 10b5-1 Trading Arrangements
During the three months ended September 30, 2024, no director or officer adopted or terminated a “Rule 10b5-1 trading arrangement” or a “Non-Rule 10b5-1 trading arrangement” (as defined in Item 408 of Regulation S-K).
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
Amendment No. 4 to Credit Agreement by and among Advanced Energy Industries, Inc., the guarantors party thereto, Bank of America, NA as the administrative agent, and the lenders party thereto
8-K
000-26966
Sep. 11, 2024
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.
Filed herewith
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 Link base Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Link base Document.
101.LAB
Inline XBRL Taxonomy Extension Label Link base Document.
101.PRE
Inline XBRL Taxonomy Extension Presentation Link base 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:
October 30, 2024
/s/ Paul Oldham
Paul Oldham
Chief Financial Officer and Executive Vice President
/s/ Bernard R. Colpitts, Jr.
Bernard R. Colpitts, Jr.
Chief Accounting Officer and Controller