Advanced Energy Industries, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Advanced Energy designs and supplies precision power conversion, measurement, and control products for semiconductor, industrial and medical, data center, and telecom markets. Unless otherwise noted, dollar amounts below are in millions.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $410.0 | $516.3 | $1,250.5 | $1,354.7 |
| Gross profit / margin | $147.3 / 35.9% | $191.2 / 37.0% | $449.5 / 35.9% | $497.7 / 36.7% |
| Operating income / margin | $30.1 / 7.3% | $77.6 / 15.0% | $99.9 / 8.0% | $175.0 / 12.9% |
| Continuing operations income | $33.7 | $74.9 | $92.9 | $156.5 |
| Net income | $32.7 | $74.2 | $90.8 | $155.9 |
| Diluted EPS, continuing operations | $0.89 | $1.99 | $2.45 | $4.15 |
| Operating cash flow, continuing operations | Not separately stated for quarter | Not separately stated for quarter | $128.2 | $113.0 |
- Q3 sales fell 20.6% year over year; nine-month sales declined 7.7%. Q3 declines were led by Semiconductor Equipment (down 30.6%) and Data Center Computing (down 22.0%).
- For the first nine months, Semiconductor Equipment sales decreased 20.9% and Data Center Computing decreased 19.7%; Industrial and Medical grew 19.0% and Telecom and Networking grew 25.3%, helped by improved component availability.
- Gross margin contraction reflected lower volume, unfavorable product mix, and higher costs associated with prior investments, partly offset by reduced premiums for securing scarce components. Operating expenses rose to 28.6% of Q3 sales from 22.0%, including higher restructuring charges.
- Q3 GAAP effective tax rate was 2.5%, versus 13.5% a year earlier; the nine-month rate was 12.6%, versus 16.0%. Management attributed the lower 2023 rates mainly to favorable discrete items from tax strategies. This boosted reported earnings relative to the pretax result.
- Non-GAAP diluted EPS was $1.28 for Q3 and $3.63 for the first nine months, compared with $2.12 and $4.79, respectively, in 2022. These are company-defined non-GAAP measures.
Cash, liquidity, and debt
- Cash and cash equivalents were $985.9 at September 30, 2023, up from $458.8 at year-end 2022; marketable securities were $0.2. Management said available liquidity is expected to cover anticipated needs for at least the next 12 months.
- Nine-month operating cash flow was $124.9 including discontinued operations, versus $112.9 in 2022. Investing cash outflow was $50.2, including $46.8 of capital expenditures. Financing cash inflow was $454.2, driven primarily by the convertible-note issuance.
- Gross debt was $935.0: $575.0 of 2.50% convertible notes due 2028 and $360.0 under the term loan facility due 2026. Net debt carrying value, including current maturities, was $919.8. The company had $200.0 of undrawn revolver capacity and reported compliance with debt covenants.
- Of the term loan, $225.1 was fixed at 1.17% through interest-rate swaps expiring September 2024; $134.9 was variable at 6.17%. Management estimated that a 100-basis-point rate increase would raise annual interest expense by $1.4 on variable-rate debt.
Material changes, outlook, and risks
- On September 12, 2023, the company issued $575.0 of convertible notes, receiving approximately $562.1 in net proceeds. It used $40.0 to repurchase shares and paid $115.0 for note hedges, partly offset by $74.9 received from selling warrants. The hedge and warrant structure raises the effective conversion threshold from $137.46 to $179.76, but warrants may dilute shareholders above their exercise price.
- Backlog expected to ship within 12 months fell 41.2% from year-end 2022 to $514.5. Management said improved lead times and weaker demand contributed to the decline, expects backlog to return to a more normalized $400–$500 range, and cautioned that orders can be cancelled, changed, or delayed.
- Management expects semiconductor market weakness to continue into Q4 2023 and 2024. It does not expect Telecom and Networking to sustain its first-nine-month revenue level into Q4 and 2024. Industrial and Medical demand moderated in Q3; the pace of recovery in data center customers’ spending remains uncertain. The filing gives no specific company-wide revenue or EPS guidance.
- The 2022 restructuring plan is expected to be substantially completed by the end of 2024; further charges are anticipated. Q3 restructuring expense was $4.7, versus $0.1 a year earlier.
- Principal risks include cyclical demand and macroeconomic weakness, U.S. export restrictions affecting China semiconductor shipments, supply constraints, inflation and labor costs, foreign exchange and interest rates, and potential conversion-related cash needs or dilution. Management reported no legal proceeding it believes would reasonably have a material adverse impact, while noting litigation outcomes are uncertain.
- The company continued a $0.10 quarterly dividend and said it currently anticipates continuing that level, subject to Board approval. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether semiconductor and data center demand stabilizes, and whether backlog converts to sales as expected.
- How Q4 and 2024 performance compares with management’s market commentary, particularly for Telecom and Networking and Industrial and Medical.
- The extent and timing of further restructuring charges and the expected savings from factory consolidation.
- Convertible-note conversion conditions, cash settlement obligations, hedge-counterparty risk, and potential dilution from warrants.
- Cash generation, capital expenditure needs, debt service, and the effect of swap expiry in September 2024 on interest expense.
- The effect of favorable discrete tax items on reported earnings and the sustainability of the effective tax rate.