Advanced Energy Industries, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. Comparisons are with the corresponding 2021 periods. Amounts below are in U.S. dollars.
Business context
Advanced Energy designs, manufactures, and supports precision power conversion, measurement, and control products, with sales across semiconductor equipment, industrial and medical, data center computing, and telecom and networking markets. It also provides repair and related services. The company reports one operating segment.
On April 25, 2022, the company acquired SL Power Electronics for net consideration of approximately $143.4 million. The acquisition added medical power products and industrial-market exposure; SL Power contributed $12.9 million in revenue from acquisition through June 30. Purchase accounting remained preliminary.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $440.9 million | $361.3 million | $838.4 million | $712.9 million |
| Gross profit | $162.2 million | $135.0 million | $306.5 million | $272.5 million |
| Gross margin | 36.8% | 37.4% | 36.6% | 38.2% |
| Operating income | $52.8 million | $41.1 million | $97.4 million | $85.3 million |
| Operating margin | 12.0% | 11.4% | 11.6% | 12.0% |
| Net income attributable to Advanced Energy | $45.0 million | $35.4 million | $81.7 million | $74.1 million |
| Diluted EPS | $1.19 | $0.92 | $2.17 | $1.92 |
| Operating cash flow | Not stated separately | Not stated separately | $47.6 million | $87.7 million |
Q2 sales rose 22.0% year over year and operating income increased 28.5%. Gross margin contracted, primarily from higher material and freight costs, supply-related productivity inefficiencies, COVID-19 capacity restrictions, and the Shenzhen-to-Penang manufacturing transition; higher volume and favorable mix partly offset these pressures. Q2 tax expense was $11.2 million, with a 20.0% effective tax rate, versus $1.9 million and 5.0% a year earlier. The filing attributes the higher 2022 rate mainly to required capitalization and amortization of R&D costs and the absence of favorable 2021 discrete tax items.
Markets, liquidity, and capital
- Q2 sales by market: Semiconductor Equipment $228.8 million, up 29.5%; Industrial and Medical $105.0 million, up 26.1%; Data Center Computing $69.2 million, down 0.4%; Telecom and Networking $38.0 million, up 18.9%.
- Cash and cash equivalents were $372.7 million at June 30, down from $544.4 million at year-end 2021; marketable securities added $2.2 million. Current assets were $1.09 billion and current liabilities $389.0 million.
- Debt was $385.0 million gross ($383.0 million carrying value); $20.0 million was current. The company had no revolver borrowings and $200.0 million of undrawn capacity. Approximately $247.0 million of term debt was swap-fixed at 1.271%; the remaining $138.0 million carried a stated 2.416% rate at quarter-end. Debt matures in September 2026, with scheduled repayments before then.
- Six-month operating cash flow fell to $47.6 million from $87.7 million, principally due to working-capital investment, including $52.1 million used for inventory and $27.8 million for receivables. Investing cash outflow was $171.3 million, including $145.8 million for acquisitions and $25.5 million for property and equipment. Financing cash outflow was $42.8 million, including $23.6 million of repurchases, $10.0 million of debt repayment, and $7.6 million of dividends.
- Capital returns included quarterly dividends of $0.10 per share. The board increased the remaining repurchase authorization to a maximum of $200 million in July 2022.
Changes, outlook, and risks
Management reported strong customer demand across served markets but said component shortages and supply-chain disruption limited shipments and increased backlog. Backlog reached $1.17 billion, up 25.7% from year-end and 118.2% from June 2021. Orders may be canceled, changed, or delayed, and management cautioned that backlog timing does not assure future sales.
Management expected demand to remain strong for the rest of 2022, while supply constraints were expected to continue; the duration of shortages, recovery timing, and ability to recover higher costs were uncertain. The filing provides no numerical revenue or earnings guidance. Inflation, higher interest rates, freight and labor costs, geopolitical developments, foreign-exchange movements, COVID-related restrictions, and potential demand deterioration could pressure results. A 100-basis-point increase in rates was estimated to add approximately $1.4 million to annual interest expense on variable-rate debt.
Other notable items: foreign-exchange gains helped Q2 other income; currency translation reduced first-half cash by $5.2 million. The company disclosed ordinary-course legal matters, but said it did not believe any current matter would have a material adverse effect; it cautioned that adverse intellectual-property litigation could disrupt products or production. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether component availability improves enough to convert the exceptionally high backlog into shipped revenue, and whether customers maintain or revise orders.
- Whether gross margins recover as freight, material, manufacturing-efficiency, and transition costs evolve.
- Whether working-capital demands and acquisition spending continue to constrain cash generation; monitor cash, receivables, and inventory.
- SL Power’s integration, contribution, and final purchase-price allocation, including the preliminary $71.0 million goodwill allocation.
- Debt-service exposure to higher rates, tax effects from R&D capitalization rules, and the sustainability of dividends and repurchases.